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Ruling

Subject: Capital gains tax

Questions and answers:

Does the transfer of your ownership interest in property two give rise to a capital gains tax event?

Yes.

Are you entitled to the main residence exemption for property two?

Yes.

This ruling applies for the following period:

1 July 2006 to 30 June 2007.

The scheme commenced on:

1 July 2006.

Relevant facts and circumstances:

You were a joint owner of property one prior 20 September 1985 and became the sole owner of that property after 20 September 1985.

You acquired property two after 20 September 1985.

You disposed of property two to another person.

The land area of property two is less than two hectares.

You did not use property two to earn assessable income during your ownership period.

Property two had to be repaired before you could occupy it.

You moved into property two and occupied it as your main residence immediately the repairs were completed.

You occupied property two as your main residence for a period of time. After this, and up until you disposed of property two you either resided at property one or property two.

You choose property two as your main residence for capital gains tax purposes.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 102-5.

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Section 118-135

Income Tax Assessment Act 1997 Section 118-145

Reasons for decision

Capital gains tax - general

Real estate acquired on or after 20 September 1985 is a capital gains tax (CGT) asset.

When you dispose of a CGT asset to another person a CGT event happens. In the case of the disposal of real estate, the time of the CGT event is when the contract for the disposal is entered into. If there is no contract, the event occurs when the change of ownership takes place.

Any net capital gain or loss that results from a CGT event is included in your assessable income in the year the CGT event takes place.

Because you acquired property two after 20 September 1985 it was a CGT asset in your hands and a CGT event happened when you disposed of property two. Accordingly, the CGT rules will apply to potentially include in your assessable income any net capital gain or loss arising from the disposal. However, the CGT main residence exemption may also apply to allow you to reduce or disregard any gain or loss made from the disposal of property two.

The CGT main residence exemption - general

Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) contains the rules for applying the CGT main residence exemption to the disposal of a property used as your main residence.

As a general rule, the main residence exemption can only be applied to one dwelling at a time and if you own and occupy more than one dwelling in a particular period of time, you must choose which dwelling the main residence exemption will apply to. You make this choice in the income year in which the CGT event happens to the property you wish the exemption to apply to.

Section 118-110 of the ITAA 1997 provides that the following conditions must be met to qualify for a full main residence exemption (a partial exemption may be available in cases where any of the conditions are not met):

· the dwelling must have been your home for the whole period you owned it,

· you must not have used the dwelling (or the land on which it is situated and adjacent to) to produce assessable income, and

· the land on which the dwelling is situated must be 2 hectares or less.

During that time you owned property two you also owned property one and you used both properties as your main residence for various periods of time.

You have chosen to apply the main residence exemption to property two.

Property two is on less than two hectares of land and was never used to produce assessable income during the period you owned it. Accordingly, you meet two of the three conditions for a full main residence exemption to be applied to any gain or loss made from the disposal of property two. However, you did not physically occupy property two as your main residence for the whole of the period you owned it.

If a dwelling was not your main residence for the whole time you owned it, other CGT rules may apply to extend the main residence exemption to some or all of the periods of time you did not occupy the dwelling. These rules may apply if:

· you moved into the dwelling as soon as practicable after you became its owner, and/or

· you make a choice to treat the dwelling as your main residence, even though you no longer live in it.

Moving into a dwelling as soon as possible

Section 118-135 of the ITAA 1997 provides that a dwelling can be treated as your main residence in the period between when you acquired it and when you actually occupied it as your main residence if you moved into and occupied it as soon as it was 'first practicable' for you to do so.

The Explanatory Memorandum (EM) to the Bill that later became the Tax Law Improvement Act (No.1) 1998) provides some guidance on what is meant by the phrase 'first practicable' in the context of section 118-135. The EM states:

The rewritten provision (118-135) takes account of situations where, for example, there is a delay in moving in because of illness or other reasonable cause.

The exemption (in section 118-135) does not extend to cases where an individual is unable to move into the dwelling because it is being rented out. However, it would cover a period after the end of the tenancy if the owner could not take up residence immediately because of the nature of repairs required to the dwelling.

Based on your facts, we consider your circumstances to be similar to the situation described in the EM in that property two required repairs before it could be occupied. Because you moved into and occupied property two as your main residence as soon as the repairs were complete, you are entitled to apply the provisions of section 118-135 to your circumstances and treat property two as your main residence between the time you acquired it and the time you first occupied it.

Continuing to treat a dwelling as your main residence after it ceases to be your main residence

The absence rule in section 118-145 of the ITAA 1997 allows you to choose to treat a dwelling as your main residence even though you no longer live in it. To make this choice you must have occupied the dwelling as your main residence at some point during your ownership of it.

If you make the choice to continue to treat a dwelling as your main residence after you stop living in it you cannot treat any other dwelling as your main residence for the period you choose to apply section 118-145 (except for a limited time if you are changing main residences however this does not apply to your circumstances).

If you make this choice and do not use the dwelling (or any of the land on which it is situated) to produce income after you stop living in it, you can treat the dwelling as your main residence for an unlimited period on time.

The choice to apply the absence rule to a dwelling that was your main residence is made in the income year in which the CGT event happens to the dwelling, the year is it sold for example.

You have chosen property two as your main residence for CGT purposes.

You occupied property two as your main residence for a period of time, after which time you resided (up until the time you disposed of property two) either at property one or property two. During your ownership of property two, you did not use it to produce assessable income during any of the periods you were not occupying it as your main residence.

Accordingly, you are entitled to apply the absence rule to property two so that the main residence exemption is extended to encompass the periods that you did not occupy property two as your main residence after you first stopped living in it.

Conclusion

You are entitled to a full main residence exemption in regard to the disposal of property two.