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Ruling

Subject: Capital gains tax (CGT) - main residence - cost base

Question 1

Is the capital gain made on the sale of your interest in the property disregarded?

Answer

No.

Question 2

Is the capital gain made on the sale of your interest in the property disregarded in part?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You and your sibling purchased an equal share in a property after 20 September 1985.

You incurred additional costs when you purchased the property including; stamp duty, legal costs, and vendors and purchasers allowances.

The property comprised a vacant shop premises (the shop) located on the ground level and residential premises (the dwelling) on the first floor.

You spent time refurbishing the dwelling while it was vacant.

You lived in the dwelling for part of your ownership period.

You spent several months refurbishing the shop before operating your own business from the shop.

You leased the shop for part of your ownership period until you sold your interest in the property.

You incurred additional costs when you sold your interest in the property including; real estate agent commissions, legal costs, and vendors and purchasers allowances.

You have made a capital gain on your interest in the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-185

Reasons for decision

Capital gains tax (CGT) is the tax you pay on certain gains that you make. You make a capital gain or capital loss as a result of a CGT event.

The most common CGT event is CGT event A1. CGT event A1 happens when you dispose of an asset to another entity, for example if you sell a dwelling.

Generally, you can disregard any capital gain or capital loss realised on the disposal of a dwelling that was your main residence.

However, to be eligible for the full exemption from CGT:

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

· the dwelling must not have been used to produce assessable income; and

· any land on which the dwelling is situated must be two hectares or less

You must have resided in the dwelling to be able to get the main residence exemption, whether a full exemption or a partial exemption.

In your case, your property comprised a shop and a dwelling. As you lived in the dwelling and did not treat any other dwelling as your main residence, the dwelling is considered to be your main residence for the period you lived in it. As the dwelling was your main residence for part of your ownership period you are entitled to a partial main residence exemption.

How to calculate your capital gain

Your capital gain is the difference between the capital proceeds and the cost base of the property.

Your capital proceeds are the capital amounts you received or expect to receive from the event. In your case, your capital proceeds are the sale amount you received when you sold the property.

The cost base of a CGT asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset.

The cost base of a CGT asset is made up of five elements:

· money or property given for the asset

· incidental costs of acquiring the CGT asset or that relate to the CGT event

· costs of owning the asset

· capital costs to increase or preserve the value of your asset or to install or move it

· capital costs of preserving or defending your ownership of or rights to your asset.

You need to work out the amount for each element, then, add them together to work out the cost base of your CGT asset.

In your case, the first element of your cost base is the purchase price of the property.

Your second element costs include stamp duty, real estate agent commissions and legal costs.

Your third element costs include rates, land taxes, repairs, insurance premiums and interest expenses.

You do not include second and third element costs if you have claimed a tax deduction for them in any year.

The fourth element is capital costs you incurred for the purpose or the expected effect of increasing or preserving the asset's value. Your refurbishment costs would fall into this category.

The fifth element is capital expenses you incur to preserve or defend your ownership of, or rights to, the asset.

Your share of the capital gain is your interest in the capital proceeds less your interest in the total of all elements of the cost base of the property.

Apportionment of capital proceeds

On a CGT event happening to the real property, that CGT event happens to each separate asset comprising the property and a separate capital gain or loss calculation is necessary for each CGT asset. The capital proceeds from each CGT event are so much of the overall capital proceeds as is reasonably attributable to that event.

In the absence of an agreed allocation, each party needs to make their own reasonable apportionment of the capital proceeds to the separate assets. In making this apportionment, it is expected that each party would generally have regard to, and be able to justify, their reasonable apportionment based on the relevant market values of the separate assets at the time of the making of the contract.

In your case, your property comprised two separate CGT assets, a shop and a dwelling. You need to apportion the capital proceeds and cost base between the shop and the dwelling on a reasonable basis as detailed above.

Partial main residence exemption

In your case, you get only a partial exemption on the capital gain calculated on the dwelling as the dwelling was not your main residence for the whole time you owned it.

You are entitled to a partial main residence exemption to account for the days where the dwelling was your main residence.

You calculate the capital gain on the dwelling as follows:

Capital gain x non-main residence days

days in your ownership period

The capital gain is calculated as the difference between the capital proceeds and the cost base of the dwelling (after apportionment).

Non-main residence days are the number of days in your ownership period when the dwelling was not your main residence.

Days in your ownership period is the number of days in the period from when you acquired the dwelling until your ownership interest ends.

Absence choice

You can choose to continue to treat a dwelling as your main residence even though you no longer live in it. You cannot make this choice for a period before a dwelling first becomes your main residence. This choice needs to be made only for the income year that the CGT event happens to the dwelling. Generally, if you make this choice, you cannot treat any other dwelling as your main residence for that period.

If you do not use it to produce income you can treat the dwelling as your main residence for an unlimited period after you stop living in it. If you do use it to produce income you can choose to treat it as your main residence for up to six years after you stop living in it.

In your case, you may choose to treat the dwelling as your main residence from the time you stopped living in it. If you make this choice your main residence exemption period will increase to account for the days where you moved out and any other short term absences.

Summary

The capital gain made on the sale of your interest in the property is not disregarded. However, you are eligible for a partial main residence exemption. To calculate your capital gain the capital proceeds and cost base needs to be apportioned between the shop and the dwelling on a reasonable basis. You then calculate your partial main residence exemption on the capital gain on the dwelling to account for the days where the dwelling was your main residence. If you make the absence choice the exemption period is from the day you first lived in the dwelling until it was sold and you can ignore any days where you were absent from the dwelling.