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Ruling
Subject: CGT
Question 1
Can the Commissioner apply discretion to allow you to calculate the taxable capital gain of the property using a method other than the method outlined in subsection 118-185(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No
Question 2
Can you include any third element costs, such as repairs, in the cost base of the property?
Answer
No
Question 3
Will repairs form part of the fourth element of the cost base?
Answer
No
This ruling applies for the following period:
Year ended 30 June 2012
The scheme commences on:
1 July 2011
Relevant facts and circumstances
You purchased a property (the property) jointly with your spouse prior to 21 August 1991.
You had intended to make it your main residence as soon as the sale of your previous main residence was completed. This sale fell through and it became financially impractical for you to move into the property immediately as intended.
You instead rented the property for X years before moving in and making it your residence for X years.
You sold the property. You made a capital gain on the sale.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 110-25(4)
Income Tax Assessment Act 1997 Subsection 110-25(5)
Income Tax Assessment Act 1997 Section 118-110
Income Tax Assessment Act 1997 Subsection 118-115(2)
Income Tax Assessment Act 1936 Subsection 160ZH(6A)
Reasons for decision
Partial main residence exemption
Section 118-110 of the ITAA 1997 states that you can disregard any capital gain or loss realised on the disposal of a dwelling that was your main residence for your entire ownership period.
If a capital gains tax (CGT) event happens to a dwelling you acquired on or after 20 September 1985, and that dwelling was your main residence but not for the whole time that you owned it, you are entitled to a partial exemption.
In these cases, a capital gain or loss is determined by reference to that part of the whole of the period of ownership during which the dwelling was not the taxpayer's sole or principal residence. It is not determined according to any increase or decrease in value of the dwelling during the period that it was not the taxpayer's sole or principal residence.
The method to calculate the taxable portion of the capital gain where you are entitled to a partial exemption is detailed in section 118-115(2) of the ITAA 1997. The part of the capital gain that is taxable is calculated as follows:
Total capital gain made from the CGT event |
x |
number of days in your ownership period |
There is no discretionary power included in the taxation legislation which would allow the Commissioner to permit you to calculate your capital gain using another method. Accordingly, you are required to use the method above to calculate your capital gain.
Note: Home first used to produce income rule
Section 118-192 of the ITAA 1997 sets out a special rule that applies in working out a capital gain or loss on a dwelling that has been a main residence and which has also been used to produce assessable income during your ownership period.
If the conditions in section 118-192 of the ITAA 1997 are satisfied, you are taken to have acquired the dwelling at the time it was first used to produce assessable income for its market value at that time.
However one of the conditions is that you would have been entitled to a full main residence exemption if you had disposed of the dwelling just before it was first used to produce assessable income (paragraph 118-192(1)(b) of the ITAA 1997).
In your case the property was used to produce assessable income before it became your main residence. Therefore section 118-192 of the ITAA 1997 does not apply.
Cost base - third element
Subsection 110-25(4) of the ITAA 1997 provides that the third element of the cost base of a CGT asset are the costs of owning the CGT asset. These costs include council rates, interest on loans to acquire the asset and costs of maintaining, repairing or insuring the asset.
Ownership costs can only be included in the cost base of a CGT asset where the asset was acquired after 21 August 1991 and the costs are not deductible in the year they were incurred.
Subsection 110-25(4) of the ITAA 1997 is a rewrite of subsection 160ZH(6A) of the Income Tax Assessment Act 1936 (ITAA 1936). The explanatory memorandum that introduced subsection 160ZH(6A) of the ITAA 1936 said:
The changes only apply to costs on assets acquired on or after 21 August 1991. If you bought an asset before that date, you cannot add your non capital expenses to its costs base, even where the expenses were incurred on or after 21 August 1991.
There is no discretionary power included in the taxation legislation which would allow the Commissioner to disregard the date of commencement of the provisions which relate to the third element of the cost base.
Accordingly, as you acquired your property before 21 August 1991, you cannot include third element costs, being ownership costs, in the cost base of the property.
Cost base - fourth element
The fourth element of the cost base of a CGT asset includes capital costs you incurred for the purpose, or the expected effect, of increasing or preserving the asset's value (subsection 110-25(5) of the ITAA 1997). Examples can include the costs to rezone land or capital improvements made to the asset.
The word 'repair' is not defined within the taxation legislation. Taxation Ruling TR 97/23 states that the word 'repair' ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.
Repairs that fall within this definition are not capital in nature and therefore, could not be considered fourth element expenditure. Additionally, repairs and maintenance of the property are specifically listed as third element expenditure under paragraph 110-25(4)(b) of the ITAA 1997.
Accordingly, you cannot include the cost of repairs in the fourth element of the cost base of the property.