Edited version of your private ruling

Authorisation Number: 1012441272086

Ruling

Subject: Capital gains tax and continuing main residence

Questions and answers

Can you disregard the capital gain or loss made on the disposal of property B?

Yes.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

You purchased a property B and occupied it as your main residence.

You moved out of property B and rented it out for less than six years.

You sold property B with settlement occurring more than 12 months after you moved out it.

You lived in rental accommodation.

You signed a contract to purchase property A which you occupy as your main residence.

For a period of time you owned two properties and you chose to treat property B as your main residence for that period of time.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Section 118-145.

Income Tax Assessment Act 1997 Section 118-150.

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer makes a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985.

A taxpayer makes a capital gain if their capital proceeds from the sale of a CGT asset are greater than the cost base for the purchase of that asset, for example, if a taxpayer received more for an asset than they paid for it.  

A taxpayer makes a capital loss if their reduced cost base for the purchase of that asset is greater than the capital proceeds resulting from the sale of that asset.

Capital gains tax is not a separate tax, it forms part of a taxpayer's assessable income and is taxed at each taxpayer's marginal tax rate.

Main residence exemption

A capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence is generally exempt from CGT (section 118-110 of the ITAA 1997).

To be fully exempt from CGT:

The dwelling must have been your home for the entire period you owned it.

The dwelling must not have been used to produce assessable income.

Any land on which the dwelling is situated and adjacent to must be two hectares or less.

In your case property B:

was not your home for the entire period you owned it

it was used to produce assessable income; and

the land on which the dwelling is situated and adjacent to is less than two hectares.

Based on the above, you would not be entitled to the main residence exemption under section 118-110 of the ITAA 1997, however, the rules regarding changing main residence and continuing main residence should also be considered in your situation.

Changing main residences

If a taxpayer acquires a dwelling that is to become the taxpayer's main residence and the taxpayer still owns an existing main residence, both dwellings are treated as the taxpayer's main residence for up to six months. However, this rule only applies if the taxpayer's existing main residence was the taxpayer's main residence for a continuous period of at least three months in the 12 months before it was disposed of and it was not used for income-producing purposes in any part of that 12 month period when it was not the taxpayer's main residence.

In your case you do not meet the conditions of this rule because you did not occupy property B in the 12 months prior to it selling and because it was used for income producing purposes.

While you do not meet the conditions of the rule in regard to changing main residences, you have chosen to treat property B as your main residence for the period of time that it was rented out and you were not living there. In your situation the rules for continuing main residence status can be applied.

Continuing main residence status after dwelling ceases to be your main residence. 

In some cases, you can choose to have a dwelling treated as your main residence even though you no longer live in it. However, to take up this option, you need to have firstly occupied the dwelling as your main residence and the land on which the dwelling is situated on and adjacent to needs to be less than 2 hectares.

Where this choice has been made, you cannot treat any other dwelling as your main residence for that period.

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

If you use the dwelling to produce income, you can choose to treat the dwelling as your main residence for up to six years after you cease living in it.

To be entitled to the full main residence exemption upon the disposal of the dwelling, you are not required to live in this residence again, nor must it be vacant prior to its sale as long as you dispose of the dwelling within the six year period.

In your case, as you have rented out your main residence while you are not living in it, you will be able to treat the dwelling as your main residence for up to six years as you:

· occupied the dwelling as your main residence,

· the land on which the dwelling is situated on and adjacent to is less than 2 hectares; and

· you are not treating any other dwelling as your main residence during the period of ownership.

Therefore, as the period of time you did not live in property B is less than six years, you will be entitled to the full main residence exemption upon the disposal of the dwelling as you are not treating another place as your main residence and you satisfy the criteria for continuing main residence status after a dwelling ceases to be your main residence