Edited version of your private ruling

Authorisation Number: 1012448201665

Ruling

Subject: Capital gains tax - main residence

Questions and answers

1. Are you entitled to a full main residence exemption on the sale of property A from the time you purchased it until you dispose of it?

No.

2. Are you entitled to a partial main residence exemption on the sale of property A from the time you purchased it until you dispose of it?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You purchased property A some years ago, it was less than 2 hectares in area.

You lived in property A as your main residence for a short period of time and rented it out for the remaining time.

You subdivided the block and built a house on the block property B.

For the period property A was rented out property C was your main residence.

Property C was a pre CGT asset.

For the period property A was your main residence you ran a small business from it.

From the time property B was built and you moved into it this has been your main residence until the present day.

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 111-190

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-190

Income Tax Assessment Act 1997 Section 118-192

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss as a result of a CGT event. The most common event is CGT event A1 which happens when a person disposes of a CGT asset to someone else.

Under section 108-5 of the ITAA 1997 a CGT asset is any kind of property, or a legal or equitable right that is not property. CGT assets include part of or an interest in property or a legal or equitable right that is not property. You purchased the property after 19 September 1985 which you intend to sell, this will trigger CGT event A1.

Subdivision

Section 112-25 of the ITAA 1997 states that the subdivision of land into a number of lots is not in itself a CGT event. The original block of land is deemed to have been split into a number of new assets as a result of the subdivision.

You sub-divided the land. Although the sub-division into a number of blocks did not trigger a CGT event the subsequent sale of one or both blocks will trigger CGT event A1.

Main residence exemption

Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, the ownership period, and must not have been used to produce assessable income. You are only able to have one main residence at any one time.

Property A was your main residence for a short period during your ownership.

You elected property B and property C to be your main residences for the remainder of the time.

As property A has not been your main residence for the whole of your ownership period, has been used to derive income both as a small business and a rental property you are not entitled to a full main residence exemption.

Partial Main residence exemption

Section 118-185 of the ITAA 1997 states that if a dwelling is your main residence for only part of your ownership period, you will only get a partial exemption for any loss or gain arising from a CGT event that occurs in relation to that dwelling. The capital loss or gain is calculated using the following formula:

Capital gain or loss

Note: non main residence days are the number of days where a dwelling was not occupied as your main residence.

In your case the period from when you purchased property A to the present day is your ownership period. X years of the ownership period is your main residence days and the remainder of your ownership period until disposal is your non-resident days.

Calculation of capital gain or loss

In determining the amount of capital gain or capital loss, the Commissioner will have regard to the amount of the capital gain or capital loss, as the case may be, made on the disposal of the dwelling and also the extent to which, and the period for which, it was used for income producing purposes.

Generally speaking, unless the part of the dwelling used to gain assessable income is distinctly of a greater or lesser proportionate value than the rest of the dwelling, the extent to which it was used to gain assessable income will be determined on an area basis. This amount of the capital gain or capital loss will also be determined having regard to the period for which that part of the dwelling was used:

· by the individual; or

· by any another person,  

to gain assessable income.

In your situation, you will need to apportion the area within your dwelling used for the operation of your business. 

The formula for apportionment is as follows:

Capital gain x percentage of floor area not used as main residence x percentage of period of ownership portion of home not used as main residence = taxable portion

As the capital gains provisions apply to property A any capital gain arising from the sale of the property is required to be declared in your tax return in the income year it is derived. There is no provision within the legislation that allows you to roll any capital gain over.