Edited version of your private ruling

Authorisation Number: 1012460440524

The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.

Ruling

Subject: CGT - main residence - home first used to produce income

Question 1

Are you entitled to use the market value of property A at the time it was first used to produce income as the first element of the cost base or reduced cost base?

Answer

Yes

Question 2

If the sale of property A results in a capital gain, are costs of maintaining property A, such as interest and council rates, that were incurred after the date it was first used to produce income included in the third element of the cost base?

Answer

Yes, but only to the extent that they were not otherwise deductible.

Question 3

If the sale of property A results in a capital gain, are you entitled to the 50% discount?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You purchased a property A.

Property A was your main residence up until when you purchased a new property (property B) to reside in. Property B was your main residence for CGT purposes from this date.

You put the property on the market for sale.

You were unsuccessful in selling property A and decided to rent it out to cover some of the costs of ownership while you continued to try and sell it.

Property A was rented out for a period of time.

Property A was sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Subsection 110-45(1B)

Income Tax Assessment Act 1997 Section 110-55

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Subsection 118-140(1)

Income Tax Assessment Act 1997 Subsection 118-140(2)

Income Tax Assessment Act 1997 Section 118-192

Reasons for decision

First element of the cost base

For most capital gains tax (CGT) events, the capital gain is the difference between the capital proceeds and the cost base of the CGT asset. That is, if an individual sells an asset for more than they paid for it. They will make a capital loss if their reduced cost base of the CGT asset is greater than their capital proceeds.

Section 110-25 of the ITAA 1997, advises that the cost base of a CGT asset consists of five elements. The first element of the cost base of a CGT asset are the acquisition costs, which is the total of the money paid in respect of the acquisition of the asset.

Generally the first element of the cost base of a CGT asset will be the money paid for its acquisition, subject to other provisions.

Rule for home first used to produce income rule 

Under section 118-192 of the ITAA 1997, if you start using your main residence to produce income, there is a special rule that affects the way you calculate your capital gain or capital loss. In working out the amount of capital gain or capital loss, the period before the dwelling is first used to produce income is not taken into account.

You are taken to have acquired the dwelling at the time you first started using it for income producing purposes for its market value at that time if all of the following apply:

you first used the dwelling to produce income after 20 August 1996;

when a CGT event happens in relation to the dwelling, you would obtain only a partial exemption because the dwelling was used to produce assessable income during the period you owned it; and

you would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income.

Changing Main Residences

Under subsection 118-140(1) of the ITAA 1997, if you acquire an ownership interest in another property and intend to use it as your main residence, you are able to treat your original property and your newly acquired property as your main residences for a maximum period of six months.

Subsection 118-140(2) of the ITAA 1997 states that this exemption only applies if:

your original main residence was your main residence for a minimum of 3 months in the 12 months prior to the disposal of it, and

you did not use it to produce assessable income in any part of those 12 months when it was not your main residence.

Application to your circumstances

You meet all the conditions listed under section 118-192 of the ITAA 1997:

property A was first used to produce income after 20 August 19XX

you would have only been entitled to a partial main residence exemption as property A was used to produce assessable income during your ownership period; and

although you had moved out of property A prior to the date it was first used to produce income, as a result of section 118-140 of the ITAA 1997 you would have been able to treat both property A and B as your main residences for a period of up to 6 months. Accordingly, if the CGT event occurred immediately before property A was used to produce income, you would have been entitled to a full exemption under the main residence exemption.

Accordingly, you are taken to have acquired property at the time it was first used to produce assessable income, and the first element of the cost base is its market value on that day. Any expenditure incurred by the taxpayer prior to that day is ignored.

Third element of the cost base

The third element of the cost base of a CGT asset is made up of the costs of owning the asset, including rates, land taxes, repairs and insurance premiums. Interest on borrowings to finance a loan used to acquire a CGT asset and on loans used to finance capital expenditure you incur to increase an asset's value are also third element costs.

You do not include such costs if you:

· have claimed a tax deduction for them in any income year, or

· did not claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not ended.

The third element of the reduced cost base of a CGT asset differs from the third element of the cost base and does not include ownership costs. Accordingly, these costs cannot be used to work out a capital loss.

As discussed above, you are taken to have acquired the property on the day it was first used to produce income. Accordingly, expenses you have incurred after the date the property was first used to produce income such as interest and council rates are only included in the third element of the cost base to the extent that they have not been already (or could be) deducted. As your property was used to produce income, these expenses would have been deductible and would not be included in the third element of the cost base.

50% discount

Under section 115-10 of the ITAA 1997, to qualify for the 50% general discount a capital gain must be made by an individual, a complying superannuation entity, a trust or a life insurance company. The capital gain must result from a capital gains tax (CGT) event happening after 11:45am on 21 September 19XX and must not have an indexed cost base. Also, the gain must result from a CGT event happening to an asset that was acquired at least 12 months before the CGT event.

Your acquisition date for the purposes of calculating CGT is more than 12 months before the CGT event. Accordingly, if the CGT event results in a capital gain you are entitled to apply the 50% general discount to the capital gain.