Edited version of private advice

Authorisation Number: 1012653079284

Ruling

Subject: CGT - main residence - cost base

Question and answer:

1. Will capital gains tax be applicable on property A for the entire ownership period?

Yes

2. Will capital gains tax be applicable on property A for the entire ownership period?

Yes

3. Are you entitled to a full main residence exemption when you disposed of your property?

No.

4. Are you entitled to a partial main residence exemption when you dispose of your property?

Yes.

5. Are you entitled to disregard in full or in part any capital gain or loss that resulted from the disposal of your properties car space?

No.

This ruling applies for the following period:

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You purchased a residence (property A) and an adjoining a car park (property B) as joint tenants with your then partner post September 1985. You owned a 50% share of both properties.

Property A was initially used as a rental property.

A number of years later, you separated from your then partner and subsequently moved into property A and occupied it as your main residence.

Shortly after you took up an employment position interstate. This meant that you moved out of property A and moved into a rented unit.

You continued to elect property A as your main residence.

As a result of a court ordered settlement with your former partner, you became sole owner of property A.

A number of months later Property A was once again used to earn assessable income.

After a number of years, you purchased an apartment (property C) with a new partner. You had a proportional share in this property.

For a number of years you lived in property C with your partner until you separated.

After your separation you moved out of property C and lived in rental accommodation.

During the period that you lived in property C, you continued to elect property A as your main residence while your then partner elected property C.

A number of months later you purchased a property (property D). You moved into property D once renovations were completed after a number months.

During this period property A continued to earn assessable income.

You disposed of property A and B in different financial years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 115-5

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Subsection 104-10(5).

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Section 118-120.

Reasons for decision

Capital gains tax

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 happening to a CGT asset in which you have an ownership interest.

Buildings and land are CGT assets as defined under section 108-5 of the ITAA 1997, and the disposal of a CGT asset triggers a CGT event under section 104-10 of the ITAA 1997. The most common event is a CGT event A1 which occurs when you dispose of a CGT asset to someone else. Subsection 104-10(5) of the ITAA 1997 provides that any capital gain or loss is disregarded if you acquire the asset before 20 September 1985.

Main residence exemption

Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or 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, must not have been used to produce assessable income, and the land surrounding the dwelling (including the land on which the dwelling is situated) must not be more than 2 hectares.

Marriage breakdown rollover

As a general rule, capital gains tax (CGT) applies to all changes of ownership of assets on or after 20 September 1985. However, if you transfer an asset to your spouse as a result of the breakdown of your marriage or de facto marriage, there is automatic rollover in certain circumstances, under section 126-5 of the ITAA 1997. You cannot choose whether or not it applies. One of those circumstances where an automatic rollover arises is where the CGT event occurs due to a marriage breakdown and as a result of an order of a court or a court order made by consent under the Family Law Act 1975, or a similar law of a foreign country.

The result of the application of the roll ever provisions is that if you receive an asset where rollover provisions are applicable the first element of the cost base in your hands as the transferee is the asset's cost base in the hands of your former defacto as the transferor, at the time you acquired it.

Continuing Main Residence status after the dwelling ceases to be your main residence

Section 118-145 of the ITAA 1997 allows you to elect to treat a dwelling as your main residence even though you no longer live in it. If you use the dwelling to produce assessable income you can only claim main residence exemption for a period of up to 6 years. Section 118-145(4) of the ITAA 1997states you cannot treat any other dwelling as your main residence in the period you choose to treat the vacated dwelling as your main residence.

Spouses having different main residences

'Spouse' is defined in subsection 995-1(1) of the ITAA 1997 to include a person who, although not legally married to a person, lives with the person on a genuine domestic basis as the person's husband or wife. This includes defacto relationships.

Section 118-170 of the ITAA 1997 deals with a situation where, during a particular period, you have a main residence and your spouse (excluding a spouse living permanently apart from the taxpayer) has a different main residence.

Applying the principle that only one dwelling at a time can qualify as a main residence, section 118-170 requires each spouse to:

(a) choose one of the dwellings as the main residence for both of them; or

(b) nominate different dwellings as each spouse's main residence.

Where a nomination is made under (b), the availability of the main residence exemption is determined according to the following rules:

(a) where a spouse's interest in the nominated dwelling is 50% or less, the nominating spouse will be entitled to an exemption on that interest for the whole period in question; and

(b) where the relevant interest is greater than 50%, the nominating spouse will only be entitled to an exemption in respect of that interest for half the period.

The nomination rule applies to each home the spouses own whether or not they have sole ownership or own the home jointly (either as joint tenants or tenants in common). That is, there is no requirement that they both have an interest in the nominated dwelling.

If you nominate different homes for the period and you own 50% or less of the home you have nominated, you qualify for an exemption for your share. If you own more than 50%, your share is exempt for half the period you and your spouse had different homes.

The same applies to your spouse. If your spouse owns 50% or less of the home they have nominated, they qualify for an exemption for their share. However, if your spouse owns more than 50% of the home, their share is exempt for only half the period you had different homes.

This rule applies to each home the spouses own whether they have sole ownership or own the home jointly (either as joint tenants or tenants in common).

This rule applies also if you choose to treat a dwelling as your main residence when you no longer live in it, and this choice results in your having a different main residence from your spouse for a period.

Disposal of adjacent land

Subsection 118-120 of the ITAA 1997 provides that the main residence exemption maybe be extended to the land adjacent to the dwelling subject to certain conditions. This includes car parks, garages, storerooms etc. One of those conditions necessitates that the disposal of the land occurs in the same CGT event as the disposal of the dwelling, under section 118-165 of the ITAA 1997.

CGT discount

Under section 115-5 of the ITAA 1997, you make a discount capital gain if the following requirements are satisfied:

a)  you are an individual, a trust or a complying superannuation entity

b)  a CGT event happens to an asset you own

c)  the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999

d)  you acquired the asset at least 12 months before the CGT event, and

e)  you did not choose to use the indexation method (only for properties acquired prior to 21 September 1999).

Under the discount method you reduce your capital gain by the discount percentage. For individuals, the discount percentage is 50%. However, you can reduce the capital gain only after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years.

Your circumstances

Property A

In your case you and your ex-spouse purchased property A and property B as joint tenants. Property A was used to earn assessable income for a number of years. As this property was at no stage occupied as your main residence you are not entitled to apply the main residence exemption for this period.

You and your partner separated and as a result of a court order the remaining 50% share of property A was transferred to you. Shortly after you moved into property A and occupied it as your main residence. A number of years later you moved out of the property and lived in a rented unit. Although you moved out of the property you continued to elect it to be your main residence under the absence rule. Therefore for this period you are entitled to apply the main residence exemption.

You then purchased property C with your new partner. You had a proportional share in this property. Although you moved into property C with your new partner, you continued to elect property A as your main residence. However as your partner elected property C as their main residence you are only entitled to a partial main residence exemption. Therefore for this period you are only entitled to a partial main residence exemption.

A number of years later, you separated from your partner and moved into a unit while property A continued to be rented out to tenants. As you continued to elect property A as your main residence you are entitled to apply the main residence exemption up until 6 years from the time that property A was last occupied as your main residence

As 6 years from the time that you last occupied property as your main residence elapsed, you are not entitled to apply the main residence exemption in part or in full after this period.

Property B

In June 20XX you disposed of property B. As property B was not disposed of in the same CGT event as property A, you are not entitled to apply the main residence to property B. Therefore any capital gain or capital loss that results from the disposal of property B cannot be disregarded in full or in part. You will be required to perform a separate calculation for property A and property B

Conclusion

Calculation Property A

As you received your partners 50% share of property A as a result of court order due to a marriage breakdown, rollover provisions will apply. Therefore the first element of your cost base will be the amount that you and your then spouse paid for this property.

Once you have determined your capital gain by subtracting your proceeds from your cost base you will be required to calculate your main residence exemption as follows.

Once you have calculated your capital gain or loss you will be required to use the following formula to apply you main residence exemption.

Net capital gain = Capital gain X non-main residence days

Total ownership days

As you satisfy the requirements outlined under section 115-5 of the ITAA 1997, you are entitled to apply the 50% discount to your capital gain, however only after capital losses for the year and any unapplied net capital losses from earlier years have been applied.

Calculation Property B

You are not entitled to apply the main residence exemption in part or in full.

As you received your partners 50% share of property B as a result of court order due to a marriage breakdown, rollover provisions will apply. Therefore the first element of your cost base will be the amount that you and your then spouse paid for this property.

You will be required to determine your capital gain by subtracting your proceeds from your cost base.

As you satisfy the requirements outlined under section 115-5 of the ITAA 1997, you are entitled to apply the 50% discount to your capital gain, however only after capital losses for the year and any unapplied net capital losses from earlier years have been applied.