Edited version of your written advice

Authorisation Number: 1012660858662

Ruling

Subject: CGT

Question and answers:

1. Are you entitled to disregard any capital gain or loss made on the disposal of your dwelling?

No.

2. Are you entitled to partially disregard any capital gain or loss made on the disposal of your dwelling?

Yes.

This ruling applies for the following period

Year ended 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts and circumstances

You and your spouse purchase a dwelling after September 1985.

You, your spouse and a child, occupied the property as your main residence.

You and your spouse purchased a second dwelling.

You and your spouse have occupied the second dwelling as your main residence from the day you moved out of the first dwelling until now. Your child continued to occupy the first dwelling but did not pay rent.

Your child moved out of the first dwelling.

You have sold the first dwelling. Settlement will occur in the ruling period.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 108-5(1)

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 104-10(3)

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-185

Reasons for decision

CGT asset

Subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines a capital gains tax (CGT) asset as any kind of property or a legal or equitable right that is not property.

Your first dwelling is a CGT asset.

CGT event A1

Section 102-20 of the ITAA 1997 states that you make a capital gain or capital loss if and only if a CGT event happens. CGT events are the different types of transactions or happenings which may result in a capital gain or a capital loss.

The disposal of a CGT asset is the most common CGT event and is referred to as CGT event A1 (section 104-10 of the ITAA 1997). A taxpayer disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity.

Subsection 104-10(3) of the ITAA 1997 describes when the event happens. The time of the event is either when the taxpayer enters into a contract for the 'disposal', or if there is no contract - when the change of ownership occurs.

A CGT event A1 will happen when you dispose of your first dwelling, that is, when settlement occurs.

CGT - main residence

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.

Taxation Determination TD 51 states that whether a dwelling is a taxpayer's sole or principal residence is an issue which depends on the facts in each case. Some factors may include, but are not limited to: 

• the length of time the taxpayer has lived in the dwelling

• the place of residence of the taxpayers family

• whether the taxpayer has moved his or her personal belongings into the dwelling

• the address to which the taxpayer has his or her mail delivered

• the taxpayers address on the Electoral Roll

• the connection of services such as telephone, gas and electricity

• the taxpayers intention in occupying the dwelling.

In your case, you and your spouse purchased the first dwelling and occupied it as your main residence.

You and your spouse purchased a second dwelling and have occupied it as your main residence from the day you moved out of the first dwelling until now.

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.

As the first dwelling was your main not your main residence for all of the ownership period you cannot disregard any capital gain or loss when you dispose of it. You are only entitled to partial main residence exemption.

This applies to the first dwelling for the period from when the second dwelling became your main residence until settlement occurs on the first dwelling.

Calculating a partial main residence exemption 

The following formula is used to calculate a partial main residence exemption:

Capital gain or loss x Non-main residence days*

Total days of ownership period**

* Non-main residence days are the number of days where a dwelling was not occupied as your main residence. (When it was solely occupied by your child.)

** The total days of ownership period is from the acquisition date until the disposal date of the property. 

Please note

As your child has no ownership interest in the first dwelling, the fact that your child continued to live in it rent free after you and your spouse moved out has no effect on the calculation of the main residence exemption period. Also, it is not taken into account when calculating any capital gain or loss on disposal.

Further issues for you to consider

A comprehensive guide to CGT can be found on our website at:

https://www.ato.gov.au/General/Capital-gains-tax/

On the left hand side of this web page you will find specific topics one of which is "Calculating a capital gain or loss".

If your calculation results in a capital loss, this loss can only be offset against a capital gain in this year or it can be carried forward to be offset against future capital gains.