Edited version of your written advice

Authorisation Number: 1012785768429

Ruling

Subject: Main residence

Questions and Answers

Are you entitled to a full main residence exemption when you dispose of your property X?

Yes

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

Yes

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You and your ex-spouse purchased the property after 1986.

The property became your main residence.

You and your ex-spouse divorced and you acquired the property on date A after 2000.

On date B, you rented out a room and the property continued to be your main residence.

You moved to another property and you rented out the property.

You are selling the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 126-A

Income Tax Assessment Act 1997 Section 126-5

Income Tax Assessment Act 1997 Section 118-192

Income Tax Assessment Act 1997 Section 118-190

Income Tax Assessment Act 1997 Section 118-185

Income Tax Assessment Act 1997 Section 118-145

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 CGT event A1 which occurs when you dispose of a CGT asset to someone. 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 which is your main residence. To qualify for main exemption, the dwelling must have been your main residence for the whole period you owned it, must have not been used to produce assessable income.

Special rule for first use to produce income

If a main residence is first used to produce income after 20 August 1996, there is a special rule in section 118-192 of the ITAA 1997 that affects the way in which a capital gain or loss is calculated when the residence is sold.

Under the rule, 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:

a) only a partial main residence exemption would be available because the dwelling was used for the purpose of producing assessable income during your ownership period, and

b) you would have been entitled to a full main residence exemption if you had entered into a contract to dispose of the dwelling just before the first time it was used for the income producing purpose.

Part of dwelling used to produce income

Where part of the dwelling is set aside and used to produce income (such as rent), the individual cannot get a CGT exemption for that part of the dwelling by not claiming a deduction for the interest. Nor can the individual include interest in the cost base if they are entitled to a deduction but do not claim it.

When the dwelling is disposed of, the proportion of the capital gain or capital loss that is taxable is an amount that is reasonable having regard to the extent to which the individual would have been able to deduct the interest on money borrowed to acquire the dwelling (section 118-190 of the ITAA 1997). This is usually the proportion of the floor area of the dwelling that is set aside to produce income and the period the dwelling is used to produce income.

Absence

As a general rule, a dwelling is no longer your main residence once you stop living in it. However, in some cases you can choose to have a dwelling treated as your main residence for CGT purposes even though you no longer live in it.

Section 118-145 of the ITAA 1997 allows you to treat a dwelling (that was you main residence) as your main residence indefinitely, if you do not use it for the purpose of producing assessable income.

However, if you do use it for that purpose, you can only treat the dwelling as your main residence for a maximum period of 6 years while you use it for that purpose. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.

For any period(s) you choose to apply the main residence exemption, you cannot treat any other dwelling as your main residence for that period of time.

CGT discount

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

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

b) the CGT event happened on an asset you own after 11.45am (by legal time in the Australian Capital Territory) on 21 September 1999;

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

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

Under the discount method, the 50% CGT discount is applied to the taxable portion of the capital gain.

Your circumstances

In your case, you and your ex-spouse purchased the property after 1986; the property was your and your ex-spouse's main residence.

You and your ex-spouse divorced and your ex-spouse's share of the property was transferred to you on date A and it remained your main residence. On date B, you rented out a room of the property to earn assessable income; as a result, for the date you purchased the property to date B, you are entitled to apply the main residence exemption.

From date B, you rented out a room of the property, and you still occupied it as your main residence. From date C, you moved to another property and you rented out the property. Therefore, for the period from date B to date C, you are only entitled to a partial main residence exemption.

From date C, you may choose the property as your main residence. You are entitled to apply the main residence exemption up until date D when 6 years from the time that the property was last occupied as your main residence.

You are not entitled to apply the main residence exemption in part or in full for the period from date D to the date when you actually sold the property.

Conclusion

As you would have qualified for a full exemption if you had disposed of the property on date B, when you first used the property to produce assessable income, section 118-192 of the ITAA 1997 will apply. The first element of your cost base will be the market value at that time.

Once you have determined your capital gain by subtracting your proceeds from your cost base, you calculate you main residence exemption as follows:

Firstly, for the period from date B to date C, you are entitled to partial exemption. You will be required to use the following formula to apply your partial main residence exemption.

Net Capital Gain A = Capital Gain × Percentage of floor area not used as main residence × Percentage of period of ownership that part of property was not used as a main residence

Secondly, for the period from date D to the date you actually sold the property, you will be required to use the following formula to apply you main residence exemption.

Net Capital Gain B = Capital Gain x Non-main residence days

Total ownership days

Finally, you add Net capital gain A and Net capital gain B together. As you satisfy the requirements outlined under section 115-5 of the ITAA 1997, you are entitled to apply for the 50% discount to your capital gain.