Edited version of private advice

Authorisation Number: 1052129202380

Date of advice:

Ruling

Subject: Capital gains tax

Question

Will the sale of the property result in a capital gains tax event for you?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2022

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

Your parents had four children.

On X July 19XX, your parents purchased the property and became the joint registered proprietors of the property.

They lived at the property as their main residence until they passed away.

One parent passed away in 19XX. The other parent passed away XX February 19XX.

You lived with your parents at the property from 19XX.

When the latter parent passed away, they did not leave a Will.

At the time of their death, you and your siblings entered into an agreement whereby you gave your siblings each a sum of your own money and in return your siblings relinquished any interest they had in the property to you.

You continued to live at the property as your main residence.

Letters of Administration was successfully granted to you on XX October 20XX.

You and your spouse continued to live at the property until 20XX.

You moved out and rented the property out as your investment property from 20XX.

During the time that the property had been rented out, all rental agreements have always been in your personal name.

You collected the rental income from the property as your personal income

You used your own money to pay the expenses associated with the property, such as council rates.

You included the rental income as assessable income and claimed deductions for the property expenses in your personal income tax returns.

You continued to treat the property as your main residence under the absence rule in section 118-145 of the Income Tax Assessment Act 1997 after moving out of the property.

In late 20XX, you decided to sell the property.

On XX May 20XX, the property was successfully sold at auction.

The settlement occurred on XX June 20XX.

Relevant legislative provisions

Income Tax Assessment Act section 104-10

Income Tax Assessment Act section 118-110

Income Tax Assessment Act section 118-145

Income Tax Assessment Act section 118-185

Income Tax Assessment Act section 118-192

Income Tax Assessment Act subdivision 115-A

Income Tax Assessment Act subdivision 115-B

Reasons for decision

Summary

Capital gains tax (CGT) event A1 happens for you in the 20XX income year when the property was sold.

The property was your main residence for part of your ownership period. As the property was rented out for more than six years, you are entitled to a partial main residence exemption.

The special rule in section 118-192 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to your case. Therefore, the dwelling will have a cost base and reduced cost base equal to its market value at the time you first started using the property for income producing purposes.

The CGT general discount applies as you sold the property more than 12 months after you first used it to produce income.

Detailed reasoning

CGT event A1 happens when you dispose of a CGT asset. The beneficial owner of the CGT asset will be liable to determine the capital gain or loss from the event. You became the beneficial owner of the property in 20XX. When the property was disposed of in the 20XX income year, CGT event A1 happens for you and you need to determine any capital gain or loss from the event.

The main residence provisions contained in subdivision 118-B of the ITAA 1997 allow an individual to disregard a capital gain or capital loss relating to the disposal of a dwelling which was that person's main residence.

The property was your main residence for a period of your ownership. Under section 118-145 of the ITAA 1997 you have chosen to continue to treat the dwelling as your main residence after you moved out. As the dwelling was being used for income producing purposes during your absence, the maximum period it can be treated as your main residence is six years (noting you cannot claim the main residence exemption for another property for the same period). In your case, as the property was rented out for more than six years before it was sold, you are eligible to a partial main residence exemption (section 118-185).

In addition, a special rule under section 118-192 of the ITAA 1997 applies where a main residence is first used for income-producing purposes after 20 August 1996 (commonly referred to as the 'home first used to produce income rule').

In respect of the dwelling, the rule is triggered if the following apply:

•         You acquired the property on or after 20 September 1985;

•         You first used the property to produce income after 20 August 1996;

•         When you sell the property (or another CGT event happens to it), you would get only a partial CGT exemption because you used it to produce income during the period you owned it; and

•         You would have been entitled to a full exemption if the sale or other CGT event happened to the property immediately before you first used it to produce income.

If these conditions are satisfied, you are taken to have acquired the dwelling with a cost base and a reduced cost base equal to its market value at the time you first started using it for income-producing purposes. Note that expenditure incurred before that time is ignored.

In your case, as discussed above, you are entitled to a partial main residence exemption, the income producing use started after 20 August 1996 and you would have been entitled to the full main residence exemption if the property was sold before you first rented it. Therefore, the special rule in section 118-192 applies and you will work out the capital gain or loss using the property's market value at the time you first used it to produce income.

For CGT purposes you are taken to have acquired the property when you first used it to produce income. This is more than 12 months before you sold it, so you can use the CGT discount (50% for individuals) to reduce any capital gain.