Edited version of private advice

Authorisation Number: 1052178694861

Date of advice: 13 October 2023

Ruling

Subject: CGT - main residence exemption - becoming an Australian resident

Question 1

Will the Payment received on the disposal of the Apartment be assessable to you under the capital gains tax provisions?

Answer

Yes.

Question 2

Will the first element of the cost base of the Apartment be its market value on the date you became an Australian resident?

Answer

Yes.

Question 3

Are you eligible for a full main residence exemption on the disposal of the Apartment?

Answer

No.

Question 4

Are your eligible for a partial main residence exemption on the disposal of the Apartment?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX.

The scheme commenced on:

1 July 20XX.

Relevant facts and circumstances

Background

You were born in Country X.

You lived with your relatives at a property (the Property) that had been owned by your family for a significant period of time, with the Property being a large piece of land.

Your parents worked and lived in a different part of Country X, away from where the Property was located.

After 20 September 1985, a local government authority (the Government) acquired the Property and other properties located in the same street to accommodate more residents in the area, with a multi-level block of flats being constructed on the combined land.

Your relatives were allocated several small apartments in the block of flats to compensate them for surrendering the Property to the Government.

Your relatives gave a separate apartment to each of their children and planned to give one apartment (the Apartment) to one of your parents (Person A). However, due to the legal system in Country X at that time, Person A was not allowed to own property in the area the Property was located while your parents were living in another part of Country X.

The Apartment

The Apartment was put into your name for no consideration on Date 1.

At that time you were under twenty years of age and did not have any income, having commenced studying and living at College.

The Apartment was renovated and then used by you during school holidays and occasionally used by your parents when they travelled to that area of Country X.

After some time, you moved into the Apartment after you completed college (Date 2), continuing to live there until you and your spouse departed Country X to travel to Australia to live (Date 3).

After you departed for Australia, your parents mainly used and cared for the Apartment.

All renovations, maintenance and repair costs of the Apartment were covered by your parents from when the Apartment was put into your name until you disposed of the Apartment.

The Payment

The local municipal government decided to redevelop the neighbouring area and reclaimed the entire neighbourhood, including the Apartment.

You were unable to travel to Country X to negotiate a favourable price for the Apartment with the government due to the COVID lockdown policies in both Country X and Australia.

You authorised your parent to sign the agreement for the disposal of the Apartment (the Agreement) which was signed on Date 6.

The amount payable under the Agreement (the Payment), was deposited into an account in your name that had been created by the relevant authority.

During the following year, you travelled to Country X to collect the Payment from the government and had it transferred to Australia.

You do not own any other property in Country X.

You and/or your spouse owned the following Australian properties after you arrived in Australia:

Table 1: You and your spouse owned the following Australian properties after you arrived in Australia

You will make the absence choice in relation to the Apartment for the period after you moved out of the Apartment, being Date 3, until your spouse purchased a property in Australia some years after your arrival in Australia on Date 4.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-135

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-170

Income Tax Assessment Act 1997 Section 118-185

Income Tax Assessment Act 1997 Section 855-45

Reasons for decision

Question 1

Will the Payment received on the disposal of the Apartment be assessable to you under the capital gains tax provisions?

Capital gains tax

Capital gains tax (CGT) is the tax you pay on certain capital gains you make. You make a capital gain or a capital loss when a 'CGT event' happens under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997).

For most CGT events, your capital gain is the difference between the capital proceeds and the cost base of your CGT asset.

Property is a CGT asset under section 108-5 of the ITAA 1997.

The most common CGT event A1 happens when you dispose of the asset to another party, such as when you dispose your ownership interest in a property under section 104-10 of the ITAA 1997.

The time of the CGT event A1 is:

•         when you enter into the contract for the disposal; or

•         if there is no contract, when the change of ownership occurs.

Taxation Determination TD 94/89 Income tax: capital gains: in what year of income is a taxpayer required for tax purposes to include a capital gain or loss in relation to land disposed of under a contract which is made in one year of income, but which is settled in a later year of income? provides the Commissioner's view as to the year of income you are required to include a capital gain or loss in relation to land disposed of under a contract which is made in one year of income, but which is settled in a later year of income. If that occurs, the capital gain is not included in your income tax return in the income year in which the asset is disposed until the disposal is finalised.

Application to your situation

The Apartment is a CGT asset. A CGT event A1 occurred when you transferred the ownership interest in the Apartment to the government authority and your ownership interest in the Apartment ended. The time of the CGT event A1 was when the Agreement was entered into, with your parent signing it on your behalf, being Date 6.

Therefore, the CGT provisions will apply in relation to the taxation treatment of the Payment.

We do not have sufficient information to determine when the Payment had been deposited into an account in your name by the relevant authority, such as did that occur in the income year in which the Agreement was signed or the following income year.

Regardless of when that occurred, the Agreement was entered into on Date 6. Therefore, in accordance with the principles contained in TD 94/89 any capital gain made in relation to the disposal of the Apartment will be assessable in the income year in which Date 4, the signing of the Agreement occurred, and not the income year in which the Payment was received by you.

Question 2

Will the first element of the cost base of the Apartment be its market value on the date you became an Australian resident?

CGT and becoming a resident of Australia

Special cost base and acquisition rules apply in respect of each CGT asset owned by the taxpayer just before becoming a resident under section 855-45 of the ITAA 1997.

If an individual becomes an Australian resident, then for each CGT asset that was owned just before the individual became an Australian resident (except an asset that is taxable Australian property or an asset that was acquired before 20 September 1985):

1.    the asset is taken to have been acquired by the individual at the time of becoming an Australian resident, and

2.    the first element of the cost base and reduced cost base of the asset at the time of becoming an Australian resident is its market value at that time.

Application to your situation

You acquired your ownership interest in the Apartment after 20 September 1985 on Date 1 while you were a resident of Country X.

You departed Country X around Date 3 to travel to Australia where you have continued to live from that time until the present time, becoming an Australian resident.

For CGT purposes, you are viewed as having acquired your interest in the Apartment on the date you became an Australia resident. Therefore, the first element of the cost base of the Apartment used when completing the capital gains tax calculation on the disposal of the Apartment will be its market value at the time you became an Australian resident.

Question 3

Are you eligible for a full main residence exemption on the disposal of the Apartment?

Question 4

Are your eligible for a partial main residence exemption on the disposal of the Apartment?

Full main residence exemption

Under section 118-10 of the ITAA 1997, a capital gain or capital loss you make from a CGT event that happens to your main residence is disregarded if you are an individual and:

•         the dwelling was your main residence throughout your ownership period; and

•         the property was not used to produce assessable income.

The ownership period for main residence exemption purposes starts from when you obtain your legal interest in the property, such as when the title is transferred into your name and ends when your legal interest in the property ends, such as when the title of the property is transferred out of your name.

A dwelling will be viewed as your main residence from the time you acquired your ownership interest in it if you moved into it as soon as practicable after that time under section 118-135 of the ITAA 1997, such as the date the dwelling was put into your name. If you do not move into a dwelling as soon as practicable after you obtain your ownership interest in it, the main residence days in relation to your ownership period will not start until you move into the dwelling, and you will only be entitled to a partial main residence exemption.

Extension to the main residence exemption - absence rule

The main residence exemption can be extended if you move out of a dwelling that has been your main residence which is then used by family members for no consideration. When that occurs you can make the absence choice which allows you to continue to treat the dwelling as your main residence for an indefinite period when the property is used by family members for no consideration (section 118-145 of the ITAA 1997).

Taxation Determination TD 95/7 Income tax: capital gains: does subsection 855-45(3) of the Income Tax Assessment Act 1997 prevent a taxpayer from making a choice that section 118-145 of that Act apply to an overseas dwelling that the taxpayer owned before becoming a resident of Australia? outlines that you can make an absence choice in relation to a main residence that you owned before becoming a resident of Australia.

ATO Interpretative Decision ATO ID 2010/101 (Withdrawn) Income Tax Capital Gains Tax: main residence exemption - interaction with non-resident provisions states that for the purposes of the main residence exemption, the ownership period of a dwelling located in a foreign country includes the period that it was owned by a taxpayer prior to the taxpayer becoming an Australian resident. This is the case even though for acquisition purposes the foreign resident provisions in Division 855 of the ITAA 1997 provide that the taxpayer is considered to have acquired the dwelling for its market value at the time of becoming a resident. While this ATO ID has been withdrawn, the information contained in it can still be relied upon.

Limitation to the main residence exemption

If you and your spouse have different homes for a period, for CGT purposes you and your spouse must each make a choice in relation to the properties (section 118-170 of the ITAA 1997). You must either:

•         choose one of the homes as the main residence for both of you for the period. If this occurs, then the person who owns that dwelling can make the choice to fully disregard any capital gain or capital loss for the period in relation to their interest in their property; or

•         nominate the different homes as each of their main residences for the period in which case the exemption is split dependent on each of their respective interests in their property.

Partial main residence exemption

If a CGT event happens to a dwelling you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole time you owned it, you are entitled to a partial exemption (section 118-185 of the ITAA 1997).

The following formula is used when calculating any capital gain or capital loss when you are eligible for a partial main residence exemption:

Capital gain/capital loss × Non-main residence days ÷ Total number of days in your ownership period

Capital gain or capital loss is the difference between your capital proceeds (sale proceeds) and the cost base of the dwelling. You make a capital gain if the capital proceeds are more than the cost base of the asset. You make a capital loss if the capital proceeds are less than the reduced cost base.

Non-main residence days are the number of days in your ownership period when the dwelling was not your main residence.

Total number of days in your ownership period are the days from when you obtained your ownership interest in the dwelling until your ownership interest in the dwelling ends, such as when it is transferred to another party.

Application to your situation

You used the Apartment as follows during your ownership period, and will make the following choice:

•         You obtained your ownership interest in the Apartment on Date 1 but did not move into it for several years until Date 2. Therefore, you had not moved into the Apartment as soon as practicable for main residence purposes and you will not be eligible for a full main residence exemption. This period will be non-main residence days in relation to your ownership period.

•         From Date 2 until Date 3 you lived in the Apartment until you moved out to travel to Australia to live. This period will be main residence days.

•         From Date 3 until your spouse purchased Property A on Date 4, you will make the absence choice to continue to treat the Apartment as your main residence while you were in Australia and your parents used the Apartment in your absence. The days in this period will be main residence days.

•         From Date 4 until your ownership interest in the Apartment ended, the days in this period will be non-main residence days. That is because the absence choice you made to extend the main residence exemption from Date 3 when you moved out of the Apartment ends on Date 4 on the purchase of your spouse's property as you had made the choice for your spouse's property, Property A, to be your main residence from Date 4 until they sold their property several years later on Date 5 as evidenced by them making a choice to apply a full main residence exemption to disregard any capital gain made on the disposal of Property A, which could not have occurred if you had not made that choice.

While you lived in the Apartment for part of your ownership period and will make the absence choice for the period from Date 2 to Date 4, you will not have main residence days for all of your ownership period.

Therefore, as the Apartment was not your main residence for all of your ownership period, and it cannot be extended by any choices being made in relation to it to cover the entire ownership period, you will not be entitled to a full main residence exemption and will only be entitled to a partial main residence exemption.

Conclusion

We have determined that the CGT provisions and the main residence exemption will apply to you as follows:

•         For CGT purposes you will be viewed as having acquired the Apartment for its market value when you became an Australian resident, and the market value will be the first element of the cost base of the Apartment

•         You will only be entitled to a partial main residence exemption

•         Your total ownership period will be from Date 1 when you obtained ownership of the Apartment until your ownership ended

•         The main residence days in your ownership period will be from Date 2 when you moved into the Apartment until Date 4 when your spouse purchased their property, being the days you lived in the Apartment and the period covered by the absence choice; and

•         The non-main residence days will be from Date 1 when you acquired the Apartment until Date 2 when you moved into the Apartment, and from Date 4 until you disposed of the Apartment under the Agreement.

You meet the conditions contained in Division 115 of the ITAA 1997 to be able to reduce any capital gain made on the disposal of the Apartment by the 50% CGT discount.