Edited version of private advice

Authorisation Number: 1052231422549

NOTICE

This is an edited version of a revised private ruling. It replaces the edited version of the private ruling with the authorisation number 1052208861574.

Date of advice: 13 March 2024

Ruling

Subject: CGT - cost base

Question 1

Are you entitled to apply the special rule 'home first used to produce income' under section 118-192 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

If the special rule does not apply, can the number of days during for which the Property was not used for the purpose of producing assessable income, be exempt from capital gains tax ('CGT') under the absence rule in section 118-145 of the ITAA 1997?

Answer

No.

Question 3

Should the decline in value deductions (Division 40 plant and equipment) claimed over the ownership years be subtracted from the cost base under section 110-25 of the ITAA 1997?

Answer

Yes.

This private ruling applies for the following period:

Year ended X June 20XX.

The scheme commenced on:

X July 20XX.

Relevant facts and circumstances

The Property is located at location A.

The taxpayer purchased the Property off the plan in 20XX.

The Property was situated on less than 2 hectares.

They owned 100% of the Property.

Settlement of the Property occurred in 20XX.

Prior to moving into the Property, the taxpayer was offered alternative housing at a location that would enable them to see their child more frequently.

The taxpayer accepted the offer of alternative housing and never moved into the Property.

The taxpayer frequented the Property during their ownership period to check the mail and ensure everything is in order however they never stayed there overnight.

The Property was first used for income producing purposes in 20XX when the taxpayer rented it out.

The Property was rented out from that time until it was subsequently sold in 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 110-125

Income Tax Assessment Act 1997 section 118-135

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 118-185

Income Tax Assessment Act 1997 section 118-192

Reasons for decision

Question 1

Summary

You are unable to use the special rule under subsection 118-192(2) of the ITAA 1997 as you did not first establish the property as your main residence by moving into the property at the time it was first practicable after you acquired your ownership interest in it.

Detailed reasoning

CGT main residence - full exemption

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.

Under section 118-135 of the ITAA 1997, a dwelling is considered your main residence provided you moved into the property at the time it was first practicable after you acquired your ownership interest in it.

CGT main residence - partial exemption

Under section 118-185 of the ITAA 1997, a partial exemption is available for a CGT event that happens in relation to a dwelling, or your ownership interest in it, if:

•  you are an individual; and

•  the dwelling was your main residence for part only of your ownership period; and

•  the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person.

Section 118-135 of the ITAA 1997 also applies to the partial exemption. That is, a dwelling is considered your main residence provided you moved into the property at the time it was first practicable after you acquired your ownership in it.

Although you had the intention to move into the property, the mere intention is not enough to satisfy that you have established the property as your main residence.

Therefore, you are not eligible for the full or partial exemption from CGT.

First use to produce income rule

This special rule (under subsection 118-192(2) of the ITAA 1997) provides that you are taken to have acquired the dwelling at its market value at the time it was first used to produce income if all of the following conditions apply:

•  you acquired the dwelling on or after 20 September 1985;

•  you first used the dwelling to produce income after 20 August 1997;

•  when a CGT event happens in relation to the dwelling, you would only get a partial exemption because the dwelling was used to produce income during the period you owned it (your ownership period); and

•  you would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income.

As outlined above, you are not eligible for the full or partial CGT exemption as you did not move into the property and establish it as your main residence as soon as practicable after you purchased the property. You do not satisfy conditions 3 and 4 of the rule and are therefore not able to use the special rule in section 118-192 of the ITAA 1997 when calculating your capital gain.

Question 2

Summary

You are not eligible for the absence rule as you did not establish the dwelling as your main residence prior to first using it for the purpose of producing assessable income.

Detailed reasoning

Section 118-110 of the Income Tax Assessment Act 1997 (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.

Section 118-145 of the ITAA 1997 provides that if a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence.

Subsection 118-145(2) of the ITAA 1997 further provides that if you use the part of the dwelling that was your main residence for the purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years. This is called the absence rule.

You are not eligible for the absence rule as you did not establish the dwelling as your main residence prior to first using it for the purpose of producing assessable income. As outlined in question 1 of this ruling, you are required to have moved into the property and establish it is your main residence to be eligible for the CGT exemption. This is also applicable to the absence rule.

Question 3

Summary

The expenditure pertaining to this ruling has been deducted by another provision of the ITAA 1997, therefore it does not form part of the cost base of the CGT asset and should be subtracted.

Detailed reasoning

Subsection 110-25(1) of the ITAA 1997 states that the cost base of a CGT asset consists of 5 elements.

Subsection 110-25(4) of the ITAA 1997 states that the third element of a CGT asset, acquired after 20 August 1991, is the costs of owning the CGT asset you incurred. It also states that these costs include:

•  interest on money you borrowed to acquire the asset; and

•  costs of maintaining, repairing, or insuring it; and

•  rates or land tax, if the asset is land; and

•  interest on money you borrowed to refinance the money you borrowed to acquire the asset; and

•  interest on money you borrowed to finance the capital expenditure you incurred to increase the asset ' s value.

However, expenditure on assets acquired after 7:30 pm on 13 May 1997 does not form part of the third element of the cost base to the extent that they have been deducted or can be deducted (subsection 110-40(2) and subsection 110-45(1B) of the ITAA 1997).

As the expenditure pertaining to this ruling has been deducted by another provision of the ITAA 1997, it does not form part of the cost base of the CGT asset and should be subtracted.