Private ruling: CGT Main Residence Exemption
Published: December 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will you be liable for Capital Gains Tax on the disposal of the property? | A1: Yes. | Q2: Will you be able to claim the main residence exemption, on a pro-rata basis, for the period from when it was your principal place of residence, until the later disposal of the property? | A2: Yes.

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: o your application for private ruling o copy of the Family Court consent order A marriage breakdown occurred. As part of the divorce settlement, a jointly owned investment property that you moved into due to the marriage breakdown was transferred into your sole name. The transfer happened because of a consent order under the Family Law Act 1975 . The investment property was let out to tenants prior to you moving in. You sold the dwelling after the property was transferred into your sole name. You used the dwelling as your main residence for part of the ownership period.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Subdivision 126-A | Income Tax Assessment Act 1997 Section 126-5

Reasons for decision: Summary: You will be entitled to a partial main residence exemption on the disposal of the property for the period it was used as your main residence. Capital gains tax will be payable for the gains not covered by the partial main residence exemption. | Detailed Reasoning - Marriage or relationship breakdown roll-over: As a general rule, capital gains tax (CGT) applies to all changes of ownership of assets on or after 20 September 1985. However, if an asset is transferred as a result of the breakdown of a marriage or relationship, there is automatic rollover in certain cases. A same asset roll-over involves the transferral of an asset from one taxpayer to another. It allows a taxpayer to defer the making of a capital gain from such a CGT event until such time as a later event occurs in respect of the asset. Subdivision 126-A of the Income Tax Assessment Act 1997 (ITAA 1997) considers same asset roll-overs in the context of marriage breakdown. Section 126-5 of the ITAA 1997 states there is a roll-over if a CGT event (the trigger event) happens involving an individual (the transferor) and his or her spouse (the transferee), or a former spouse (also the transferee) when one of the requirements of the section is met. The requirement that is met in your instance is: - A court order under the Family Law Act 1975 or under a State law, Territory law or foreign law relating to a breakdown of relationships between spouses. | Detailed Reasoning - Position of transferee (you): Subsection 126-5(5) explains that, for a disposal case where the transferor acquired the asset (or share of a jointly owned asset) on or after 20 September 1985, the first element of the asset's cost base (in the hands of the transferee) is the asset's (or share of a jointly owned asset's) cost base (in the hands of the transferor) at the time the transferee acquired it. | Detailed Reasoning - Example:: Jen transfers land to her former spouse, Alf, because of a court order under the Family Law Act 1975. If the cost base of the land to Jen at the time Alf acquired it is $100,000, the first element of the land's cost base in Alf's hands is $100,000. A payment, made by a taxpayer to their former spouse under a Family Court order does not form part of the taxpayer's cost base. In your case, the amount that you were required to pay under the Court Orders is not included in the cost base of the property. | Detailed Reasoning - Example:: Jen transfers land to her former spouse, Alf, because of a court order under the Family Law Act 1975. Alf under the Family Court order is required to pay $150,000 to Jen. If the cost base of the land to Jen at the time Alf acquired it is $100,000, the land's cost base in Alf's hands is $100,000 not the payment amount of $150,000 made under the Family Court order. The first element of the cost base of the share of the property transferred to you from your former spouse is his cost base of his interest in the property at the time of transfer. In working out the cost base of the interest transferred to you from your former spouse, you add any costs incurred after the interest was transferred to you that form part of the other four elements of the cost base. The total cost base of the property is the cost base of your former spouse's interest as above plus the cost base of your original interest in the property. | Detailed Reasoning - Example:: Dwelling transferred to you under a CGT event that happened after 12 December 2006 becomes your home. George and Natalie jointly purchased a holiday home on 0.1 hectare of land. Settlement of the purchase contract happened on 13 March 2011. On 13 March 2013, George transferred his half interest to Natalie under the terms of an arbitral award. Natalie uses the dwelling as her main residence for three years from the date of the CGT event until she sells it. Settlement of the sale contract happens on 13 March 2016. Because the dwelling was Natalie's main residence for three years out of the five years she owned her original interest, she is entitled to a 60% main residence exemption on that interest. Because George's half interest in the dwelling was transferred to Natalie under a CGT event that happened after 12 December 2006 and CGT marriage or relationship breakdown rollover applied, Natalie is also entitled to a 60% main residence exemption on that half interest - having regard to how they both used that interest during their combined period of ownership. In working out the cost base of the interest George transferred to her, Natalie adds any relevant costs she incurred after George transferred it to her to the cost base of his interest at the time of the transfer. | Detailed Reasoning - Main residence exemption: A capital gain or loss from a dwelling is ignored for CGT purposes if the taxpayer is an individual, the dwelling was the taxpayer's main residence throughout the ownership period and the interest did not pass to the taxpayer as a beneficiary in, or as the trustee of, the estate of a deceased person under section 118-110 of the ITAA 1997. Subsection 118-185(1) of the ITAA 1997 explains that you get only a partial exemption for a CGT event that happens in relation to a dwelling or your ownership interest in it if: a) you are an individual; and b) the dwelling was your main residence for part only of your ownership period; and c) 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. Subsection 118-185(2) provides that you calculate your capital gain or loss using the formula: CG or CL amount X Non-main residence days Days in your ownership period where: CG or CL amount is the capital gain or capital loss you would have made from the CGT event apart from this Subdivision. Non-main residence days is the number of days in your ownership period when the dwelling was not your main residence. Accordingly, you will only be entitled to a partial main residence exemption for the period from when the dwelling was firstly used as your main residence (your principal place of residence), in certain month 20xx, until when the property was sold, certain month 20yy. | Detailed Reasoning - Example:: Lisa acquired a dwelling on 20 October 2006 which she let out to tenants until 21 October 2009, from which date she used the dwelling as her main residence. Lisa eventually sold the dwelling on 8 September 2011 and made a capital gain of $40,000, calculated without regard to the exemption provisions. The capital gain is reduced pro-rata by reference to the period Lisa used the dwelling as her main residence. The reduced capital gain is: $40,000 X 1,098 (number of days from 20/10/2006 to 21/10/2009) 1,785 (number of days of Lisa's ownership) = $24,605