Private ruling: Capital gains tax - main residence exemption
Published: January 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the dwelling your main residence for the whole ownership period? | A1: No. | Q2: Will you be exempt from capital gains tax? | A2: No.

Relevant facts and circumstances: You purchased the dwelling after 20 August 1996 Sometime later the dwelling was used to produce income some. Although you intended to move back into the dwelling, you were unable to due to unforeseen circumstances. The dwelling will be sold in order for you to buy a new dwelling.

Relevant legislative provisions: Income Tax Assessments Act 1997 Section 102-20 | Income Tax Assessments Act 1997 Section 118-110 | Income Tax Assessments Act 1997 Section 118-145 | Income Tax Assessments Act 1997 Section 118-185 | Income Tax Assessments Act 1997 Section 118-192

Reasons for decision: Detailed Reasoning - Capital gains tax: Capital gains tax (CGT) events are the different types of transactions or events that may result in a capital gain or capital loss. Many CGT events involve a CGT asset; some relate directly to capital receipts (capital proceeds). When you sell your dwelling (CGT asset) this will be a CGT event. | Detailed Reasoning - Main residence: If you dispose of an asset that was your main residence you may qualify for an exemption on the CGT. To obtain the full main residence exemption from CGT you must meet the following conditions: · The dwelling must have been your home for the whole period you owned it · You must not have used the dwelling to produce assessable income, and · Any land on which the dwelling is situated must be two hectares or less. You may be partially exempt from CGT if: · The dwelling was your main residence during only part of the period you owned it · You used the dwelling to produce assessable income, or · The land on which the dwelling is situated is more than 2 hectares. In your case, you used your dwelling to produce assessable income during your ownership period. Therefore you are not eligible for a full main residence exemption, but you are eligible for a partial main residence exemption. | Detailed Reasoning - Absence choice: In some cases, you can choose to apply an absence choice and treat a dwelling as your main residence even though you no longer live in it. You cannot make this choice for a period before a dwelling first becomes your main residence. After you move out, if you use the dwelling to produce income you can choose to continue to treat it as your main residence for up to six years. If you do not use the dwelling to produce income, you can treat it as your main residence indefinitely. In your case, sometime later you moved out of your dwelling. From that time the dwelling has been used to produce assessable income. Your six year absence period therefore commences from the date the dwelling first became available for rent. | Detailed Reasoning - Working out your capital gain: A capital gain is the difference between your capital proceeds (sale price) and the cost base of your CGT asset. The cost base of a CGT asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset. The cost base of a CGT asset is made up of five elements: 1. Money or property given for the asset 2. Incidental costs of acquiring the CGT asset or that relate to the CGT event 3. Costs of owning the asset 4. Capital costs to increase or preserve the value of your asset or to install or move it 5. Capital costs of preserving or defending your ownership of or rights to your asset. In working out a capital gain or loss on a dwelling, the first used to produce income rule in section 118-192 of the Income Tax Assessment Act 1997 (ITAA 1997) applies if: · 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 · The income producing use started after 7.30pm (by legal time in the ACT) on 20 August 1996, and · 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. As your circumstances satisfy the above requirements, when working out the first element of your cost base, you are taken to have acquired the dwelling for its market value at the time you first started using it for income producing purposes. | Detailed Reasoning - Partial main residence exemption: Subsection 118-185(2) of the ITAA 1997 states that you calculate the part of the capital gain that is taxable as follows: Capital gain X non-main residence days Total days in ownership period Capital gain is the amount you gained from the CGT event that took place on disposal of your dwelling. Non-main residence days are the number of days in your ownership period when the dwelling was being used to produce assessable income. Total days in ownership period are the date of settlement of the contract for purchase until date of settlement of the contract to dispose of the dwelling. Your total days in ownership period would be from the date you first started using the dwelling for income producing purposes until the date of settlement to dispose of the dwelling. In your case you would calculate your non-main residence days from the date the 6 year absence period was reached until the date of settlement to dispose of the dwelling.