Private ruling: Capital gains tax and the sale of your property
Ruling period: Year ending 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Question and Answer | Are you entitled to a partial main residence exemption on the sale of your property? | Yes.

Relevant facts and circumstances: You purchased a property shortly after 20 September 1985 and prior to 20 August 1991. You moved into the property straight after the purchase and it became your main residence. You moved out of the property several years later and began renting another property elsewhere. You purchased another main residence some time later. The original property remained vacant for a period of time as you were determining what to do with it (i.e. sell the property or rent it). You began renting out the original property some time after 20 August 1996 and continued to rent it until you sold it. You wish to make a choice under section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997) to continue to treat the property as your main residence but you only wish this choice to apply from the time that you moved out of the property until the time that you acquired another main residence.

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 110-25, | Income Tax Assessment Act 1997 Section 110-55, | Income Tax Assessment Act 1997 Section 114-5, | Income Tax Assessment Act 1997 Section 114-10, | Income Tax Assessment Act 1997 Section 115-5, | Income Tax Assessment Act 1997 Section 115-10, | Income Tax Assessment Act 1997 Section 115-15, | Income Tax Assessment Act 1997 Section 115-20, | Income Tax Assessment Act 1997 Section 115-25, | Income Tax Assessment Act 1997 Section 116-20, | Income Tax Assessment Act 1997 Section 118-110, | Income Tax Assessment Act 1997 Section 118-140, | Income Tax Assessment Act 1997 Section 118-145, | Income Tax Assessment Act 1997 Section 118-185 and | Income Tax Assessment Act 1997 Section 118-192.

Reasons for decision: Summary: Calculating your capital gain or capital loss You make a capital gain if your capital proceeds are more than your cost base and you make a capital loss if your capital proceeds are less than your reduced cost base. Your capital proceeds is the amount of money that you receive, or that you are entitled to receive, as a result of the sale. The cost base of a CGT asset is made up of five elements. You need to add together all of these elements to calculate the cost base. Briefly these are: · Money paid or required to be paid for the property. · Incidental costs of acquiring the property, or costs in relation to the CGT event, for example, stamp duty, legal fees, agent's commission etc. · Costs of owning the asset such as rates, land taxes, repairs and insurance premiums. These costs can only be included if the asset was acquired after 20 August 1991. As you acquired your property prior to this date, you will not be able to include these costs in its cost base. · Capital expenditure you incur to increase or preserve the value of the asset such as renovations that are improvements rather than repairs. · Capital expenditure you incur to preserve or defend your title or right to the asset. · Third element costs are not included in the reduced cost base of an asset. Main residence exemption Generally, you disregard any capital gain or capital loss that you make on the sale of a dwelling that was your main residence for your entire ownership period. Absence choice In some cases, you can choose to continue to treat a property as your main residence even though you no longer live in it. You can only make this choice for a property that you have first occupied as your main residence. Where you use the property to produce income, for example you rent it out, you can choose to treat it as your main residence while you use it for that purpose for a period of up to six years after you stop living in it. Where you do not use the property to produce income you can choose to treat it as your main residence indefinitely. If you make this choice you cannot treat any other property as your main residence. You can choose when you want to stop the period covered by this choice. In your situation, you have made the choice to continue to treat your original property as your main residence from the time that you moved out of it until you purchased another main residence. Changing main residence If you acquire a new home before you dispose of your old one, both properties are treated as your main residence for up to six months if: · the old property was your main residence for a continuous period of at least three months in the 12 months before you disposed of it, · you did not use the old property to produce assessable income in any part of that 12 months when it was not your main residence, and · the new property becomes your main residence. In your situation, the original property was not your main residence for any period within 12 months prior to its sale and it was used to produce assessable income during that 12 month period. Accordingly, this concession will not apply. Partial main residence exemption Where a property was your main residence for only part of your ownership period, you will only be entitled to a partial exemption. Where you are only entitled to a partial main residence exemption you need to calculate your capital gain or capital loss using the following formula: capital gain or capital loss multiplied by non main residence days divided by days in your ownership period. In your situation, your non main residence days will be from the time you purchased another main residence and terminated your choice under section 118-145 of the ITAA 1997 until you sold the property. Your total ownership days will be from the time you purchased the property until you sold the property. Special rule for first use to produce income There is a special rule that applies where a property is rented for the first time after 20 August 1996 whereby you are taken to have acquired the property, for its market value, on the day that you began renting it out. However, in order for this special rule to apply you must have been entitled to a full main residence just prior to the time that you first began renting out the property. In your situation, you were not entitled to a full main residence exemption prior to your renting the property. The property was your main residence from the time you purchased it until you purchased another main residence. You did not rent the property out until some time later. This means that you were only entitled to a partial rather than a full main residence exemption just prior to the time that you first began renting out the property and accordingly, the special rule will not apply. Therefore, the first element of the cost base of the property will be the amount that you paid to acquire it. Indexation or discount method As you acquired the property before 21 September 1999 and you have owned it for more than 12 months, you are able to choose either the indexation method or the discount method when calculating your capital gain or capital loss. For more information in respect of these methods or calculating your capital gain or capital loss please refer to the guide to capital gains tax 2010 - NAT 4151-6.2010 which can be accessed on the ATO's website at www.ato.gov.au.

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