Private ruling: Capital gains tax
Date of advice: 21 December 2017
Published: March 2018
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Do the capital gains tax (CGT) provisions apply to the sale of your properties? | A1: Yes.

Relevant facts and circumstances: You owned properties (the properties). You borrowed heavily against your properties, however economic conditions deteriorated and you entered into bankruptcy. You were declared bankrupt. In accordance with section 133 of the Bankruptcy Act 1966 the Trustee disclaimed the Properties. Properties were eventually sold within shortfall of the mortgage which was accepted by the bank. No money was paid to you after the sale of the properties and you did not gain any personal benefit from the sale of the property. The contracts for the sale of the properties contained a condition stating that the buyer is aware that the seller was bankrupt. All properties were purchased after 1985. You lived in one of the properties before turning it into an investment property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-185

Reasons for decision: Summary: You make a capital gain or capital loss if a CGT event happens to a CGT asset. The most common CGT event is CGT event A1, which happens when you dispose of an asset to someone else. The time of the event is when you enter into a contract for the sale, or if there is no contact, when the change of ownership occurs. A CGT asset is any kind of property, and an interest in a property is a CGT asset. If two or more individuals own an asset jointly, CGT applies separately to each of the individuals interests in the assets. You make a capital gain if the capital proceeds from the disposal are more than the assets cost base. Division 106 of the Income Tax Assessment Act 1997 (ITAA 1997) contains rules to ensure that only one entity is recognised where a capital gain or loss is made by someone other than the entity to which a CGT event happens. For CGT purposes, the vesting of an individual's CGT assets in the trustee in bankruptcy under the Bankruptcy Act 1966 or under a similar foreign law is ignored (section 106-30 of the ITAA 1997). Similarly, the CGT provisions apply to an act done by an entity (or its agent) in relation to a CGT asset for the purpose of enforcing, giving effect to or maintaining a security, charge or encumbrance over the asset as if the act had been done by the entity that provided the security (section 106-60 of the ITAA 1997). In this instance, CGT event A1 occurred following the sale of each of the properties and you will be liable for any CGT liabilities that follow. | Detailed Reasoning - Partial main residence exemption from CGT: Section 118-185 of the ITAA 1997 provides that you are entitled to a partial exemption from CGT where a dwelling was your main residence for part of your ownership period. Subsection 118-185(2) of the ITAA 1997 provides a formula which allows you to adjust the capital gain or capital loss amount calculated on disposal of the property to take into account the proportion of your main residence days in the property to the total number of ownership period days of the property. If a dwelling was your main residence for only part of your ownership period, you will only get a partial exemption for a CGT event that occurs in relation to the dwelling. The capital gain or loss is calculated using the following formula: Capital gain or loss amount X non-main residence days total ownership period days In your case, you will be entitled to a partial main residence exemption for the property that was your main residence before becoming an investment property. Your non-main residence days will be the total number of days that you were not residing in the dwelling. The total number of days in your ownership period will be the total days from the date of purchase until the date the dwelling was sold.