Private ruling: Assessability of foreign sourced income
Published: August 2013
Date scheme commenced: 1 July 2009

Ruling: Questions and answers: | 1. Are you entitled to disregard in full any capital gain or loss that resulted from the disposal of your property 1? | No. | 2. Are you entitled to disregard in part any capital gain or loss that resulted from the disposal of your property 1? | Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 118-145 | Income Tax Assessment Act 1997 Section 118-185 | Income Tax Assessment Act 1997 Section 115-5

Reasons for decision: Detailed Reasoning - Capital gains tax (CGT): Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. Section 108-5 of the ITAA 1997 lists land and buildings as CGT assets. Under section 104-10 of the ITAA 1997, a CGT event A1 occurs when you dispose of the CGT asset to someone else. You make a capital gain if the capital proceeds from the disposal are more than the assets cost base. You make a capital loss if those capital proceeds are less than the assets reduced cost base. | Detailed Reasoning - Main residence exemption: Generally you can disregard a capital gain or capital loss made on the disposal of a property that is your main residence if: · the property was your main residence for the whole period you owned it · the property was not used to produce assessable income, and · any land on which the dwelling is situated is not more than 2 hectares. In some cases you can choose to have a dwelling treated as your main residence even though you no longer live in it. You can only make this choice for a dwelling that you have first occupied as your main residence. If you make this choice, you cannot treat any other dwelling as your main residence for that period. | Detailed Reasoning - Absence rule: Subsection 118-145(1) of the ITAA 1997 provides that a taxpayer can make an election to continue to treat a dwelling as their main residence even though it has ceased to be so. The choice can be made for a total of up to 6 years. If an individual does elect to treat a dwelling as their main residence after they have moved out of it, no other dwelling can be treated as their main residence during the same period. | Detailed Reasoning - Main residence for only part of ownership period: If a CGT event happens to a dwelling you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole time you owned it, you are only entitled to a partial main residence exemption. | Detailed Reasoning - Your circumstances: In your case, you and your then spouse purchased property 1 for recreational use. The property was purchased from the proceeds you received from your compensation payout. During your ownership of property 1, you and your spouse also owned another property which was occupied as your main residence (property 2). After a period you separated from your spouse. After you separated your spouse you moved into property 1 and occupied it as your main residence until your spouse vacated property 2. As property 1 was only occupied as your main residence from the period you separated from your spouse to the period that you returned to property 2, you are entitled to apply the main residence exemption for property 1 only for this period. Since you had occupied property 1 as your main residence from the day you separated from your spouse, you are entitled to apply the 6 year absence rule and continue to elect the property as your main residence up until the property was disposed of. If you elect property 1 to be your main residence for this period you will be unable to apply the main residence exemption to any other property during the same period. This is because you are not entitled to elect 2 main residences for the same period. Accordingly, you are entitled to disregard in part any capital gain or loss that has resulted from the disposal of property 1. This period will be from the date that you moved into the property after you separated from your spouse to the date that it was disposed. | Detailed Reasoning - Calculating your partial capital gain: Under subsection 118-185(2) of the ITAA 1997, a partial exemption is allowed based on the number of days the dwelling was your main residence. The assessable portion of the capital gain is calculated using the following formula: Capital gain or Capital loss amount × Non-main residence days Total days Once you calculate the amount that will be subject to CGT, you will then need to apportion any capital gain or loss according to your ownership interest not according to distribution of the proceeds. | Detailed Reasoning - CGT discount: Under section 115-5 of the ITAA 1997, you make a discount capital gain if the following requirements are satisfied: a) you are an individual, a trust or a complying superannuation entity b) a CGT event happens to an asset you own c) the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999 d) you acquired the asset at least 12 months before the CGT event, and e) you did not choose to use the indexation method. Under the discount method you reduce your capital gain by the discount percentage. For individuals, the discount percentage is 50%. However, you can reduce the capital gain only after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years. As you have owned property for a period of greater than 12 months, and you have satisfied the other relevant requirements provided under section 115-5 of the ITAA 1997, you will be able to apply the 50% discount after you have calculated your assessable capital gain and applied all the capital losses for the year and any unapplied net capital losses from earlier years. | Detailed Reasoning - Marriage breakdown: Where you transfer an asset to your spouse as a result of a marriage breakdown, there is automatic CGT rollover in certain cases. If the rollover applies, the spouse transferring the asset disregards any capital gain or capital loss they make on the transfer. The spouse to whom the asset is transferred makes the capital gain or capital loss when they eventually dispose of the asset. In your case, as there was no transfer of ownership of property 1 between you and your ex-spouse the marriage breakdown rollover provisions will not apply and any capital gain or loss that was made as a result of its disposal of the property cannot be disregarded. | Detailed Reasoning - Note: While it is acknowledged that property 1 was not an investment property and therefore did not earn any assessable income, subdivision 118-B of the ITAA 1997 provides that you are only entitled to elect one main residence at any one time to apply the main residence exemption.

Relevant facts: You made use of a payout by purchasing property 1. | Property 1 was purchased to provide a permanent holiday home for you, your spouse and your children. | The ownership title of the property was held by both you and your spouse. | In addition to property 1, you and your spouse also owned property 2, which you occupied as your main residence. | After a period of ownership, you and your spouse separated and later divorced. | After the separation, you resided at property 1 until your ex-spouse moved out of property 2. | As a consequence of the marriage breakdown a court order was issued by a family law court. | Contained within the court order was a direction that property 1, be disposed of, with the proceeds being divided between you and your ex-spouse. | The proceeds received from the disposal of property 1 were distributed as directed by the court order such that you received a lesser amount than your spouse received. | In consideration of your ex-spouse receiving the larger share of the proceeds from the disposal of property 1, your ex-spouse transferred their ownership interest in property 2 to you. | You are electing to treat property 1 as your main residence from the date it was first occupied as your main residence to the day it was disposed of.