Private ruling: Capital gains tax
Published: June 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Questions and answers: | 1. Are you entitled to a full main residence exemption on your ownership interest in the property? | No. | 2. Are you entitled to a partial main residence exemption on your ownership interest in the property? | Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20. | Income Tax Assessment Act 1997 Section 104-25. | Income Tax Assessment Act 1997 Subsection 108-55(2). | Income Tax Assessment Act 1997 Subsection 124-10(2). | Income Tax Assessment Act 1997 Subsection 124-10(4). | Income Tax Assessment Act 1997 Section 124-575. | Income Tax Assessment Act 1997 Section 124-580.

Reasons for decision: Summary: You make a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985. You make a capital gain if your capital proceeds from the sale of a CGT asset are greater than the cost base for the purchase of that asset, for example, if you receive more for an asset than you paid for it. You make a capital loss if your reduced cost base for the purchase of that asset is greater than the capital proceeds resulting from the sale of that asset, for example, if you receive less for an asset than you paid for it. Capital gains tax is not a separate tax, a capital gain forms part of your assessable income and is taxed at your marginal tax rate. | Detailed Reasoning - Main Residence exemption: You can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for the full exemption from CGT: · The residence must have been your home for the whole period that you owned it. · You must not have used the dwelling to produce assessable income. · The land the dwelling is situated on and adjacent to must be 2 hectares or less in size. · You must have moved into the dwelling as soon as practicable after you purchased the dwelling. A main residence exemption is not extended to the situation where you are unable to move into the dwelling because it is being rented out at the time of acquisition. In your case, you purchased a property after 19 September 1985 with an existing lease attached to it. You and your sibling moved in to the property as your home after the tenant vacated. The land on which the dwelling was situated and adjacent to is less than 2 hectares and apart from the initial rental period was not used to produce assessable income. Therefore, a full main residence exemption is not available for the period of ownership prior to you occupying the dwelling as your main residence. | Detailed Reasoning - Partial Main residence exemption: Section 118-185 of the ITAA 1997 states that if a dwelling is your main residence for only part of your ownership period, you will only get a partial exemption for any loss or gain arising from a CGT event that occurs in relation to that dwelling. The capital loss or gain is calculated using the following formula: Capital gain or loss x Non main residence days * Total days of your ownership period (*non main residence days are the number of days where a dwelling was not occupied as your main residence). Your non main residence days will be calculated from the date of settlement for acquisition until the date you moved in and established the property as your main residence. | Detailed Reasoning - Construction and sale of new dwelling: As discussed above you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. You can choose to apply the main residence exemption as if the dwelling that you are building, repairing or renovating on the land was your main residence from the time you acquired the ownership interest where the following conditions are met: · a dwelling on the land that you construct, repair or renovate becomes your main residence as soon as practicable after the work is finished, and · It continues to be your main residence for at least 3 months. You and your sibling moved into the newly constructed dwelling dual occupancy as soon as it was completed which was more than 3 months ago. There was a delay during the construction phase. You and your sibling are currently living in the property. | Detailed Reasoning - Demolition of dwelling: Capital gains event C1 happens if a capital gains asset you own is lost or destroyed. Taxation Determination TD 1999/79 confirms that CGT event C1 can happen on the voluntary destruction of an asset where for example, a taxpayer might demolish a building in the course of redeveloping a property. Therefore, on the demolition of the property CGT event C1 happened. Subsection 104-20(3) of the ITAA 1997 provides that you make a capital gain from CGT event C1 if the capital proceeds from the loss or destruction are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. | Detailed Reasoning - Capital proceeds: You did not receive any capital proceeds on the demolition of the dwelling. Further, section 116-25 of the ITAA 1997 provides that the market value substitution rule does not apply to CGT event C1. | Detailed Reasoning - Cost base: As a CGT event has happened to only part of your asset, you will be required to apportion the cost base or reduced cost base between the land and the dwelling using the apportionment rules in subsections 112-30(2), (3) and (4) of the ITAA 1997. Because you received no capital proceeds, the combined effect of these provisions is that no amount is apportioned to the cost base /reduced cost base of the dwelling. Subsection 112-30(5) of the ITAA 1997 is an exception to the application of these apportionment rules. It provides that an amount that forms part of the cost base or reduced cost base of an asset is not apportioned if, on the facts, that amount is 'wholly attributable' to the part to which the CGT event happened or to the remaining part. No amount of the acquisition cost of the property or of the demolition costs in this case are wholly attributable to the demolished dwelling. Although a valuation of the property carried out after its acquisition might be the basis for making a reasonable apportionment it cannot disclose an amount that was 'wholly attributable' to the acquisition of the dwelling. As the capital proceeds from the demolition were nil and the cost base attributed to the dwelling is nil, you will not make a capital gain or capital loss on the demolition. | Detailed Reasoning - Joint ownership: For CGT purposes, if you are joint owners of a property, you are treated as if you own an equal share in the asset. For example, if you own two blocks of land together you are treated as if you own a 50% interest in each of the two blocks of land rather than owning one block each. If two or more taxpayers own an asset jointly, CGT applies separately to each of the taxpayers' interests in the asset. Example: A and B were joint owners of a one hectare block of land acquired in 1986. In 1992, they subdivide the land. A took a one-half hectare block (block 1) and B took the other one-half hectare block (block 2). A acquired a 50% interest in land constituted by block 1 in 1986 and acquired the remaining 50% interest from B in 1992. Similarly, B acquired a 50% interest in the land constituted by block 2 in 1986 and acquired the remaining 50% interest from A in 1992. A and B have each disposed of their 50% interest in that land constituted by blocks 2 and 1 respectively, in 1992. The property has been your main residence since construction of the dual occupancy and for all but a number of weeks of the time you had a z% ownership interest in the original dwelling. Your ownership interest in the property is z%. Accordingly the calculation of your capital gain or loss on disposal is: Capital gain or loss x Non main residence days * x z% Total days of your ownership period (*non main residence days are the number of days where a dwelling was not occupied as your main residence).

Relevant facts: You and your sibling purchased a home after 19 September 1985. | The property was purchased as tenants in common with you holding a z% ownership share. | This property was your main residence. | At the time of the purchase there was an existing rental agreement on the property and it was a condition of the sale contract that this agreement be honoured. | After that, you and your sibling lived in the property for a number of months at which point major repairs needed to be carried out on the property. A quote revealed that it was going to be expensive and an alternative was to demolish the house and build a dual occupancy. | The house was demolished and no proceeds were received for the demolition. | The new building took longer to complete than anticipated due to construction issues. You and your sibling moved into the newly constructed dual occupancy dwelling as soon as it was completed (more than 3 months ago). You and your sibling are currently living in the property. | The local council has approved a strata subdivision of the two units, but not the land on which they stand. The units after subdivision are capable of being sold separately. | The title deeds for the land and the two strata units are in the joint names of the original purchasers, you and your sibling, as tenants in common with you owning z%. The mortgage on the property is also in the same names with you having z% liability. | You intend to sell the property.