Private ruling: Capital gains tax
Published: September 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 20XX

Ruling: Questions and answers | 1. Are you entitled to a full main residence exemption upon the sale of the dwelling? | No. | 2. Are you entitled to a partial main residence exemption upon the sale of the dwelling? | Yes.

Relevant facts and circumstances: You acquired the Property together with two relatives. The Property was initially left vacant and then rented out for three months. After the three months, the Property was left vacant while renovations were undertaken. You married and moved into the Property which was your main residence. You moved out of the Property and were later divorced. One of the other joint owners moved into the Property. The Property was subsequently rented out for 12 months. After the tenants moved out, the Property was left vacant until it was demolished X months later. The land was subdivided into lots. One relative relinquished their interest in the Property and the subdivided lots were allocated to you and the other relative. You and your new spouse received one lot and the other relative the other lot. On subdivision, you and your spouse were registered as the joint owners of the lot. Your spouse did not pay any consideration for the ownership interest in the lot. A property was constructed on the lot within 12 months. You and your spouse moved into the property on completion and used it as your main residence. You vacated the property 12 months later and the property was rented out for over six years. The property was sold X months after it was vacated. You consider the Property, the land and the property as your main residence for the whole period since you first used it as your main residence.

Relevant legislative provisions: Income Tax Assessment Act 1997 s ection 104-10 | Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 s ection 112-25 | Income Tax Assessment Act 1997 subsection 112-25(3) | Income Tax Assessment Act 1997 s ection 118-110 | Income Tax Assessment Act 1997 section 118-125 | Income Tax Assessment Act 1997 s ection 118-135 | Income Tax Assessment Act 1997 s ection 118-145 | Income Tax Assessment Act 1997 section 118-150 | Income Tax Assessment Act 1997 section 118-185 | Income Tax Assessment Act 1997 subsection 118-185(2)

Reasons for decision: Detailed Reasoning - The Property: Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling or your ownership interest in it, if you use the dwelling as your main residence. To qualify for a full exemption, the dwelling must have been your main residence for the whole period you owned it. You are entitled to a partial exemption if the dwelling was your main residence for only part of your ownership period (section 118-185 of the ITAA 1997). If you moved into the dwelling when it was first practical to do so, the dwelling will be treated as you main residence for the period from when you acquired the interest to when you actually moved in (section 118-135 of the ITAA 1997). Further, section 118-150 of the ITAA 1997 states that where: • you acquired an ownership interest in land where there was already a dwelling on it, • you or someone else occupied the dwelling after the acquisition, • the dwelling ceased to be occupied at a later time, and • you built a new dwelling on the land or repaired or renovated a dwelling on the land, you can choose to treat the dwelling as your main residence from the time the old dwelling ceased to be occupied, as long as the dwelling became your main residence as soon as practicable after the work was finished, and it continued to be your main residence for at least three months. There is a time limit during which the choice can operate. Where there was a dwelling on the land when you acquired your ownership interest, the time period is the shorter of four years before the dwelling becomes your main residence, or the period from when you or someone else ceased to occupy the dwelling and ending when the dwelling becomes your main residence. In your case, the Property was purchased and initially left vacant. It was rented out for three months before it was again left vacant and renovations undertaken. You moved into the property following your marriage. Consequently, the Property does not qualify for the main residence exemption from the time of purchase as you did not move into it as soon as it was practicable to do so. However, as you completed renovations to the dwelling, section 118-150 of the ITAA 1997 operates to allow you to choose the main residence exemption from the time the tenants moved out until you and your ex-spouse occupied the property as your main residence. The main residence exemption then continued to apply until you moved out of the property. Section 118-145 of the ITAA 1997 allows you to treat a dwelling (that was you main residence) as your main residence indefinitely, if you do not use it for the purpose of producing assessable income. Therefore, for the period between when you moved out and when the Property was rented, the main residence exemption applies. Further, section 118-145 of the ITAA 1997 specifies that if you use the dwelling for the purpose of producing assessable income, you can still treat the dwelling as your main residence for a maximum period of six years. You are entitled to another maximum period of six years each time the dwelling again becomes and ceases to be your main residence. In your case, it was less than six years from when the Property was rented until it was demolished. Therefore, the main residence exemption applies for that period. | Detailed Reasoning - The land and subdivision: The land was subdivided into two lots as per the original ownership percentages. Section 112-25 of the ITAA 1997 specifies that when a CGT asset is split into two or more assets, the split assets are treated as new CGT assets and the splitting does not constitute a CGT event. The cost base of each new asset is worked out as per subsection 112-25(3) of the ITAA 1997. On subdivision, one relative relinquished their interest in the Property and the two subdivided lots were allocated to you and the other relative. Consequently, at the time of the subdivision, you disposed of your part share one lot to your relative and received a part share of the other lot from your relative. As a result, CGT A1 happened on the disposal to your relative. Therefore, you made a capital gain or capital loss on the disposal of your interest in the other lot. Further, on subdivision, you and your spouse became the registered joint owners of one of the lots which meant that you disposed of 50% of your interest to your spouse. As a result, CGT A1 happened on the disposal to your spouse. | Detailed Reasoning - Construction: As previously stated, section 118-150 of the ITAA 1997 provides that where: • you acquired an ownership interest in land where there was already a dwelling on it, • you or someone else occupied the dwelling after the acquisition, • the dwelling ceased to be occupied at a later time, • you built a new dwelling on the land or repaired or renovated a dwelling on the land, and • certain time limits are met, you can choose to treat the dwelling as your main residence from the time the old dwelling ceased to be occupied, as long as the dwelling became your main residence as soon as practicable after the work was finished, and it continued to be your main residence for at least three months. In your case, the tenants moved out, the dwelling was demolished, you built a dwelling on the land, you moved into the dwelling as soon as it was completed and you lived there for over three months. Therefore, the main residence exemption applies for that period. | Detailed Reasoning - The dwelling: You lived in the dwelling for 12 months as your main residence so the main residence exemption applies for that period. As mentioned above, you can treat a dwelling as your main residence indefinitely, if you do not use it for the purpose of producing assessable income. Therefore, the main residence exemption applies for the period after the dwelling was left vacant until it was made available for rent. Further, as mentioned above, once a dwelling is made available for rent, the maximum period it can be treated as your main residence is six years. The dwelling was used for the purpose of producing assessable income for just over six years. The dwelling was then vacated and sold two to three months later. Therefore, the main residence exemption applies for the six year period commencing from when the dwelling was made available for rent and from when the dwelling was vacated until it was sold. From the above, it is evident that there is a gap where the main residence exemption will not apply as the six year rental period was exceeded. Please note, the short periods between tenancies are considered as part of the renting period, as merely leaving the property vacant for cleaning purposes to put it on the market again does not affect the fact that the property was still being used as a rental property. | Summary: You are not entitled to a full main residence exemption for the property you sold. Instead, you are entitled to a partial exemption under section 118-185 of the ITAA 1997. The main residence exemption does not apply for the period from when you acquired your ownership interest until the first lot of tenants moved out. The main residence exemption also does not apply to the period where the six year rental period was exceeded. The main residence exemption applies to the rest of your ownership period. Your capital gain or loss should be apportioned by taking into account your total non-main residence days and the total days in your ownership period as per subsection 118-185(2) of the ITAA 1997. For any period(s) you choose to apply the main residence exemption, you cannot treat any other dwelling as your main residence for that period of time. | Detailed Reasoning - Cost base: The cost base of the Property should be calculated with reference to the rules contained in section 110-25 of the ITAA 1997 and the Guide to capital gains tax 2013 available on the ATO website. Your calculation should take into account the five elements of the cost base including your proportion of the original purchase price of the Property, the creation of a new CGT asset, disposal of part of your interest to your spouse and your proportion of the construction cost of the dwelling.