Private ruling: Capital gains tax (CGT) - main residence - cost base
Published: October 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the capital gain made on the sale of your interest in the property disregarded? | A1: No.

Relevant facts and circumstances: You and your sibling purchased an equal share in a property after 20 September 1985. You incurred additional costs when you purchased the property including; stamp duty, legal costs, and vendors and purchasers allowances. The property comprised a vacant shop premises (the shop) located on the ground level and residential premises (the dwelling) on the first floor. You spent time refurbishing the dwelling while it was vacant. Your sibling lived in the dwelling for part of your ownership period. You did not live in the dwelling. You spent several months refurbishing the shop before operating your own business from the shop. You leased the shop for part of your ownership period until you sold your interest in the property. You incurred additional costs when you sold your interest in the property including; real estate agent commissions, legal costs, and vendors and purchasers allowances. You have made a capital gain on your interest in the property.

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 118-110

Reasons for decision: Summary: Capital gains tax (CGT) is the tax you pay on certain gains that you make. You make a capital gain or capital loss as a result of a CGT event. The most common CGT event is CGT event A1. CGT event A1 happens when you dispose of an asset to another entity, for example if you sell a dwelling. Generally, you can disregard any capital gain or capital loss realised on the disposal of a dwelling that was your main residence. However, to be eligible for the full exemption from CGT: · the dwelling must have been your home for the whole period you owned it; · the dwelling must not have been used to produce assessable income; and · any land on which the dwelling is situated must be two hectares or less You must have resided in the dwelling to be able to get the main residence exemption, whether a full exemption or a partial exemption. In your case, your property comprised a shop and a dwelling. As you have not resided in the dwelling, a main residence exemption cannot be granted. | Detailed Reasoning - How to calculate your capital gain: Your capital gain is the difference between the capital proceeds and the cost base of the property. Your capital proceeds are the capital amounts you received or expect to receive from the event. In your case, your capital proceeds are the sale amount you received when you sold the property. The cost base of a CGT asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset. The cost base of a CGT asset is made up of five elements: · money or property given for the asset · incidental costs of acquiring the CGT asset or that relate to the CGT event · costs of owning the asset · capital costs to increase or preserve the value of your asset or to install or move it · capital costs of preserving or defending your ownership of or rights to your asset. You need to work out the amount for each element, then add them together to work out the cost base of your CGT asset. In your case, the first element of your cost base is the purchase price of the property. Your second element costs include stamp duty, real estate agent commissions and legal costs. Your third element costs include rates, land taxes, repairs, insurance premiums and interest expenses. You do not include second and third element costs if you have claimed a tax deduction for them in any year. The fourth element is capital costs you incurred for the purpose or the expected effect of increasing or preserving the asset's value. Your refurbishment costs would fall into this category. The fifth element is capital expenses you incur to preserve or defend your ownership of, or rights to, the asset. Your share of the capital gain is your interest in the capital proceeds less your interest in the total of all elements of the cost base of the property.

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