Private ruling: Capital gains tax - disposal of main residence - partial main residence exemption
Published: September 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a partial main residence exemption on the disposal of your former home? | A1: Yes. | Q2: Is the first element of your cost base the market value of your former home the date it was first used to produce income? | A2: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. After 20 September 1995, you and your spouse jointly purchased a property (former home). You and your spouse established your former home as your main residence. You and your spouse continued to reside in the former home for a period of approximately two years. Early the next year you and your spouse commenced two consecutive overseas postings with a government department. Several months prior to returning to Australia you and your spouse purchased an investment property (property A) in another suburb in the city your former home is situated. Just after your return to Australia you and your spouse made the decision to move into property A and establish it as your main residence. At this time your former home formally became an investment property and it has been continued to be rented to various tenants for approximately 10 years. Early the following year you and your spouse received a couple of market appraisals of your former home. You and your spouse then renovated your former home and then it was placed on the market. Your former home was disposed of late last year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-145 | Income Tax Assessment Act 1997 Section 118-185 | Income Tax Assessment Act 1997 Section 118-192

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. The most common capital gains tax (CGT) event, CGT event A1 occurs when you dispose of an asset to another entity. The time of the event is when you enter into the contract for disposal or if there is no contract - when the change of ownership occurs. CGT event A1 occurred when you and your spouse disposed of your former home. | Detailed Reasoning - Main residence: Generally, you ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence. To obtain the full exemption from CGT: · the dwelling must have been your home for the whole period you owned it · you must not have used the dwelling to produce assessable income, and · any land on which the dwelling is situated must be two hectares or less. If you are not fully exempt, you may be partially exempt if: · the dwelling was your main residence during only part of the period you owned it · you used the dwelling to produce assessable income, or · the land on which the dwelling is situated is more than two hectares. | Detailed Reasoning - Partial exemption: If a CGT event happens to a dwelling you acquired on or after 20 September 1985, and the dwelling was not your main residence for the whole time you owned it, you are entitled to a partial exemption. You calculate the part of the capital gain that is taxable as follows: total capital gain made number of days in your ownership period from the CGT event X when the dwelling was not your main resident total number of days in your ownership period | Detailed Reasoning - Absence: In some cases, you can choose to treat a dwelling as your main residence even though you no longer live in it. You cannot make this choice for a period before a dwelling first becomes your main residence. The choice needs to be made only for the income year that the CGT event happens to the dwelling, for example, the year that you enter into a contract to sell it. If you make this choice you cannot treat any other dwelling as your main residence for that period. You can choose when you want to stop the period covered by this choice. If you use the dwelling to produce income you can choose to treat it as your main residence for up to six years after you stop living in it. If you make this choice and as a result of it the dwelling is fully exempt the home first used to produce income rule does not apply. | Detailed Reasoning - Home first used to produce income: In working out a capital gain or loss on a dwelling, the first used to produce income rule applies if: · only a partial main residence exemption would be available because the dwelling was used for the purpose of producing assessable income during the taxpayers ownership period · the income producing use started after 7.30pm (by legal time in the ACT) on 20 August 1996, and · the taxpayer would have been entitled to a full main residence exemption if they had entered into a contract to dispose of the dwelling just before the first time it was used for the income producing purpose. | Detailed Reasoning - The cost base: The cost base of a CGT asset is generally the cost of the asset when you brought 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 to five elements: 1. money or property given for the asset 2. incidental costs of acquiring the CGT asset or that relate to the CGT event - you do not include costs if you: · have claimed a tax deduction for them in any year, or · omitted to claim a deduction but can still claim it because the period for amending the relevant assessment has not expired 3. costs of owning the asset - you do not include such costs if your acquired the asset before 21 August 1991. Nor do you include them if you: · have claimed a tax deduction for them in any year, or · omitted to claim a deduction but can still claim it because the period for amending the relevant assessment ahs not expired 4. capital costs to increase or preserve the value of your asset or to install or move it 5. capital costs of preserving or defending your ownership of or rights to your asset. | Detailed Reasoning - Application to your circumstances: You are not eligible for the full main residence exemption but you are eligible for a partial main residence exemption in relation to your former home. The first used to produce income rule is not applicable to your circumstances as: · you started renting your former home before 20 August 1996. You can choose to use the absence rule and continue to treat the former home as your main residence for a period of six years from the time you started renting it. You will need to use the above formula to calculate your capital gain or capital loss made on the disposal of your former home. As the home first used to produce income rules does not apply in your circumstances, the first element of your cost base is the money paid (the purchase price). As you acquired your ownership interest in your former home prior to 21 September 1999, and you have owned it for more than 12 months you can use either the indexation or discount method to calculate your capital gain or capital loss.