Private ruling: Income tax - capital gains tax- CGT events - CGT event a1 - disposal of a CGT asset
Date of advice: 7 June 2018
Published: August 2018
Ruling period: Year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Would the first element of the cost base of the original dwelling (dwelling A) be determined using the market value of the property at the date it was first used to produce income? | A1: Yes | Q2: Would the first element of the cost base of the other dwelling (dwelling B) built in 20xx be determined using the market value of the property at the date it was first used to produce income? | A2: No

Relevant facts and circumstances: You and a relative inherited the property on xx xxxx 19xx. You moved out of the property for a year to work and returned to live in the property from xx xxxx 19xx. You bought your relative out prior to moving back into the property. A valuation of $xxx,000 was obtained at this time and you paid your relative $xxx,000. You sought an appraisal of the property in xxxxx 20xx. The appraisal considered the market value of your property once dual occupancy approval was obtained by the Council. The appraisal included the plan of renovating the existing house and building a second house on the block. The property with house on it was valued at approximately $xxx,000 on the condition dual occupancy was approved. The property could be worth $xxx,000 if developed as planned. You renovated the original dwelling and built the new dwelling. In xxxxx 20xx you began renting both properties. No further market valuations were sought. It cost $xx,xxx to renovate the original dwelling. The new dwelling cost $xxx,xxx to build. Both properties were continuously rented out until the block with both houses was sold to a single buyer in xxxxxx 20xx for $xxx,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 112-20. | Income Tax Assessment Act 1997 section 112-25. | Income Tax Assessment Act 1997 Subdivision 118-B. | Income Tax Assessment Act 1997 section 118-115. | Income Tax Assessment Act 1997 section 118-150. | Income Tax Assessment Act 1997 section 118-192. | Income Tax Assessment Act 1997 section 118-195.

Reasons for decision: Summary: Section 112-25 of the Income Tax Assessment Act 1997 (ITAA 1997) states that if a CGT asset is split into two or more assets or changes in whole or in part into an asset of a different nature, the CGT provisions treat the assets as though they were always separate assets. The acquisition dates of the property will be the date you inherited your portion of the property and the date that you acquired the other interest in the property from your relative. The cost base of the original land is to be apportioned based on where the two dwellings now stand on a reasonable basis. Taxation Determination TD 97/3 provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks, such as on an area basis or relative market value basis. | Detailed Reasoning - Home first used to produce income: If you start using your main residence to produce income for the first time after 20 August 1996, a special rule in section 118-192 of the ITAA 1997, affects the way you calculate your capital gain or capital loss. You are taken to have acquired your home at its market value at the time it is first used to produce income if all of the following apply: ● you acquired your dwelling on or after 20 September 1985; ● you first used the dwelling to produce income after 20 August 1996; ● when a CGT event occurs, you would only obtain a part exemption because your dwelling was used to produce assessable income during the period you owned it; and ● you would be entitled to a full exemption if the CGT event happened to your dwelling immediately before you first used it to produce income. In your case, dwelling A was your main residence from when you inherited the property until it was first used to produce assessable income in xxxxxx 20xx. When calculating the capital gain or capital loss you have made on the disposal of dwelling A, you are taken to have acquired dwelling A at its market value at the time it was first used to produce income. This will be the first element of the cost base of dwelling A when calculating the capital gain. The total capital proceeds you received will need to be reasonably apportioned between the two dwellings on the property. The capital gain will then be calculated using the cost base as described in the preceding paragraph. | Detailed Reasoning - Dwelling B: You are not entitled to any main residence exemption on dwelling B as it has not been your main residence during any part of your ownership period. The acquisition dates for the cost base of each acquisition of the original land will be the date when you inherited an interest in the property and when you acquired the interest in the property from your relative. The cost base of each interest needs to be apportioned between the land size in which dwelling A and dwelling B is situated on a reasonable basis. TD 97/3 provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the blocks, such as on an area basis or relative market value basis. This will be the first element of the cost base of dwelling B when calculating the capital gain. The total capital proceeds you received will need to be reasonably apportioned between the two dwellings on the property. The capital gain will then be calculated using the cost bases as described in the preceding paragraph.