Private ruling: Capital gains tax - disposal of main residence
Published: December 2013
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Can the main residence exemption and absence rule be applied to your property ? | A1: Yes.

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 1985, you and your spouse jointly purchased a property. You and your spouse moved in as soon as practicable and established the property as your main residence. Approximately seven years ago you and your spouse purchased another property. You and your spouse continued to reside at the property for a period of approximately 12 months. The property has been rented out since you and your spouse moved out until its disposal late this year. The real estate commission on it disposal was $X. The property was valued at the time the property was first rented out. You and your spouse have elected to continue to treat the property as your main residence for your entire ownership period. You have calculated that you and your spouse will each have a capital gain of a specified amount.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Section 115-5 | 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 a CGT asset or interest in asset to another entity. CGT event A1 occurred when you and your wife disposed of Greenway Parade. | Detailed Reasoning - Joint tenants: For CGT purposes, individuals who own an asset as joint tenants are each treated as if they own an equal interest in the asset. Each joint tenant makes a capital gain or capital loss from an event in the line with their interest in the asset. Therefore, you and your spouse had a 50% interest in the property. | Detailed Reasoning - Main residence: Generally, you can disregard a capital gain or capital loss made on the disposal of a dwelling that is your main residence if: · the dwelling was your home for the whole period you owned it · the dwelling was not used to produce assessable income, and · any land on which the dwelling is situated is not more than two hectares 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 residence total number of days in your ownership period | Detailed Reasoning - Continuing main residence status after dwelling ceases to be your main residence: In some cases you can choose to have a dwelling treated 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. This 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 for its disposal. 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 is as your main residence for up to six years after you cease living in it. If make this choice the dwelling is fully exempt. You are entitled to another maximum period of six years each time the dwelling again becomes, and then ceases to be your main residence. | Detailed Reasoning - Home first used to produce income: In working out a capital gain or capital loss on a dwelling, the first used to produce income applies if: · only a partial main residence exemption would be available because the dwelling was used for the purpose of producing assessable income during your ownership period · the income producing use started after 20 August 1996, and · you would have been entitled to a full main residence exemption of they had entered into a contract to dispose of the dwelling just before the first time it was used for income producing purposes. If all of the above apply, you must work out your capital gain or capital loss using the market value of the dwelling at the time you first used it to produce income. You do not have a choice. There are a number of methods of determining the market value of the property such as obtaining a valuation from a qualified valuer; or compute your own valuation based on reasonably objective and supportable data. Note: The Tax Office may challenge valuations where appropriate. In working out the amount of capital gain or capital loss, the period before the dwelling is first used by you to produce income is not taken into account. | Detailed Reasoning - Cost base: The cost base of CGT asset is made up of 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 you 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 has not expired 4. capital costs to increase or preserve the value of your asset or to install or move it, and 5. capital costs of preserving or defending your ownership of or rights to your asset. | Detailed Reasoning - Application to your circumstances: You and spouse are not eligible for the full main residence exemption but you are eligible for a partial main residence exemption on the disposal of the property. The first used to produce income rule applies in your circumstances as you and your spouse would have been entitled to a partial main residence exemption because the property was used for income producing purpose, it became income producing after 20 August 1996 and just prior to it being used to produce assessable income you would have been entitled to a full main residence exemption. Therefore, you and your spouse must use the market value of the property as the first element of your cost base, to calculate your capital gain. You and your spouse can apply the CGT discount method to calculate your capital gain as you meet all the relevant criteria.