Private ruling: Capital gains tax - main residence and dwelling used for income producing
Published: March 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the capital gain made on the disposal of property A disregarded in full? | A1: No. | Q2: Is the capital gain made on the disposal of property A disregarded in part? | A2: 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 former spouse purchased an investment property (property A) for a specified amount. You and your former spouse claimed tax deductions for property A whilst it was being used as an investment property. X years later your marriage broke up and as part of the property settlement you had to purchase your former spouse's interest in property A. You moved into property A and established it as your main residence. Under the Consent Orders issued under the Family Law Act 1975 in the relevant Magistrates Court it advises the following: "That the spouse shall do all act and things and sign all necessary documents to cause the transfer to the other spouse of all their right, title and interest in the property situated at property A. The contemporaneous with the above transfer, the other spouse shall refinance the current mortgage on the property and thereafter indemnify the spouse and keep their indemnified against all further liabilities or liability of whatsoever nature arising out of or in connection with that mortgage." You refinanced property A for a specified amount. X years later, your former spouse's interest in property A was transferred into your name. You continued to reside in property A as your main residence for approximately Y years. Approximately X months later you rented out property A for a period of approximately12 months. You obtained a property valuation for property A. You disposed of property A approximately 12 months later for approximately $X. You made a capital gain on the disposal of property A. You have supplied a copy of certain documentation to support your application and this documentation is to be read with and forms part of your application for the purpose of this ruling.

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 118-110 | Income Tax Assessment Act 1997 Section 118-185 | Income Tax Assessment Act 1997 Section 126-5

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. | Detailed Reasoning - Marriage breakdown: Where an asset is transferred to a spouse as a result of a marriage breakdown, there is an automatic rollover in certain cases (you cannot choose whether or not it applies). For the rollover conditions to be met, a CGT event must have happened because of: · an order of a court or court order made by consent under Family Law Act 1975 or a similar law of a foreign country; · a maintenance agreement approved by a court under section 87 of that Act or a similar agreement under a foreign law; or · a court order under a state, territory or reign law relating to de facto marriage breakdowns. In effect, the one who receives the asset (the transferee spouse) will make the capital gain or capital loss when they dispose of the asset. Where the asset is transferred to the transferee spouse and there is a marriage breakdown rollover, the transferee spouse is taken to have acquired the asset at the time they received it from their former spouse for the cost base of the former spouse. In your circumstance, you and your former spouse owned a 50% interest in property A. As a result of a marriage breakdown your former spouse's interest was transferred to you and the rollover provisions have been met. Therefore, no capital gain or capital loss was incurred upon the transfer of this interest in property A into your name. For CGT purposes you are considered to own two separate interests in property A. You acquired your first interest when you and your former spouse originally acquired it. You acquired your second interest on the date when your former spouse's interest was transferred into your name in accordance with your consent order. Each interest will be considered separately. | Detailed Reasoning - Interest one: You acquired a 50% interest in property A when you and your former spouse purchased it as joint tenant. For CGT purposes, if you are a joint tenant, you are treated as if you are a tenant in common owning equal shares in property A. The first element of the cost base is the money paid or required to be paid and the market value of any other property given or required to be given in respect of acquiring a CGT asset. The first element of your cost base of this interest will be 50% of the original purchase price. | Detailed Reasoning - Interest two: You have acquired your former spouse's interest in property A as a result of a court order, so you are taken to have acquired their interest on the date it was transferred to you at the cost base of your former spouse. The first element of your cost base of this interest is $X. All costs incurred in the transfer of this interest such as conveyancing fees and stamp duty of a CGT asset transferred between spouses because of a court order under the Family Law Act 1975 are included in the cost base of the transferor which becomes the first element of the transferee's cost base. | Detailed Reasoning - Main residence exemption: A capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence is generally disregarded. To be fully exempt from CGT: · the dwelling must have been your home for the entire 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. In your case, property A was not your main residence for your entire ownership period and it was also used to produce assessable income. Therefore, you are not entitled to disregard the entire capital gain made on the disposal of property A, although you may be entitled to a partial exemption. Where a dwelling was your main residence for only part of your ownership period you are entitled to a partial main residence exemption. You calculate the part of the capital gain that is taxable as follows: total capital gain made X number of days in your ownership period when from the CGT event the dwelling was not your main residence total number of days in your ownership period In your case, you are entitled to a partial main residence exemption. You will need to do a calculation for each interest you owned in property A. | Detailed Reasoning - Interest one: The capital gain made will be the difference between the 50% of the cost base of property A and 50% of the capital proceeds received from its disposal. Your 'number of days in your ownership period when the dwelling was not your main residence' will commence from the date you acquired this interest in property A until the date you moved in and established it as your main residence plus the days from when you ceased residing in it as your main residence until its disposal date. Your 'total number of days in your ownership period' is from the acquisition date until the date you disposed of it. | Detailed Reasoning - Interest two: The capital gain made will be the difference between the 50% of your former spouse's cost base of property A and 50% of the capital proceeds received from its disposal. Your 'number of days in your ownership period when the dwelling was not your main residence' commenced from the date you moved out of property A until its disposal date. Your 'total days in your ownership period' is from the acquisition of this 50% interest in property A until the date you disposed of it. You can use the discount method to calculate your capital gain as you meet all the relevant criteria. The discount percentage is 50% for individuals. Note: you do not qualify to use the 'first used to produce income' rule because you moved out of property A before it became income producing and you have not chosen to continue to treat it as your main residence after moving out. (This rule would have allowed you to reset the cost base to the market value calculated as at the 'first income time'.)

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.