Private ruling: Main residency
Published: April 2013
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Questions and answers | 1. Are you entitled to a full main residence exemption when you sell your property? | Yes. | 2. Are you entitled to claim a depreciation expense in relation to your property while it is being used for income-producing purposes? | Yes.

Relevant facts and circumstances: You purchased the dwelling in 20XX. You lived in the dwelling for less than 15 months after purchasing, After the 15 months you rented the dwelling to tenants. Neither you, nor your spouse, own any other dwelling. You have elected to continue treating the dwelling as your main residence during your absence from it. You intend to sell the dwelling in the 20YY year. The total land size is less than 2 hectares.

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 118-100 | Income Tax Assessment Act 1997 Section 118-145.

Reasons for decision: Detailed Reasoning - Capital gains tax: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you make a capital gain or capital loss if and only if a CGT event happens. CGT events are the different types of transactions or happenings which may result in a capital gain or a capital loss. The disposal of a CGT asset is the most common CGT event and is referred to as CGT event A1 (section 104-10 of the ITAA 1997). A taxpayer disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity. Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you make a capital gain or capital loss if and only if a CGT event happens. CGT events are the different types of transactions or happenings which may result in a capital gain or a capital loss. Subsection 104-10(3) of the ITAA 1997 describes when the event happens. The time of the event is either when the taxpayer enters into a contract for the 'disposal', or if there is no contract - when the change of ownership occurs. In your case, CGT event A1 will happen when you sell your property. The time of the event will be when you enter into the contract for sale. Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, the ownership period, and must not have been used to produce assessable income. However, section 118-145 of the ITAA 1997 provides an exception to this rule. This section states that you may choose to continue to treat a dwelling as your main residence when you cease to live in that dwelling. However, if you use your main residence for the purpose of producing assessable income, the maximum period that you can treat it as your main residence while you are absent is six years. In your case, when you purchased the property, you used it at your main residence before renting it out and therefore using the property to produce assessable income. You first used the property to produce income in a particular month in 2010. This means that the maximum period that you can treat the property as your main residence while you are absent from is from 2010 to 2016. You have stated that you intend to sell the property in 20YY, that is, prior to 2016. As this is before 2016 and therefore less than six years from your absence from the property, you satisfy the requirements of section 118-145 of the ITAA 1997 and can elect to treat the property as your main residence for the entire period of ownership. As the dwelling will be treated as your main residence for the entire ownership period, you can disregard any capital gain or capital loss you make when you dispose of the dwelling. | Detailed Reasoning - Depreciation expenses: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. You can claim a deduction for the decline in value of certain items, known as depreciating assets, that you acquired as part of the purchase of your property or that you subsequently purchased for your property. As the dwelling is used in gaining or producing assessable income you are entitled to claim a depreciation expense in relation to your property while it is being used for income-producing purposes.