Private ruling: CGT- main residence exemption- absence choice- first used to produce income
Date of advice: 6 December 2017
Published: April 2018
Ruling period: Income year ending 30 June 2018 | Income year ending 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you entitled to a partial main residence exemption from capital gains tax upon disposal of your dwelling? | A1: Yes

Relevant facts and circumstances: You acquired an interest in a block of land after 20 September 1985. Your relative acquired a 50% interest, and you and your spouse each acquired a 25% interest. The land was subdivided and new titles were issued. You now owned a separate parcel of land to your relative. Your land exceeded two hectares. You built a house on the land and occupied it as your main residence. You then subdivided the land, and sold the dwelling and the attached one hectare of land. You maintained ownership of the remaining land. You built a new house on the land and occupied it as your main residence. You resided in the dwelling for a period of time, until you moved to overseas for work. You chose to continue to treat the dwelling as your main residence, after you moved out. The dwelling was rented for the majority of the time that you were not living in it, being vacant for approximately four months between tenants. While living overseas, you purchased two dwellings that you lived in, and then sold, before returning to Australia. When you returned to Australia, you did not move back into the dwelling, however, you continued to treat the dwelling as your main residence, while continuing to rent it out. You decided to rent property, except for a period of time when you purchased and lived in another dwelling. You have sold this dwelling. Your child and their family ‘house-sat’ the dwelling for a period of time, just prior to you moving back in. You then moved back into the dwelling and occupied it again as your main residence. For the purposes of this private ruling, you will dispose of the dwelling during the period of the ruling and will make a capital gain.

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 118-110 | 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: Detailed Reasoning - Capital gains tax: All assets you’ve acquired since capital gains tax (CGT) started (on 20 September 1985) are subject to capital gains tax unless specifically excluded. A capital gain or capital loss is made when a CGT event happens to a CGT asset you own. The most common event is CGT event A1 which happens when a person disposes of a CGT asset to someone else. A capital gain is made if the amount received (called capital proceeds) from the disposal exceeds the cost base (the cost of the asset and certain other costs associated with acquiring, holding and disposing of the asset) of the CGT asset. Your net capital gain is the total of your capital gains for the income year, reduced by any capital losses that you have made. | Detailed Reasoning - Main residence exemption: Generally, you disregard a capital gain 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. | Detailed Reasoning - Land exceeding two hectares: Taxation Determination TD 1999/67 provides that a taxpayer can apply the main residence exemption to whichever two hectares of the property they choose (as long as they include the area of land on which the dwelling is built). Where a property exceeds two hectares, Taxation Determination TD 1999/67 states at paragraphs 3 to 5: 3. If your selected area of land can be separately valued, you calculate your capital gain or capital loss on the remainder of your land by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on the basis of the valuation. This is relevant if the value of the remainder of the land is of a greater or lesser value than your selected area of land. 4. If your selected area of land cannot be separately valued, your capital gain or loss on the remainder of your land may be calculated by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on an area basis. 5. The amount of the capital gain or capital loss attributable to the remainder of your land must be reasonable in the circumstances. You may obtain an acceptable valuation for CGT purposes to determine the market value of the asset by either: ● obtain a detailed valuation from a qualified valuer; or, ● compute your own valuation based on reasonably objective and supportable data. | Detailed Reasoning - Example: Alistair owns a 10 hectare property. He has selected the area of the land on which he wishes to claim the main residence exemption. This area does not exceed two hectares and is used primarily for private or domestic purposes in association with Alistair's dwelling. He sells the property for $500,000. He obtains an opinion from an expert valuer that the value of the two hectares of land and the house is $300,000 (representing 60% of the capital proceeds). The cost base attributable to this part of the property (taking into account improvements since purchase) is $180,000 (60%) and the remainder is $120,000 (40%). The capital gain on the total property is $200,000. Alistair disregards $120,000 of the capital gain because it is attributable to his main residence. | Detailed Reasoning - Absence choice: The main residence provisions are extended to cover those taxpayers who leave their main residence, but choose to continue to treat it as their main residence even if it is rented out, provided certain conditions are met. If a dwelling ceases to be a taxpayer’s main residence, and they use the dwelling to produce assessable income, they can choose to treat the dwelling as their main residence for up to six years after they ceased living in it. If you do not use it to produce income (for example, you leave it vacant or use it as a holiday home) you can treat the dwelling as your main residence for an unlimited period after you stop living in it. This is known as an absence choice. This choice can be made each time a taxpayer moves out of their main residence and commences renting out the dwelling. If you make this choice, you cannot treat any other dwelling as your main residence for that period. If the full exemption applies your capital gain or loss is disregarded – you don’t pay tax on any capital gain, but nor can you use any capital loss to reduce your assessable income. Alternatively, you may be entitled to a partial exemption. | 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 affects the way you calculate your capital gain or capital loss. In this case, 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. | Detailed Reasoning - Partial main residence exemption: If a CGT event happens to a dwelling you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole time you owned it, you will only be eligible for a partial exemption on the disposal of the dwelling. In that situation, the capital gain is calculated using the following formula: [Capital gain X Non-main residence days] / Total number of days in your ownership period | Detailed Reasoning - Conclusion: In your case, you acquired land after 20 September 1985 with your spouse and your relative. This land was subdivided further, with your relative now the sole owner of one parcel, and you and your spouse joint owners of a separate parcel. You built a dwelling on your land and resided in it as your main residence. You sold this dwelling and the attached one hectare of land. You built a new dwelling on the remaining land and resided in it as your main residence for a period of time until you moved overseas, and the dwelling was rented out. You made the absence choice in relation to the dwelling. The absence choice period commenced when the dwelling was first rented out and could continue for up to six years while the dwelling was being used to produce assessable income, i.e. being rented or available for rent. The period of time that the dwelling was house-sat by your child will not be covered by the main residence exemption. The six years covered by the absence choice when assessable income is being produced had passed, and you had not yet returned to live in the dwelling and establish it as your main residence again. You will dispose of the dwelling during the period of the ruling. As the period of time you lived in the dwelling and the period covered by the absence choice will not encompass all of your ownership period, for the period from the end of the six years until you moved back into the dwelling, the capital gain made on the disposal of the dwelling will be subject to CGT, i.e. you will only be entitled to a partial exemption. As such, the first used to produce income rule will be applied first and then the partial exemption. In your case, the following will be used when calculating the capital gain you have made on the disposal of your dwelling: ● You are taken to have acquired your dwelling and the adjacent two hectares of land 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 your dwelling when calculating the capital gain; ● Your non-main residence days will be from the date the period covered by the absence choice ends until you moved back into the dwelling; ● Your total number of days in your ownership period is from the date the dwelling was first rented out until the settlement date when the dwelling is disposed of during the period of the ruling. You satisfy the requirements to obtain a partial main residence exemption; however, your land exceeded two hectares. Accordingly, the land in excess of two hectares, will be subject to CGT on disposal. The capital gain you make, calculated with reference to the total capital proceeds you received, will need to be reasonably apportioned between the non-exempt and the exempt portion (dwelling and two hectares) of the property. | Detailed Reasoning - CGT discount: As you are individuals, and have held the CGT asset (house and land) for more than twelve months, you will be able to apply a 50% discount to the capital gain made on disposal.

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