Private ruling: capital gains tax
Published: January 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Question and answer: | Can you disregard the capital gain or loss on disposal of your property A? | No.

Relevant facts and circumstances: You and your ex-spouse purchased property A. The property is owned by you and you ex-spouse in equal shares as joint tenants. The property was rented from the purchase date. At this time you and your ex-spouse were living at property B in a dwelling which both of you had elected to be your main residence. You sold this property. You and your ex-spouse moved into property A and both of you elected to make your main residence. At this time, you commenced building property C. This property is owned by you and you ex-spouse in equal shares as joint tenants. You and your ex-spouse moved into the property C and both of you elected to make it your main residence. Property A was again rented out. Your ex-spouse moved into property A and elected to make it their main residence. You remain in property C and it remains your main residence. Each of you has your own furniture and personal effects at your respective residences and each of you pays your own electricity, gas, telephone and rates. Your personal mail is delivered to your respective residences. You have decided to sell property A as part of marital split settlement. You have separated. Relevant legislation provision: Income Tax Assessment Act 1997 Section 102-5 Income Tax Assessment Act 1997 Section 102-10 Income Tax Assessment Act 1997 Section 102-20 Income Tax Assessment Act 1997 Section 104-10 Income Tax Assessment Act 1997 Section 108-5 Income Tax Assessment Act 1997 Subdivision 118-B


Reasons for decision: Detailed Reasoning - Capital gains tax - general: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer makes a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985. A taxpayer makes a capital gain if a their capital proceeds from the sale of a CGT asset are greater than the cost base for the purchase of that asset, for example, if a taxpayer received more for an asset than they paid for it. A taxpayer makes a capital loss if their reduced cost base for the purchase of that asset is greater than the capital proceeds resulting from the sale of that asset. Capital gains tax is not a separate tax, it forms part of a taxpayer's assessable income and is taxed at each taxpayer's marginal tax rate. In your case, property A, that you part own, was purchased after September 1985 it is therefore a CGT asset. | Detailed Reasoning - Disposal of CGT assets and CGT event A1: Section 104-10 of the ITAA 1997 is concerned with CGT event A1. CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. In your case, property A, that you part own is a CGT asset and a CGT event A1 will happen to it when you stop being its owner, i.e. when it is sold. | Detailed Reasoning - Main residence exemption: There are a number of provisions within the ITAA 1997 that may exempt, in part or in whole, a liability for CGT in certain circumstances. The one which is relevant to your circumstances is the main residence exemption. The main residence exemption under subdivision 118-B of the ITAA 1997 may allow a taxpayer to disregard all or part of any capital gain or capital loss they made from a CGT event that happens to their ownership interest in a dwelling where the dwelling was their main residence. The main residence exemption allows the capital gain or loss from the disposal of a dwelling to be disregarded for CGT purposes if the taxpayer is an individual, the dwelling was the taxpayers main residence throughout the ownership period and the interest did not pass to the taxpayer as a beneficiary in, or as the trustee of, the estate of a deceased person. However, a taxpayer will only get a partial exemption for a CGT event that happens in relation to their ownership interest in a property if the dwelling was their main residence for only part of their ownership period. In your case, property A, that you part own, was your main residence for only part of the ownership period. Therefore, you will only be entitled to a partial exemption from CGT when you dispose of it. | Detailed Reasoning - Partial main residence exemption: When a taxpayer is not eligible for a full main residence exemption a partial exemption is available for the period that the property was their main residence. The following formula is used to calculate a partial main residence exemption: Capital gain or loss x Non-main residence days* Total days of ownership period** * Non-main residence days are the days that the dwelling was not the taxpayer's main residence. For example, this will include the period from the acquisition date until the date they moved into the dwelling and commenced treating it as their main residence. ** The total days of ownership period is from the acquisition date until the disposal date of the property. | Detailed Reasoning - Example: main residence for part of the ownership period: Andrew bought a house on 1 hectare of land under a contract that was settled on 1 July 1990 and moved in immediately. On 1 July 1993, he moved out and began to rent out the house. He did not choose to treat the house as his main residence for the period after he moved out, although he could have done this under the 'continuing main residence status after dwelling ceases to be a taxpayer's main residence' rule. The 'home first used to produce income' rule does not apply because Andrew used the home to produce income before 21 August 1996. A contract for the sale of the house was entered into on 1 July 2007 and settled on 31 August 2007 and Andrew made a capital gain of $100,000. As he is entitled to a partial exemption, Andrew's capital gain is as follows: $100,000 x 5175 days = $82,522 6271 days As Andrew entered into the contract to acquire the house before 11.45am (by legal time in the ACT) on 21 September 1999 but the CGT event occurred after this date, and he had owned the house for at least 12 months, Andrew can choose to use the discount method or the indexation method to calculate his capital gain. | Detailed Reasoning - Application to your circumstances: Property A, that you part own, is a CGT asset and a CGT event will happen to it when you dispose of it. As it was your main residence for only part of the ownership period you will only be entitled to a partial exemption from CGT. Further, as you own property A in equal shares with your ex-spouse, any net capital gain or loss resulting from its disposal will be shared with your ex-spouse.

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