ATO Interpretative Decision

ATO ID 2004/945 (Withdrawn)

Income tax

• This ATO ID is withdrawn. Guidance on the basis of the decision in this ATO ID can be found in the Guide to capital gains tax (NAT 4151). Additional guidance can be found in Is the dwelling your main residence? (QC 17184), Using your home to produce income (QC 17193) and Your main residence (QC 22168).
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Issue

Is a capital gain from a dwelling a discount capital gain if, as a result of the 'first use to produce income rule' in section 118-192 of the Income Tax Assessment Act 1997 (ITAA 1997), a taxpayer was taken to have acquired the dwelling less than 12 months before the capital gains tax (CGT) event that gave rise to the gain?

Decision

No. The capital gain is not a discount capital gain because the taxpayer is taken to have acquired the dwelling less than 12 months before the CGT event that resulted in the gain. That is the effect of section 118-192 of the ITAA 1997.

Facts

A taxpayer (an individual) bought a dwelling (the first dwelling) in 1989 which they used as their main residence.

They purchased another dwelling (the second dwelling) in October 2003. They decided to rent the first dwelling to tenants and use the second dwelling as their main residence. They commenced renting the first dwelling to tenants in November 2003.

The taxpayer did not make a choice under section 118-145 of the ITAA 1997 (the absence rule) to continue to treat the first dwelling as their main residence.

The taxpayer disposed of the first dwelling under a contract entered into in July 2004 and made a capital gain.

The taxpayer wishes to apply the 50% CGT discount percentage to reduce the amount of the capital gain made on the sale of the dwelling.

Reasons for Decision

A capital gain made by an individual can be reduced by 50% if it is a discount capital gain. A discount capital gain is one that satisfies the provisions listed in section 115-5 of the ITAA 1997.

One condition is that the gain results from a CGT event happening to a CGT asset that was acquired by the taxpayer at least 12 months before the CGT event: subsection 115-25(1) of the ITAA 1997.

A taxpayer will be taken to have acquired a dwelling for its market value when they first use it to produce income if the requirements in subsection 118-192(1) of the ITAA 1997 are met: subsection 118-192(2) of the ITAA 1997. Those requirements are:

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the taxpayer would only be entitled to a partial main residence exemption under Subdivision 118-B because the dwelling was used for the purpose of producing assessable income during the taxpayer's ownership period: paragraph 118-192(1)(a)

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the income producing use started after 7.30 pm (by legal time in the ACT) on 20 August 1996: paragraph 118-192(1)(aa), and

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the taxpayer would have been entitled to a full main residence exemption if they had entered into a contract to dispose of the dwelling just before the first time it was used for the income producing purpose: paragraph 118-192(1)(b).

The taxpayer in this case satisfies these conditions and is accordingly treated as having acquired the dwelling in November 2003 (when it was first used to produce income) for its market value at that time.

Therefore, the taxpayer does not satisfy the condition in subsection 115-25(1) of the ITAA 1997 which requires that the dwelling be acquired at least 12 months before the CGT event. This condition is not satisfied even though the taxpayer actually owned the dwelling for 15 years before the event. The deemed acquisition time in section 118-192 of the ITAA 1997 overrides the taxpayer's actual acquisition time.

Consequently, the taxpayer cannot apply the 50% CGT discount to reduce the amount of the capital gain made on the sale of the dwelling. But as the first element of the cost base of the dwelling will be its market value on the date it was first used to produce income, only the gain that arises between the time the dwelling was first used to produce assessable income and the time it was sold will effectively be taken into account.

Year of income:  Year ended 30 June 2005

Legislative References:
Income Tax Assessment Act 1997
   section 115-5
   subsection 115-25(1)
   section 118-145
   section 118-192
   subsection 118-192(1)
   paragraph 118-192(1)(a)
   paragraph 118-192(1)(aa)
   paragraph 118-192(1)(b)
   subsection 118-192(2)

Related ATO Interpretative Decisions
ATO ID 2003/1112
ATO ID 2003/1113

Keywords
Capital gains tax
CGT discount
CGT main residence exemption
Main residence first used to produce income rule
Market value cost base

Business Line:  Small Business/Individual Taxpayers

Date of publication:  26 November 2004

ISSN: 1445-2782