ATO Interpretative Decision
ATO ID 2003/1113 (Withdrawn)
Capital gains tax: main residence exemption - interaction between the 'absence' rule and the 'first used to produce income' rule
FOI status: may be released
Status of this decision: Decision withdrawn 21 April 2017.
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Does the special rule in section 118-192 of the Income Tax Assessment Act 1997 (ITAA 1997), which deems a taxpayer to have acquired a dwelling for its market value when they first use it to produce assessable income, apply if the taxpayer would otherwise be entitled to a full main residence exemption by choosing under section 118-145 of the ITAA 1997 to continue to treat the dwelling as their main residence?
No. The special rule in section 118-192 of the ITAA 1997 does not apply. That rule only applies if the dwelling would attract a partial main residence exemption under the rules in Subdivision 118-B of the ITAA 1997. Therefore, it does not apply if, by making the choice under the absence rule in section 118-145 of the ITAA 1997, the dwelling will be taken to have been the taxpayer's main residence for the whole of their ownership period so that a full main residence exemption is maintained.
The taxpayer acquired a dwelling in January 2000 which became their main residence.
In January 2002, the taxpayer vacated the dwelling and commenced renting it to tenants.
However, the taxpayer made a choice under section 118-145 of the ITAA 1997 (the absence rule) to continue to treat the dwelling as their main residence.
The taxpayer disposed of the dwelling in October 2003.
Reasons for Decision
In working out a capital gain or loss on a dwelling, the 'first used to produce income' rule in section 118-192 of the ITAA 1997 applies if:
- only a partial main residence exemption would be available 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)
- 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
- 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).
If these conditions are satisfied, the taxpayer is taken to have acquired the dwelling at the time they first started using it for income producing purposes, for its market value at that time: subsection 118-192(2) of the ITAA 1997. This has the effect that the first element of the dwelling's cost base and reduced cost base is the market value of the dwelling on the day it was first used for income producing purposes (and that expenditure incurred by the taxpayer prior to that day is ignored).
The last sentence of the above paragraph has been rewritten to improve clarity
The first condition is that a partial main residence exemption is available because the dwelling was used for income producing purposes: paragraph 118-192(1)(a) of the ITAA 1997. That condition is not satisfied in this case because making a choice under section 118-145 of the ITAA 1997 gives the taxpayer a full main residence exemption. We consider that the condition is only satisfied if the taxpayer would have been entitled to a partial main residence exemption under the ordinary rules in Subdivision 118-B, including section 118-145.
Therefore, section 118-192 of the ITAA 1997 does not apply in this case. The taxpayer can claim a full main residence exemption for the dwelling and, as a result, any capital gain or loss they make on its disposal will be disregarded.
Note 1: Had the dwelling in this case been rented for more than a six year period, only a partial main residence exemption would have been available and section 118-192 of the ITAA 1997 would therefore have applied. This is because, if a dwelling is used to produce assessable income, the period for which it can be treated as a main residence under a section 118-145 choice is limited to six years: subsection 118-145(2) of the ITAA 1997.
Note 2: In that case, section 118-192 will deem the taxpayer to have acquired the dwelling for its market value at the time it was first used to produce income (and not at the end of the six year period).
Date of decision: 30 October 2003
|Year of income:||year ended 30 June 2004|
Income Tax Assessment Act 1997
Related ATO Interpretative Decisions
ATO ID 2003/1112
Capital gains tax
CGT event A1-disposal of a CGT asset
CGT main residence exemption
Dwelling ceases to be a main residence
Main residence first used to produce income rule
Siebel/TDMS reference number: 3822612; 1-7K3B7OU; 1-B0L8IIA
Business line: Small Business/Individual Taxpayers
Date of publication: 12 December 2003
Date reviewed: 3 December 2015