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ATO Interpretative Decision

ATO ID 2003/1113 (Withdrawn)

Income Tax
Capital gains tax: main residence exemption - interaction between the 'absence' rule and the 'first used to produce income' rule

Attention This ATO ID is withdrawn. Guidance relating to the issue addressed in this ATO ID can be found in the Guide to capital gains tax (NAT 4151). Additional guidance can be found in web content Is the dwelling your main residence?(QC 17184), Using your home to produce income(QC 17193) and Selling your home?(QC 22168).
Attention This document has changed over time. View its history.
FOI status: may be released
Status of this decision: Decision withdrawn 21 April 2017.

CautionCAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.


Issue

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?

Decision

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.

Facts

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).
History Note
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

Legislative References:
Income Tax Assessment Act 1997
   Subdivision 118-B
   section 118-145
   subsection 118-145(2)
   section 118-192
   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

Keywords
Capital gains
Capital gains tax
Capital losses
CGT choice
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

ISSN: 1445-2782

ATO ID 2003/1113 (Withdrawn) history   Top  
   Date   Version 
   30 October 2003   Original statement   
 You are here ®  21 April 2017   Withdrawn   


 


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