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ATO Interpretative Decision

ATO ID 2004/945 (Withdrawn)

Income tax
Income tax: capital gains tax: main residence exemption - 'first use to produce income' rule and CGT discount

Attention This ATO ID is withdrawn.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).
Attention This document has changed over time. View its history.
FOI status: may be released
Status of this decision: Decision withdrawn 21 July 2017.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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

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:

·
 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)
·
 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).

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.

Date of decision: 12 November 2004

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

Siebel/TDMS Reference Number: 4301397; 1-B0RLAWS

Business Line: Small Business/Individual Taxpayers

Date of publication: 26 November 2004

ISSN: 1445-2782

ATO ID 2004/945 (Withdrawn) history   Top  
   Date   Version 
   12 November 2004   Original statement   
 You are here ®  21 July 2017   Withdrawn   


 


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