Hi,
I am an Australian who has been living in the UK for the past four years.
My spouse and I purchased an Australian property in September 1998 for $250,000 and we lived in the house until 8th May 2000.
We started renting the property on 8th May 2000 when the property valuation was approx $350,000
We will cease renting the property onl 19th May 2006 (this is the earliest time we can request our tenants to move out as the lease expires). We then plan to return to Australia to reside in the property for a few months before selling it for about $650,000.How much capital gains tax will we pay? What would be the most tax effective way of minimising CGT? We may change our plans based on CGT ie. sell the house earlier, sell it later, live in it for longer? Any advice?
If you can get your tenants out before the 8th May you can conceivably pay no CGT as it is within the 6 year threshold allowed under the CGT exemption provisions. Unless of course you have had another home in the meantime.
I suggest you seek independent advice and speak to your PM about ways you can have it vacated so as to have rented for under 6 years.
The tenant may even be happy to move early – it never hurts to ask. Even make it worthwhile them leaving that bit early…
Simon Macks
Residential and Commercial Finance Broker
***NODOC @ 7.15% to 70% LVR***
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Thanks for your response Simon.
I have asked the PM to request the tenants to leave early, but the tenants are keen to stay in the property for as long as possible. We are exploring the option of contacting the tenant directly and offering an incentive for them to vacate the premises early, or offer them a month free in the house.
If the tenants were in the property for the additional 11 days, would the sum of CGT be calculated on the 11 days or would it be a fixed sum.
– Is this calculation correct
Value at start of renting period – 350,000
Value at end of renting period – 650,000
Proportion of Days over 6 year period – 11/2201 = 0.005
Capital Gains Owed = 0.005*(650,000-350,000)=$1249 owed for CGTAdl_Cat,
I suspect that once you go over the 6 year cut off , the 11 days count for nothing. The capital gain will be based on the portion of the time that it was an IP to the Total period of ownership. Which given that if say you sell it in December, the period that it was an IP will be about 75% of the time.
The capital gain (assuming you selll it for 675k in Dec), will be in the vicinity of 150,000 and 250,000 depending on the method of calculation the cost base.
Now depending on your tax bracket, that a lot of tax to be paid. And worth paying the tenant to leave before the 6 years is up.Speak to an Accountant – NOW.
I am NOT qualified at all to give financial advice and my figures are just as made up as yours, but I suspect that you are going to be up for a significat tax bill (well beyond $1249) . Assume that you are up for in excess of $50,000 and then figure out whether it’s worth speaking to an accoutant now.
Mal
Getting out of your comfort zone, can help you become comfortable
I believe yo ustill get the 6 years grace even if you overstep it but I have been wrong before. If you lose the 6 yr concession then it would be worth doing nearly anything to get them out early!
Additionally you need to remember CGT is halved if the asset is held more than a year.
According to your figures it really doesn’t seem much at all.
Contact an accountant as a matter of urgency.
I recommend Nick at http://www.strategicwealthmanagement.com.au who will prob give you an answer via email quite quickly.
Simon Macks
Residential and Commercial Finance Broker
***NODOC @ 7.15% to 70% LVR***
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
I may just have to eat my words. [withstupid]
Aren’t I the clown [juggle]You may be correct and the CGT payable may in fact be less that $500. The formula would appear to be CG x 11 / 3000 (approx) if say you sold it in december.
Check out the ato site below: go to the heading “Continuing main residence status after moving out ” about half way down.
http://www.ato.gov.au/individuals/content.asp?doc=/content/cgt_guide.htm&page=14Mal
Getting out of your comfort zone, can help you become comfortable
You may not have to pay CGT as you could elect to have the Australia Property as your Principal Place of Residence. This depends on your circumstances whilst overseas.
Originally posted by Glennw:You may not have to pay CGT as you could elect to have the Australia Property as your Principal Place of Residence. This depends on your circumstances whilst overseas.
Glenn,
This is what we have been discussing. Can you add anything else to the posts above?
Cheers,
Simon Macks
Residential and Commercial Finance Broker
***NODOC @ 7.15% to 70% LVR***
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Thanks all for the advice
I have consulted an accountant andh it was bad news
‘That is not good news; it may pay to offer an incentive to the tenant to
leave before the 6 year period ends. The tax office will not be
lenient.Once the 6 years ends a full exemption from CGT is no longer available.
The gain will be calculated from the day the property first earned
rental income. This will be considerable given the market price
increases in Australian properties over the last 6 years.’So unfortunately it’s bribe the tenants or be whacked with a huge tax bill!
Even if you offer to put them up in a the best hotel in town for a few weeks, it may be worth it. Or buy them a car! (wonder if you could claim this)
Terryw
Discover Home Loans
Parramatta
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Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Note – I am seeking other expert advice (expat specialists this time), as the ATO web-site contradicts the accountants advice. In addition, I have received other advice which suggests I should keep renting the property. It certainly is not clear to me yet!
http://www.ato.gov.au/individuals/content.asp?doc=/content/57252.htm&page=24&H6_7
Originally posted by adl_cat:Note – I am seeking other expert advice (expat specialists this time), as the ATO web-site contradicts the accountants advice. In addition, I have received other advice which suggests I should keep renting the property. It certainly is not clear to me yet!
http://www.ato.gov.au/individuals/content.asp?doc=/content/57252.htm&page=24&H6_7
As a result, the Sydney house is not exempt for the period it was used to produce income that exceeds the six-year period – that is, one year.
If the capital gain on the disposal of the Sydney home is $250,000, he calculates the amount of the gain that is taxable as follows:
Period of ownership of the Sydney home:
1 July 1990 to 28 February 2005
5,357 days
Periods the Sydney home was used to produce income after Ian stopped living in it:
1 January 1992 to 31 December 1996
1,827 days
1 March 1997 to 28 February 1999
730 days
2,557 days
First six years the Sydney home was
used to produce income:1 January 1992 to 31 December 1996
1,827 days
1 March 1997 to 28 February 1998
365 days
2,192 days
Income producing for more than six years after Ian stopped living in it:
365 days
Proportion of capital gain taxable in 2004–05
$250,000
x
365
5,357=
$17,033
I suspect that your accountant is not correct. I believe that the tax will only be payable on the period after the 6 years is finished.
You can always write to the ATO and request a private ruling which will lay it down in black and white as it applies in your case.
All the best
Simon Macks
Residential and Commercial Finance Broker
***NODOC @ 7.15% to 70% LVR***
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Simon’s scenario was the one that made me change my stance.
I’d say tty avoid the whole CGT scenario, give them an incentive to leave before the 8th. Pay the moving costs or waive the rent for the last few weeks.Don’t you just hate seeking professionsal advice and then having to go elsewhere because you think they are wrong!!
Mal
Getting out of your comfort zone, can help you become comfortable
I am not an accountant, and haven’t looked that the ATO site mentioned above, but I have understood the 6 year exemption is lost totally if you are away from the property for more than 6 years.
Terryw
Discover Home Loans
Parramatta
[email protected]
Sign up to my mailing list.
Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
As a result, the Sydney house is not exempt for the period it was used to produce income that exceeds the six-year period; that is, one year.
That is an excerpt from a long explanation found at:
http://ato.gov.au/individuals/content.asp?doc=/content/36887.htm
I am convinced you are only liable for the period exceeding the 6 years.
My accountant is not available for his advice this week either…
Simon Macks
Residential and Commercial Finance Broker
***NODOC @ 7.15% to 70% LVR***
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
According to the ATO web-site I am not liable to pay CGT on the whole 6 years, so hopefully my second opinion will confirm this. It’s time for a new accountant if this is the case!
Just to close this question off – the Accountant was wrong. The capital gains tax is worked out on a pro-rata basis calculated from the time when the 6 year rental period has elapsed.
We have received more accurate advice, and we will end up paying at most approx $5000 if we continue to rent our property for 6 months after the 6 years CGT exemption is up. If we had of continued with our current Accountant we would be paying $80K to the tax man.
My advice to everyone out there is to find a good accountant, because it could end up costing you!
Good to hear. That takes the stress out of the situation.
Lucky you threw the Q out to the forum before seeing your accountant first. Even if all we did was confuse the situation.
Good luck with it.Mal
Getting out of your comfort zone, can help you become comfortable
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