CGT

Here is an article I wrote a while back:

The short answer is that you get some CGT relief as the period subject to CGT is apportioned.

Example
Bic Dong purchased a home in 2000 and moved in straight away. It is a small residential block and is his main residence and only property.

On 01 Jan 2004, Bic moves out. He ends up renting a property while renting out his main residence. Mr. Dong then sells the property in 2015.

What happens with the main residence exemption? Because Dong was absent for more than 6 years – he was away for 11 years in total.

Bic must first work out the value of the property when it was first used to produce income which occurred on 01 Jan 2004. He can do this by employing a valuer who will estimate what it was worth back at that point in time.

Then he must work out how long the property was rented for (in days to be exact). 2004 to 2015 is 11 years (approx.). 6 of those 11 years are able to be counted as the main residence. Therefore 6/11th of the gain will be exempt and 5/11ths will be subject to tax.

Let’s add in some values:

2000 $200,000 purchase price

2004 $300,000 value at the date he moved out

2015 $800,000

The capital gain to work the tax out on is $800,000 – $300,000 = $500,000

Some expense can be used to reduce this – agents fees on sale, conveyance on the sale etc, but not stamp duty on the purchase or other purchase costs because Bic is deemed to have acquired the property in 2004 at its value then (s118-192 ITAA97). Also, capital works deductions would need to be added back.

Assuming all these amounts to $30,000 the gain would be $480,000

Then the 50% CGT discount will be applied. $480,000 x 50% = $240,000

Only 5/11ths of this would be taxable = $109,090

$109,090 is the taxable gain that would be added to Bic’s other taxable income for the year. The maximum tax he would pay on this would be $53,454 but he may pay much less if his other income was very low.

Had Bic moved back in before 01 Jan 2010 and then later moved out again, he would not have paid any CGT tax. He didn’t do this because he didn’t want the hassle of having to move.

Had Bic decided not to keep claiming the property as his main residence after moving out (e.g. because he claimed another property) then the cost base for CGT purposes would have been the value at the time of moving out which was $300,000

The CG would have been $800,000 – $300,000 = $500,000

Reduce this by the selling costs of $30,000

$480,000 gain

$240,000 after applying the 50% CGT discount because held longer than 12 months.

Tax would be less than $240,000 x 49% (top rate plus Medicare) = $117,600

See

ATO ID 2003/1113
Income Tax
Capital gains tax: main residence exemption – interaction between the ‘absence’ rule and the ‘first used to produce income’ rule
ATO ID 2003/1113 – Capital gains tax: main residence exemption – interaction between the ‘absence’ rule and the ‘first used to produce income’ rule

Section 118-192 of the Income Tax Assessment Act 1997
INCOME TAX ASSESSMENT ACT 1997 – SECT 118.192 Special rule for first use to produce income

Section 118-145 of the Income Tax Assessment Act 1997
INCOME TAX ASSESSMENT ACT 1997 – SECT 118.145 Absences

Bic could be totally exempt.

Hi James,

The only caveat being you cannot live in the property and rent out part of the property (ie a room), you must live in it solely.

Isn’t there another caveat – that they don’t buy another PPOR (i.e. they rent elsewhere) while their PPOR is rented out??

Benny

Hi James,

This is assuming the property is your MPR (as is assumed in brackets at the end of my quote).

You are right! I missed it, as I was unaware of the acronym “MPR”. I know the term as PPOR – Principal Place of Residence? Was the change to MPR (Main Primary Residence) a recent change?

And isn’t “main primary” tautological? I wonder who thought up that darling?

*confused*

Benny

Benny wrote:

Hi James,

This is assuming the property is your MPR (as is assumed in brackets at the end of my quote).

You are right! I missed it, as I was unaware of the acronym “MPR”. I know the term as PPOR – Principal Place of Residence? Was the change to MPR (Main Primary Residence) a recent change?
And isn’t “main primary” tautological? I wonder who thought up that darling?
*confused*
Benny

I have never seen MPR either. In commonwealth tax it is known as the main residence (since 1997) and NSW tax it is called the Principle place of residence.

Hi Terry

Just wanted to confirm. The example in your link, would they be exempt from CGT when he sold the property, or would 4/6 of the capital gains be subject to CGT?

Thanks

I think this may be the one King referred to which is in the legislation:
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Example: You live in a house for 3 years. You are posted overseas for 5 years and you rent it out during your absence. On your return you move back into it for 2 years. You are then posted overseas again for 4 years (again renting it out), at the end of which you sell the house.
=

Yes this main residence could get the full exemption – provided it meets the other requirements.

There is no minimum requirement to live in the property, but it must be reestablished as the main residence again. You property could possibly exempt from CGT if you sold before Oct 2019.