Capital gains tax calculations

21/01/2011


Question: We’re living in our principal place of residence (PPOR), and bought an investment property (IP) this January. We’ve leased the IP for the past six months and are now thinking about demolishing it and building a new home, which would become our new PPOR. If we do this, we would also sell our current PPOR. If we decide to sell that property down the track, say in five years, what would be the capital gains tax (CGT) liability? How is CGT calculated?

Answer: There are a few CGT rules applicable here:

  1. You can nominate only one PPOR at any particular point in time, unless when you move from the old PPOR to the new PPOR, where both can be treated as the PPOR and are exempt from CGT for up to six months, subject to the old PPOR meeting a few conditions.
  2. The IP can be nominated as your PPOR from the time the property is vacated for the purpose of building the new PPOR, where the old PPOR loses its CGT exemption for the same period of time.
  3. For a property that is being rented out then later becomes your PPOR and then is sold, the CGT is pro rata between the time you first bought it to the time you nominated it as your PPOR to when you eventually sell it.

Based on the above, let’s put in some real figures to illustrate. Assume you bought the IP for $450,000 (including stamp duty and legal costs) in January 2010. You rent the property out and then vacate it in October 2010 to start the demolition and construction, which costs $350,000 and is finished in April 2011. You move into the property in April 2011. The old PPOR is then sold in June 2011. Five years later, the new PPOR is sold for $920,000 in April 2016.

Option 1

You nominate the new house to be your PPOR from October 2010 (as per point 2 above). When sold in April 2016, the CGT on the new PPOR will be:

[$920,000 sale proceeds - ($450,000 + $350,000) property cost] x 9 months of renting out period = $14,400 gain.

Ownership period = six years and three months.

The $14,400 gain will also be eligible for a further 50% CGT discount. On the other hand, the old PPOR loses PPOR status from October 2010 but is entitled to a six-month exemption prior to sale (January 2011 to June 2011), hence the old PPOR is subject to CGT for the period from October 2010 to January 2011, based on the pro rata formula.

Option 2

You nominate the new house to be your PPOR from April 2011. When sold in April 2016, the CGT on the new PPOR will be:

[$920,000 sale proceeds - ($450,000 + $350,000) property cost] x 15 months of renting out period= $24,000 gain.

Ownership period = six years and three months. 

Again, the $24,000 gain will be eligible for a further 50% CGT discount. Under this scenario, the old PPOR is completely free of CGT as April 2011 to June 2011 is covered by the six-month exemption, as per point 1 above.

Choosing between the two options is largely dependant on the actual gain made from the sale of the old PPOR and the projected sale price for the new PPOR. As we don’t have actual numbers we are unable to work these out for you. You should see an accountant to work out the actual figures before you embark on your new venture.

Ed Chan from Chan & Naylor

If you have a tax question for our experts, email it to: editor@yipmag.com.au 

Or post it on www.yourinvestmentpropertymag.com.au

Chan & Naylor is an accountancy firm that specialises in the areas of asset protection, wealth creation through property investing, estate planning and tax planning. The company ranks in BRW’s top 100 accountancy firms in Australia. For more information, phone (02) 9391 5400 or visit www.chan-naylor.com.au.

The advice contained in this report is general in nature and its preparation has not taken any individual circumstances, objectives or financial needs into account. Readers are advised to seek appropriate advice from licensed professionals before embarking on any investments.

 

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