Six-Year CGT rule, Tax on non-residents and CGT when selling a previously rented PPOR

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20/02/2014


Our tax experts are on hand to answer any tax queries you may have regarding your property investments and wealth creation strategies. Email your taxing questions to editor@yipmag.com.au

SIX-YEAR CGT RULE

Question: I have a PPOR that I purchased then lived in as follows:

  • 2 years – main residence
  • 1 year – rented
  • 1 year – main residence
  • 3 years – rented

How does the six-year CGT exemption rule apply here? When does the six-year term start and finish? Does it reset when I move back in?

Answer: On first being purchased, a property can be established as either a main residence or a rental investment. The nature of first usage of the property will dictate how the capital gain is calculated on sale at a profit.

Whenever a property is occupied as a main residence, it will be exempt from capital gains tax (CGT) for that period of time. Under the six-year rule, a property can continue to be exempt from CGT if sold within six years of first being rented out. The exemption is only available where no other property is nominated as the main residence.

When the dwelling is reoccupied as the main residence, the six-year exemption resets. So another six years of exemption is available from the date it next becomes income producing. The example above shows three years when the dwelling was producing rental income since being reoccupied as a main residence. As this is less than six years, then any gain on sale will be exempt from CGT.

Where a property has great capital growth potential and the personal circumstances allow it, then extending the exemption by reoccupying the property as a main residence at regular intervals may result in a tax-free gain on sale where all the other conditions are met.

Limitations apply where the property is first rented out before 21 August 1996. I have made the assumption that the house was acquired/rented after that date.

TAX ON NON-RESIDENTS

Question: I just came to Australia for a few weeks and want to buy property to rent for five to 10 years. I’m a Hong Kong permanent resident, so if I buy Australian property, what additional fee or cost will I need to pay? Are there other methods that can reduce this cost?

Answer: Non-Australian tax residents can acquire residential rental properties for the same costs as tax residents. These include purchase price, stamp duty (a state-based tax) and legal fees for the conveyancing of the property from vendor to buyer.

At your discretion, you should include a sourcing fee for a buyer’s agent to help you locate the type of property you specify. It is also prudent to pay for a pest and building inspection report before finalising the purchase.

Positive net rental income is taxable where the property is rented. Rental losses can be carried forward to be offset against future income for an indefinite period. The losses can also be offset against any capital gain derived on sale of the property.

If a capital gain is derived on the sale of a property after it has been owned for more than 12 months, residents get a discount of 50% before the remaining 50% is taxed. Non-residents cannot access this concession.

Income-tax rates for non-residents are slightly higher than those for residents. The major difference is that the first $18,200 of income is taxable for non-residents, while it is tax free for residents. From $18.2k to $37k, residents are taxed at only 19%, while non-residents are taxed at 32.5%.

A state-based tax – land tax – is payable where the land value exceeds a threshold. Land tax rates vary between the states; in NSW it is 1.6% of land value and the threshold is $406k. Land value above this amount is taxable.

As for residents, interest expenses incurred in financing the purchase of a property are tax deductible against the rental income. Consult your property tax specialist for advice on tax planning before you enter into a transaction.

CGT WHEN SELLING A PREVIOUSLY RENTED PPOR

Question: We bought a house in 2005 in Victoria as our primary residence and in 2010 moved interstate for a job opportunity. We had the house valued at $1.1m at this time. We then rented it out until the present day, ie nearly four years. The house is on the market and we expect to get approximately $1.4m. What CGT is due on this sale? Would the six-year rule apply?

Answer: On first being purchased, a property can be established as either a main residence or a rental investment. The nature of first usage of the property will dictate how the capital gain is calculated on sale at a profit.

Whenever a property is occupied as a main residence, it is exempt from capital gains tax (CGT) for that period of time. Under the six-year rule, a property can continue to be exempt from CGT if sold within six years of first being rented out. The exemption is only available where no other property is nominated as the main residence.

So, if you relocated for work purposes in 2010 and continued to nominate your property in Victoria as your main residence, you will maintain your exemption from CGT when you realise a capital gain on selling it after four years of first renting it out.

If you nominated another property, which you purchased, as a main residence during that time, the cost base for calculating the CGT on sale will be the market value at the time you nominated the new property. This means any capital growth accrued until then will be exempt.

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

Disclaimer: The views provided are of a general nature only and should be considered as general education. Readers should not act on the information above without obtaining professional advice relevant to their circumstances. It is intended as information only.

-Shukri Barbara

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Comments
  • JW says on 20/10/2016 01:21:36 PM

    Hi

    I have a property I bought and moved into as my principal residence in 2001. I then rented it out from 2002 (and had it valued at that point) to live with my parents before moving overseas in 2004.

    I rented in the UK until 2007 where I purchased a residential property again but in the UK and lived in it until 2015. In 2016 I moved back to Australia and rented a another place and continued to rent out my original property (the one bought in 2001).

    I am now selling and trying to work out if I am entitled to use the 6 year rule and for what period of time?

    Regards
    JW

  • MHB says on 04/11/2016 12:15:13 PM

    Hi there, I would like to buy a house in Tasmania (I currently live in Sydney). The idea would be to buy the property and rent it for between 1 -3 years by which time I would be able to move to Tasmania and use the house as my home. I would expect to stay there for at least 5 years - probably much longer. While it was rented the property would be negatively geared. What does this mean for CGT if I sold the property? Regards MHB

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