Tax Q&A: Your Tax Questions on Capital Gains and More

By
16/3/2017

Our tax experts are on hand to answer any tax queries you may have regarding your property investments and wealth creation strategies.

Q: We migrated to Australia in 2010 and kept our (previously owner-occupied) property in the Netherlands as we had (and still have) the intention to move back to NL and start living in that property again.

For the years till 30 June 2013, it was not considered an investment that was income- or loss-producing, and as such no negative gearing was applied over those years from a tax perspective. We did not live in the house, but we also have not acquired a second house as a main residence.

For the years from 1 July 2013 onwards, we rented out the property and for tax purposes considered it income-producing, which resulted in a net loss.

We are looking to return to the Netherlands after our youngest child finishes high school at the end of 2020, and we’re hoping to continuously rent out our property between now and end 2020, and then to reoccupy our property as a main residence, which will also mean we would become residents of the Netherlands again and stop being residents of Australia for tax purposes (no Australian income is foreseen after 2020).

Altogether this would mean that:

• we would not have lived in our property for about 10.75 years (Apr 2010–Dec 2020)
• we would have treated it as income-producing for 7.5 years (Jul 2013–Dec 2020)
• it will not be sold but reoccupied

My question is, for CGT purposes would the difference in value of the property between April 2010 and December 2020 be the basis for calculating capital gains tax? Or will the value at July 2013 be used as the starting point? Also, will the 50%  rule apply, as we have lived for more than 12 months in that property? And lastly, what period of ownership will we be required to pay CGT on: 1.5 years, 7.5 years, or the entire 10.75 years?

Looking forward to your response! Cheers, Alan

A: There are several matters that need to be considered to effectively answer your questions. These include the implications of becoming an Australian resident for tax purposes, ceasing to be an Australian resident for tax purposes, and the main residence exemption.

When a taxpayer becomes an Australian resident for tax purposes, all their assets that are not taxable Australian property are taken to have been acquired at market value at the time of becoming a resident. This means that as your home in the Netherlands was not taxable Australian property at the time that you became a resident, it would have been required to be valued at April 2010. It would be best practice in this instance to request a valuation from a registered valuer or a reputable real estate agent.

When you depart Australia to return to the Netherlands, you will be taken to be a non-resident for tax purposes from that point in time. When this happens, a capital gains tax event occurs, and you will be deemed to have disposed of your home in the Netherlands at market value. As discussed earlier, you will be required to obtain a valuation from a registered valuer or real estate agent.

A taxpayer’s main residence is exempt from capital gains tax on sale if it has been lived in from the time the property settled or from a time as soon as was practicable after settlement until the time of sale. The main residence can produce income for up to six straight years (known as the six-year absence rule) and still be treated as their main residence, if no other place is treated as their main residence during this time. When a main residence is left vacant for a time, this period is not counted towards the six-year absence rule. 

The calculation of any potential capital gains tax starts by working out the difference between the value of the property when departing Australia and the value of the property when first arriving in Australia. This is then multiplied by the number of days in the ownership period that the dwelling was your main residence, divided by the total number of days in the ownership period. To effectively work this out, you will need to calculate the number of days the property was treated as your main residence from when you purchased the property to the date of disposal triggered when leaving Australia. The six-year absence rule and the time that you were absent but did not rent it out count towards the ownership period when the dwelling was your main residence.

If an asset is held for a period of more than 12 months, then a 50% discount is available on any capital gain that may arise.

A final matter that needs to be considered on leaving Australia is the impact of the double taxation agreement between Australia and the Netherlands.

Due to the complex nature of your situation, it would be recommended that you seek advice closer to the time of departure from Australia.
- DAVID SHAW


Q: We relocated interstate in 2014 and have rented out our home since then, which is positively geared. As my husband no longer works, I would like to apportion the largest part of that income to him to take advantage of the tax benefits of doing this. However, can I change that apportionment, if the circumstances change, possibly on a yearly basis? Or, given that I used a 50/50 apportionment initially, are we now stuck with that? 
Many thanks!

A: When two individuals jointly own a property in return for rental income from a passive investment, technically they are treated as having formed a ‘tax law partnership’ for tax purposes as they are jointly in receipt of income. 

The law operates in such a way that each of the partners in the tax law partnership is required to include their share of the partnership’s net income (or loss) in their own tax return, ie you and your husband will need to return your share of the net income arising from the property in your individual tax returns. 

“It may be possible to change your respective percentage ownership in the property, but such a change may entail capital gains tax and/or stamp duty consequences”

To determine each partner’s proportionate share of the net income of a tax law partnership that owns a passive investment, legal precedents provide that the split should be based on each partner’s respective ownership interests in the property. 

In the case of a jointly owned property in a matrimonial scenario, the property is generally held by you as ‘joint tenants’, which means that each spouse essentially owns half of the property. In other words, you should each include 50% of the net income derived from the property in your respective tax returns, unless you can prove that you and your husband originally acquired a different percentage interest in the property, eg the original purchase contract clearly states that you bought the property on a ‘tenants in common’ basis and you own different ownership percentages in the property.

It may be possible to change your respective percentage ownership in the property, but such a change may entail capital gains tax and/or stamp duty consequences. Having said that, if the property is still covered by the main residence exemption, any capital gain arising from the change may be disregarded, but it is likely that stamp duty may still apply. Therefore, professional advice is strongly recommended before you consider making the change.
- EDDIE CHUNG


Q: I am a foreigner and I purchased a two-bedroom apartment in 2007 as a residence for my children, who are pursuing their tertiary education in Sydney. The apartment has never been used to produce income or been available or advertised for rent. The apartment is still being financed by a mortgage loan.

I am planning on selling it as my four children are graduating, and would like to know if I am eligible for any of the CGT exemptions or concessions? Also, if I am not eligible for any CGT exemption or concession, would the interest on the mortgage payment be deductible against the CGT? 
Thank you, Milton

A: From a property/real estate perspective, the 50% capital gains tax discount was previously available to any individual who had a taxable capital gain on the disposal of a property that had been held for more than 12 months, irrespective of their tax residency status. This meant that only 50% of the capital gain was included in their assessable income.

However, in the 2013 Federal Budget, the government announced that the 50% CGT discount would no longer be available to non-residents effective 7.30pm (AEST) on 8 May 2012. The CGT discount would remain available for capital gains accrued prior to this date if a market valuation of the property as at 8 May 2012 was obtained.

Therefore, as you acquired your property before 8 May 2012, your options are as follows:

• If an independent market value of the property as at 8 May 2012 is obtained, a CGT discount of up to 50% will be available, depending on whether the gain accrued up to 8 May 2012 is higher or lower than the overall capital gain. If the capital gain accrued up to 8 May 2012 is more than the overall capital gain (which means the property has declined in value after 8 May 2012), the full 50% CGT discount can be applied to the overall capital gain. 

“Note that if the property is held in a company, then there is no entitlement to the 50% CGT discount, regardless of your residency status”

If the overall capital gain is more than the capital gain up to 8 May 2012 (which means the property has increased in value after 8 May 2012), then the full 50% CGT discount will only apply to the capital gain up to 8 May 2012. Any increase in value of the property related to the period after 8 May 2012 will not be subject to any discount if you remain as a non-resident during this period.

• Non-residents who do not obtain a market valuation of the property will not be eligible for any CGT discount on any capital gain before 9 May 2012. Therefore you will be taxed on the full capital gain upon disposal of the property if you remain a non-resident of Australia for income tax purposes throughout the ownership period.

Please note that if the property is held in a company, then there is no entitlement to the 50% CGT discount, regardless of your residency status or when you purchased the property  (except if the property was purchased before 20 September 1985, in which case it would be entirely CGT exempt).

In relation to the interest expense on the mortgage, yes, you will be entitled to claim this expense as an addition to the capital cost base of the property as well as other outgoings which relate to the property, such as land tax, council rates, repairs and maintenance, etc. 
- ANGELO PANAGOPOULOS

 

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