Tax Q&A: Your tax questions on CGT rules answered

By
18/02/2016​
CGT when selling your home and moving into an investment property

Q: We are a married couple and have had a rental property since 1994 and live in another property. Now we want to sell the current property so we can move into the rental property since it is closer to the city, but the rental property is a bit old. We have been told that one way to reduce the CGT is to move back to the rental property and live there for a certain number of years, then sell it to buy another property to live in – not for investment. Is that correct?

A: Where a property is first established as a rental on purchase, it will be subject to CGT when sold at a gain. If held for longer than 12 months it can qualify for a discount of 50% on the capital gain.

If that rental property is later occupied as a main residence, the capital gain will be apportioned between the period occupied as a rental and the period occupied as a main residence, measured by the number of days rented and number of days occupied.

The portion related to the period the property was occupied as a rental will be assessed and subject to tax.

Occupying the now-rental property as a main residence will slowly reduce the taxable component. It may be a slow process considering that existing growth has compounded over 20 years.

To minimise CGT, consider selling when you have capital losses to offset against. Or the sale can be deferred to when you have less income as a result of a year off work or a similar break.

With a 50% CGT discount and then splitting the amount between two of you, the pain may not be as bad as expected. Estimate the figures. Selling in July defers the tax payment for another 12–15 months, helping with cash fl ow. Note the relevant date for CGT is the contract date and not the settlement date.

- Shukri Barbara


CGT rules

Q: How long do you have to live in a property before renting it out for it to NOT be deemed as an investment property for CGT purposes?

A: When a property is first acquired, it can be established either as a main residence or a rental investment. Where the property is first established as a main residence, it will be exempt from capital gains tax if sold at a profit at a later time. Where it is later rented out, the exemption can continue for another six years ... but on the condition that no other property is nominated as the main residence. 

A property needs to be nominated either as a main residence or rental investment at the time of sale, because that is when the capital gain (if any) has to be calculated. 

Generally, the extension provided by the six-year rule is designed for situations in which people move interstate or overseas for work, or their circumstances change in some way.

To determine whether a property is established as a main residence, the ATO looks at the following factors, among others:

•     the length of time you have lived there – there is no minimum time a person has to live in a home before it is considered to be their main residence 
•     whether your family lives there 
•     whether you have moved your personal belongings into the home 
•     the address to which your mail is delivered
•     your address on the electoral roll
•     the connection of services (for example, phone, gas or electricity) 
•     your intention in occupying the dwelling

The longer a property is occupied with the above conditions, the more likely it is to be considered a main residence.  

On audit, usually carried out a long time after the transactions happen, intention is seen differently by the ATO – with the benefit of hindsight rather than according to the owner’s expectation. 

For example, selling within a short time after renovation may imply an intention to resell at a profit. Being involved in the building/construction/development trades tends to alert the ATO that the intention was for profit-making and not investment.

To establish the ‘intention’ of occupying the property as a main residence, in my opinion six to 12 months is a reasonable period, in the appropriate circumstances. 

The amount of capital gain assessed will be apportioned between the days occupied as a main residence and the days the property was a rental. The six-year absence rule extending the exemption is available following the main residence period. Reoccupying the property and establishing it as a main residence will increase the time period calculated as exempt.

– Shukri Barbara


Restarting a CGT-free period

Q: If I have exercised my exemption under the six-year rule and am now returning to stay in my unit, what is the minimum period I have to stay in my unit before I can once again rent it out under the six-year rule?  This is my only principal place of residence. Your reply would be benefi cial to others in a similar situation.

A: Provided that you move back into your unit prior to the end of the six-year period of using your unit for income-producing purposes and then occupy your unit for a reasonable period (there is no minimum period in the Tax Act; however, it is always on a case-by case basis and must satisfy the reasonable period and intent test); and provided you can show evidence that you have in fact physically moved into and occupied your unit (for example, evidence of water/council rates, utilities, electoral roll records, etc, would generally suffice), then you will preserve your CGT-free exemption on your unit if you ever sell it in 
the future.

There is no defined minimum period in the legislation; however, as a general guide, in addition to what is a reasonable period, I would suggest a minimum of six months plus genuine intent should be OK.

– Angelo Panagopoulos
 

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