CGT liability: over what period?

By Eddie Chung | 09 Sep 2011
Eddie Chung

Q:Hi Eddie, I have a question for you related to one you answered in the October 2009 issue of YIP regarding CGT.

I settled on the purchase of my principal place of residence (PPOR) in Ashwood, Melbourne, in May 2002 and lived there for three years before renting it out and moving to Perth for work. I rented in Perth rather than buying, as prices in 2005 were going through the roof. 

While in Perth, my wife and I bought a second property in Melbourne (Cheltenham), settling in September 2007, but didn’t move in until May 2008. I settled on the sale of the first house (Ashwood) in September 2009. So, over what time period am I liable to pay CGT? Is it the four years I had it rented out? The two years when we owned our now PPOR and investment property (IP)? Or the 16 months that we actually lived in our now PPOR and could no longer classify the IP as the PPOR? I bought the Ashwood property for $273k and sold for $552k, with the usual capital and maintenance expenses. With the profit from the sale of the property (I sold because of the mounting maintenance expenses that were going to soon hit and the money to be invested in this would not have been recouped any time soon in either rent or capital growth), I paid off our now PPOR and have about $250k (before allowing for CGT) to play with. I intend on buying one or two investment properties, either townhouses or houses, in Melbourne or Victorian regional centres with stable economies. 

Would you recommend buying one property with these funds or splitting the funds in two to acquire two properties? I would then like to build the property portfolio from there. 

I do intend to go through the finer details with my accountant but would really appreciate your property investment advice. 

A:I think I have good news for you – well, to some extent, anyway.

Given that you moved out of your original main residence in May 2005 but did not acquire another main residence until September 2007, the original property will continue to be your main residence under the “temporary absence rule”, which is up to the point when you bought the new home in September 2007.

Further, there is a special rule that applies to a main residence that becomes income-producing. In your case, as you moved out of the Ashwood property in May 2005, you are deemed to have acquired the property in May 2005 at its market value at that point.

In other words, your ownership period for the Ashwood property, for  capital gains tax (CGT) purposes, will be taken to be from May 2005 to September 2009 (say 4.25 years). Within the ownership period, the period that is not covered by the temporary absence rule is from September 2007 to September 2009 (two years).

Therefore, assuming that the property increased in value from $273k to say $350k between May 2002 and May 2005, the approximate apportioned capital gain on the sale of the Ashwood property would be calculated as follows:
($522k - $350k) x 2 / 4.25 years
x 50% CGT discount
= $40,471

The CGT payable would therefore be $40,471 x your marginal tax rate. Assuming that you are paying tax at the highest marginal tax rate, the maximum CGT payable on the apportioned capital gain would be $40,471 x 46.5% = $18,819 (inclusive of Medicare Levy).

This is only a rough calculation because the cost base of $273k may not include other costs that are allowed to be included in the cost base of the property (such as incidental costs on purchase and sale, other non-deductible holding costs during the property’s ownership period, etc).

Also, the above calculation will be affected by the market value of the property in May 2005 when you first rented it out and your marginal tax rate to which the capital gain will be subject. Therefore, you will need to re-calculate the above to take into account those variables. Your accountant should be able to perform the necessary calculations for you.

As to your question of whether to use the $250k to buy one or two properties, it is difficult to provide categoric advice because it will depend on various factors, such as the future market conditions in relation to property, the general state of the economy, your risk appetite, and so on. Having said that, I recommend that you seek advice from a licensed financial planner, who should be able to provide you with some guidance.

– Eddie Chung
Eddie is a partner – private & entrepreneurial clients at BDO Kendalls.
If you have a question for our experts, email it to: [email protected]

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