Tax Q&A: CGT exemption

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Q: I live in a property, of which I own 50% and my parents own 50%. I lived in it for around five years, then moved out and rented the property out for three years. As far as I can tell, I would be exempted from capital gains tax in the event of a sale, but my parents wouldn’t be, as they never lived in the property. If we decide to sell and my parents are required to pay CGT, how do we work out the tax amount required?
Peter

A: Australian tax residents are generally entitled to a full capital gains tax (CGT) exemption for their main residence, subject to some conditions. The main ones are as follows:

  • The taxpayer has not nominated any other property as their main residence for the same period of ownership as the property concerned. (Note that a six-month overlapping period is allowed if you are changing residences, ie selling the old home and moving into a new home.)
  • The taxpayer moves into the property with family and dependants as soon as practicable upon settlement of the purchase, with all their personal belongings, and lives in it as their home for a reasonable period. (Special rules apply to a land-plus-construction case, which is not covered in this discussion.)
  • The main residence has not been used to earn income, eg by running a business from it, renting part of it out, etc., while the taxpayer is living in it.
  • The property is on land measuring two hectares or less.

Hence, Peter, you’ll be exempt from CGT for your ownership interest (50%) when selling the property if all of the above conditions are met. The two-year lease period after you moved out won’t affect the exemption, because under ITAA 1997 Sect 118.145, the ATO allows you to continue to treat your property as your main residence for up to six years while it is used to produce income, as long as you have no other property that you have nominated as your main residence at the same time.

As your parents have 50% ownership, they’ll be subject to income tax on 50% of the net rental profi t, if any, and to CGT as if it were their investment property, unless they’ve also been living in the property as their main residence, meeting the same conditions above. The calculation of your parents’ CGT is illustrated in the following example.

Say the property was bought for $500,000 eight years ago, including all purchase costs, and sold for $900,000 after all selling expenses today (ignoring any cost base/balancing adjustment for the purpose of this illustration).

The capital gains made by your parents would then be ($900,000 – $500,000 = $400,000) x 25% ownership each, or $110,000 each. If they don’t have any capital loss made previously and/or from elsewhere during the year, they can apply the 50% CGT discount and declare a $50,000 net capital gain in their respective personal tax returns, and be taxed based on the applicable marginal tax rate.

The fact that you lived there as main residence for five years and rented it out for three years is irrelevant to their CGT calculation.

Note that changes have been introduced by the government which mean foreign residents and/ or temporary residents are subject to different CGT rules from the above.

Need to know

  • CGT exemption applies if it’s your PPOR, even if you own only a percentage.
  • investors are subject to income tax on the net profit from a rental.
  • Foreign or temporary residents of Australia are subject to different CGT rules.

 

Daniel Rands
is partner at PKF Chartered Accountants
and Business Advisers, Tasmania

 

 

Have you got tax queries regarding your property investments and wealth creation strategies? Our experts are on hand to answer them.
If you would like your tax question answered in our magazine or on our website, please email your question to: editor.yipmag@keymedia.com.au

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