Got tax queries regarding your property investments and wealth creation strategies? Our experts are on hand to answer them firstname.lastname@example.org
Q. We bought our company title duplex in June 2013 for $880,000, with the intention of it being our long-term place of residence.
However, by the time the property settled a few months later, we were not in a position to move in, and therefore rented it out until June 2014. We then moved into the house and have lived there ever since.
It has recently been valued at approximately $1.5m. We are thinking of selling and would like advice on the following:
• Are we liable to pay capital gains tax? In essence, we will have rented the house for one year (rental started a week after settlement) and will have lived in it for 3.5 years by the date of sale.
• Does the company title add any complications, even though this is now our PPOR and the constitution is set up so that the shareholders are also the ‘owners/residents’ of the property?
- Kind regards, Christopher
A. You own the property on a company title – this means that you own a share in this company. You do not own the property in the traditional manner where you hold the title deed subject to mortgage; this is not a common way of owning property.
The first issue we need to consider is whether the company title qualifies for the main residence exemption from capital gains tax (CGT). Subdivision 118-B – main residence of the Income
Tax Assessment Act 1997 relates to this exemption. In the simplest terms, this subdivision states that an individual who purchases a dwelling as a main residence is exempt from CGT on any profit that may be made by sale. In your case, the house is actually owned by a company that you are a shareholder in.
"Your situation may be covered by Section 118-130, which extends the exemption from capital gains tax"
Your situation may be covered by Section 118-130, which extends the exemption from CGT to the right to occupy a dwelling, not just the legal title to the dwelling.
The constitution of the company as described by you is set up so that the shareholders are also the owners/residents of the property. This will need to be reviewed carefully, however, to ensure that the particular documentation that governs this is actually a right to occupy the duplex, which satisfies the requirements of Section 118-130. If this is in order, then the sale of this right will be treated the same as the sale of a traditionally owned dwelling for CGT purposes. If you do not satisfy the conditions of Section 118-130, then it will just be the sale of a company share that will be taxable. You will be entitled to a discount of 50% of the gain as you have owned the share for more than 12 months.
There would be no main residence exemption.
Assuming that you satisfy the requirements of Section 118-130, the following will be your CGT situation: in your particular case, the property was a rental property when you initially acquired it. This means you will not get a full exemption from CGT on sale. The taxable proportion of the sale is calculated on a time basis. You will have owned the property for about 4.5 years on sale. The one year of rental is about 22.2% of the time the property has been owned. As you have owned the asset for more than 12 months, you will get a 50% discount on this gain.
Remember that when you actually do this calculation, it will need to be based on days of rental and days of occupation. Other costs involved in purchasing and selling will have to be taken into account. Don’t forget to review the building capital write-off clawback that can occur on sale.
Need to know
• Section 118–130 may apply to a property on a company title.
• No exemption applies if the property was acquired as a rental.
• Calculations are based on days of rental and occupation.
is principal at
Wilson Teis Chartered Accountants
Disclaimer: The advice contained in this article is for general information only and should not be taken as financial advice. Please make sure to speak to a qualified professional person before making any investment decision.
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