Tax Q&A: Recommendations for best capital gains tax strategy

Q: I am an Australian citizen, and I bought a property in Queensland in 2004. My family lived in it as our main residence until 2007, when we moved overseas for work. From 2007 to 2018, we did not stay in Australia for more than 30 days in each year.

The property was rented out from 2007 until early 2019. We claimed non-residency for tax purposes from 2007 until now and paid tax on the rental income. I sold the property in April 2019.

Please kindly advise the calculations and recommendations for the best capital gains tax strategy?

Best regards, Edward

A: The tax rules around the main residence exemption consider multiple legislative requirements. In summary, you will need to review how these four different rules will affect you:

• Main residence exemption
• When the home is first used to produce income
• Six-year absence rule
• Non-resident considerations

The first requirement is that you used and occupied the dwelling as your home as soon as practicable, which you confirm you did.

If you started using your main residence to produce income for the first time after 20 August 1996, then you would be deemed to have acquired the dwelling at its market value at the time it was first used to produce income within the rules applicable.

This leads to the six-year absence rule. In summary, you rented the property out for over six years, so there will be a proportional calculation as to how much is tax-free and how much is taxable (with the 50% general discount applicable to an asset that’s owned for 12 months or longer).

You cannot carry forward holding costs and deduct them in later years. But you can add them to the cost base of the vacant land

In the 2017 federal budget, the government announced its intention to remove either in full or in part any entitlement to the main residence exemption for foreign residents. The benefits are totally lost if the sale of the family home occurs while the owner is a non-resident.

To determine any capital gains tax payable, you will need the specific dates of each of the following events, and you must use the contract dates, not the settlement dates. In summary, you must identify: 

• the date the property was purchased
• the date the property was first rented and the market value at that date
• the date you departed Australia
• the date you returned to Australia
• the date the property was sold

You will need to calculate the number of days from the date the property was first used to produce income to the date of sale (total ownership). The period from the date you first rented the property plus six years (homeownership) will count towards the tax-free days, even though you were a non-resident.

The capital gain will be the net sale price less the market value. The proportion of days of homeownership relative to total ownership will be tax-free, and the balance of the capital gain will be taxable. 

Without knowing the exact dates, for the purpose of the calculation the total ownership period for your property is about 12 years, from 2007 to 2019, and the homeownership period is six years, from 2007 to 2013. This indicates that about half the capital gain would be taxable. 

Need to know 

• The main residence exemption is not offered to non-residents. 
• Total ownership comprises the number of days from the date the property was fi rst used to produce income to the sale date.
• A 50% general discount can be applied to the taxable gain if the asset was owned for 12 months or longer.

Ken Raiss

is director at Metropole

Wealth Advisory