Tax Q&A: When will CGT apply?

By Ershad Ullah | 07 Apr 2020

Q: I bought ‘House A’ in July 2011 and lived in it for 18 months before renting it out from 1 April 2013 onwards. It remained my PPOR (I did not buy another house).

I then lived overseas before moving back to Australia in November 2017. I did not move back into House A, although it was still my PPOR, but instead I rented a property. While it was tenanted, I put House A on the market for sale. The tenants moved out on 8 April 2019, and on 21 May 2019 the house sold.

In total I owned the house for a period of 94 months, from July 2011 to 21 May 2019. During this time period, the house was used as a rental for 72 months and one week. The house was then empty from 8 April to 21 May 2019 (1.5 months).

My question is, in the process of calculating which portion of the 94 months is actually subject to capital gains tax, do I subtract the six years (72 months) that I still considered the property my PPOR under the six-year rule, and then subtract the time I lived in the property (18 months)?

Thanks, Glenn

A: The absence rule allows you to continue treating the property as your main residence while you are not occupying it, and provided you did not acquire another main residence, for a period of six years when the property is being used to generate assessable income. It can apply indefinitely if the property is not being used to produce income.

If tenants stayed in the property for more than six years, the property would only be subject to capital gains tax (CGT) in respect of the period in excess of the six years.

The acquisition date for CGT purposes becomes the date the property was first used to produce income, and the cost base of the property is reset to the market value at that point. In this case, this would be the date you began to rent the property in April 2013. The gross capital gain should then be calculated using this new cost base – any costs incurred before this time should be ignored.

For the purposes of the main residence exemption, it is the settlement date that is relevant to the CGT event, rather than the contract date.

For the purposes of the main residence exemption, it is the settlement date that is relevant, rather than the contract date

Although the tenants may have only occupied the property for one week after the end of the six-year period, the property in this case may be subject to CGT for the period of 1.5 months from 31 March 2019 until the sale of the property.

Our understanding is that you should be subject to CGT in respect of the period after the tenant moved out in April 2019, because the property ceased to be treated as your main residence at the end of the six-year period when the property was rented (ie on 31 March 2019).

The legislation in section 118-145 uses the word ‘continue’, which suggests that once a property cannot be treated as someone’s main residence, it can only be treated as their main residence again if they move into the property and re-establish it as their main residence. That is, although the property was not used for income-producing purposes for the last 1.5 months, it would not be treated as your main residence during that time. If the amount involved is significant, it could be worth contacting the ATO to seek confirmation or obtain a private ruling.

Need to know

  • You can treat a property as your main residence even if you don’t reside there.
  • If a property doesn’t produce income, the absence rule applies indefinitely.
  • The settlement date is considered when calculating the main residence exemption.

Ershad Ullah
is managing partner at Chan & Naylor Sydney CBD

 

 

 

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