Tax Q&A: Will we have to pay capital gains tax

Question: In 2005, I purchased my own home to live in for $320,000. In 2015, I purchased a new family home and rented out the original home, which was valued at around $620,000 at the time. It is now worth about $520,000. If we sell it, will we have to pay capital gains tax and, if so, how much?

Also, I have just placed a contract on another property I own, with a six-month settlement period. I don’t want to lodge my tax return by October as per the ATO’s rules, because the contract doesn’t go unconditional until November, and I don’t want to declare the profi ts until I know it’s certain. Is there any way I can delay lodging my tax return without getting in trouble with the tax department?

Thanks, Henry

Answer: In respect of the property you purchased as your main residence in 2005 and turned into an investment property when you rented it out in 2015, you are required to determine the market value of the property when it fi rst became available to produce income. This value is the CGT cost base of the property.

Given your advice that the property was worth $620,000 at that time, if you are selling it now for $520,000, you would make a capital loss of $100,000 on the sale, which will be crystallised in the year ended 30 June 2019. This amount may be slightly different due to incidental costs on the sale, such as agent’s commission, legal costs, etc., and other expenses that are allowed to be included in the cost base of the property.

The capital loss may be used to offset your currentyear capital gains, if any. Otherwise, it may be carried forward indefi nitely to offset any future capital gains you make. However, the capital loss can never be used to offset your current-year or future income.

In terms of disclosing the sale of your investment in your tax return for the year ended 30 June 2018, you have the following options.

First, wait and see if settlement occurs before you lodge your tax return. If you are concerned that you may lodge your tax return late and you are not sure if the sale will settle, an option to consider is appointing a registered tax agent and asking them to include your tax return on their tax lodgement list with the Australian Taxation Office (ATO) before 31 October 2019.

In doing so, your tax return may enjoy a later lodgement due date under the tax agent lodgement program, which could potentially be deferred to as late as 15 May 2020 or even beyond in some circumstances. This option could buy you additional time for lodgement as you wait to see if settlement occurs.

Second, if settlement will occur after the due date for lodgement of your tax return and you do not wish to be penalised for lodging your return late, you may lodge your return before the lodgement due date without the capital gain or loss on the sale of the property in your tax return.

If settlement occurs after you have lodged your return, you can amend your return to include the capital gain or loss. However, amending the return may give rise to a Shortfall Interest Charge (SIC), though it is likely that the ATO will remit this in full if the amended return is lodged within a reasonable time after settlement. Note that remission of the SIC is not automatic and will only be considered by the ATO upon your request on a case-by-case basis.

If settlement never eventuates, no further action will be required.

Need to know

-A capital loss can be used to off set your current-year capital gains.

-The CGT cost base is the market value of the property when fi rst used to produce income.

-You can lodge your tax return before or after settlement.

Eddie Chung

Tax and Advisory Partner at BDO