Our tax experts tackle questions about CGT on inherited property and its six-year rule. If you have a tax question for our experts, email it to: firstname.lastname@example.org.
CGT ON INHERITED PROPERTY
Q: I presently stand to inherit a house together with my brother. I live in the house, he does not. He is also not a resident in Australia.
The property is a pre-19/09/85 purchase. After we inherit the property and then demolish and develop the site, will there be any CGT liability against the sale of the developed site? If there is, can this be avoided if my brother gifts me his half of the property after inheritance but before development?
A CGT gain or loss is disregarded (i.e. 'rolled over') when a property is transferred to a beneficiary of a deceased estate. Accordingly, the taxing point is when you ultimately sell the development site. Assuming a profit is made, this will either give rise to a capital gain or be assessable as ordinary taxable income. The treatment of a gain on capital account is preferred, given access to the 50% CGT discount for individual and trust taxpayers.
If the gain arising from the sale of the developed property is subject to CGT, the CGT event is triggered at the time you contract to dispose of the developed property. The gain is calculated as the difference between the cost base of the asset and the proceeds on disposal.
As you will acquire property from a deceased estate and the deceased had purchased the property prior to 19 September 1985, your cost base of the property will be the market value of the property at the date of death plus costs incurred to develop the property.
Whilst you are eligible for the 50% discount, your brother will not be eligible for the full CGT discount as non-residents ceased to access the CGT discount post 8 May 2012.
In the case where a property is your main residence there is an exemption from CGT. You may be eligible for a partial exemption for the period that you live in the property prior to the development. A further exemption may also be available provided you live in the newly developed property for at least three months after the construction is finished.
The ATO currently has a strong focus on whether a property development is taxed on capital or revenue account and therefore we recommend you consider this in detail. For example, if you are considered to be carrying on a business of property development, the development profits will be taxed as ordinary income.
The transfer of your brother’s share of the property prior to the development may be advantageous as you get access to the 50% discount. However, there may be stamp duty implications on the transfer.
– Josh Chye
CGT SIX-YEAR RULE
Q: I have a property in Melbourne, Australia and it is currently rented out. I lived there for a few years before renting it out. It has been less than three years since I moved out. I live overseas at the moment and am thinking of selling the property. To get the full benefit of the six-year rule and CGT exemption, do I need to move back into the property or can I sell it without moving back in? Your advice will be very helpful for me to plan my finance.
Provided your property was initially used as your main residence, and the size of the land is two hectares or less, it will be exempt from capital gains tax for that period of time.
In addition, the property must be held in your individual name to be eligible for the capital gains tax exemptions. The main residence capital gains tax exemption excludes companies and trusts (except Bare Trusts) that may own the property.
Subsequently, as you are currently using this property for income-producing purposes, and provided that you haven’t nominated any other property as your main residence (including overseas property) during this period of time, under the six-year rule, the property will be exempt from capital gains tax for a period of up to six years.
Also, the capital gains tax exemption will apply for an indefinite period if you do not use your main residence absence period rule for income-producing purposes for more than six years.
For example, if you are overseas for 10 years whereby in the first six years you have used the property for income-producing purposes and subsequently the next four years the property is not used for income-producing purposes (that is, the last four years the property is vacant and has no tenants), and you then sell the property, in this instance, although you have been away for more than six years, you will still be eligible for the capital gains tax exemptions.
Provided you meet the above criteria and timeframes, you must move back into the property (before the six years comes up) if you are going to continue to use the property for income-producing purposes longer than six years (and then when you move back out of the property, the six-year temporary absence rule starts again), or, in your current circumstances, you can sell the property now without being required to move back in to the property – if you wish to maintain the capital gains tax exemptions for your main residence.
– Angelo Panagopoulos
The tax experts
Angelo Panagopoulos is a partner at Wilson Pateras Chartered Accountants, specialising in property and taxation, asset protection and ownership structures.
Josh Chye is a tax partner at HLB Mann Judd in Melbourne with expertise in the areas of tax advisory in property investments, developments, funds management, structuring and financing.
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