Tax Q&A: Am I eligible for a full CGT exemption?

Q: I have a question about capital gains tax exemptions. Our first property was purchased in September 2009 for $495,000. This had existing tenants, who vacated the property in January 2010. We moved into that property in February 2010 and lived there till December 2013.

We moved into my parents’ property from January 2014 till January 2015, which is when we moved into our current home. We put the first property up for rent from January 2014 till January 2019, and then sold it on 31 March 2019.

Am I eligible for any CGT exemption? If so, is it a full exemption?

Kind regards, Charan

A: There are capital gains tax (CGT) implications in your circumstances as the initial period when you took ownership of the property was subject to a tenancy arrangement and cannot be treated as your main residence period.

S118-135 ITAA provides that if a dwelling becomes your main residence by the time it is first practicable for you to move in after you have acquired an ownership interest in it, the dwelling is treated as your main residence from when you acquired the interest until it actually became your main residence. However, this concession does not extend to situations in which the taxpayer is unable to move into the dwelling because the dwelling is subject to a lease.

This means that you will only get a partial main residence exemption on the sale of the property if the property is rented before it becomes your main residence.

In regard to the period January 2014 to January 2015, I am uncertain whether the relocation to your parents’ property was in relation to your current home or otherwise (you may have acquired land to construct your new residence or you may have been saving money for your new home).

You will only get a partial main residence exemption on the sale of the property if it is rented before it becomes your main residence

If you build a dwelling on land you already own, the land normally isn’t exempt from CGT until the dwelling becomes your main residence. However, you can treat land as your main residence for up to four years before the dwelling becomes your main residence if you:

• have an ownership interest (other than a life interest) in the land

• build, repair or renovate a dwelling on the land (or finish a partly constructed dwelling), and
• move into the dwelling as soon as practicable after it’s finished

If you choose to do this, you can’t treat any other dwelling as your main residence during the same period (except for a limited time if you’re moving from one main residence to another).

Alternatively, the absence rule in section 118-145 ITAA 1997 can be used to continue treating a property as your main residence for CGT purposes as long as you don’t treat any other property as your main residence for CGT purposes during that period. This means that you could apply the absence rule to your original main residence till January 2015 when you occupied your new home.

From January 2015 to March 2019, your original property would generally be treated as an investment property for CGT purposes, and any increase in its value would be subject to CGT. As you held the property for more than 12 months, the capital gain would be entitled to the 50% CGT concession.

Need to know

• A property purchased with a tenancy agreement in place can’t be a main residence for tax purposes.
• Land can be treated as a main residence for up to four years while you are building a dwelling.
• A property that is first rented out after ownership is acquired is entitled only to partial CGT exemption.

Clive Nelson

is managing director at Chan & Naylor Parramatta