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6 year exemption rule

Discussion in 'Accounting & Tax' started by albanga, 23rd Jun, 2015.

  1. albanga

    albanga Well-Known Member

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    Apologies for another 6 year thread but I just want to confirm a scenario.

    PPOR bought and moved into on settlement, lived in for 25 years and then got married and moved in with husband in his home. The husbands home was in the same state in a close suburb. This was his PPOR though so the original home is still hers.

    The PPOR was not rented for the 3 years upon moving out as kids stayed in the home but then for 2 years up to now it was rented out. The house is now going into the market for sale.

    Now I understand the 6 year exemption in theory but applying it is where it gets hazey. Some websites (although I could not find it on the ATO site) mention that the exemption rule only applies under rules such as moving interstate?

    Is this the case? And if so is it easy to get around? From what I read it really seems like she should be fully exempt as opposed to paying a CGT on the 2 years it was income producing.
     
  2. JMica

    JMica Well-Known Member

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    I used the 6 year rule when I sold my PPOR that had become an IP, I never heard of the interstate rule, is that from the ATO website, can you post the link?

    Based on my understanding you can claim the 6 year rule as long as it was your PPOR and then became an IP & you didn't have have any other PPOR in the period that it was an IP...
     
  3. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    The 6 year rule merely applies when a former main residence ceases to be a MR. You could move next door or overseas. However its not the sole issue.

    Your issue is that you and hubby cannot BOTH have a different main residence. Also you may find your kids and you need to have the same MR. See link below. It is one exemption for both of you or it must be shared. CGT can impact on a non-ownership interest for the MRE and is common with remarriage or two single each owning a home. Your former home may then be 50% and his 50% exempt etc. So you could claim the MRE for the period of time prior to marriage. You and hubby have a choice to make.

    Based on info provided you may only then be able to claim a 50% MRE. This would mean if hubby sells in future there would be a period when his property would have a 50% CGT issue. ATO link is worth reading : https://www.ato.gov.au/General/Capi...-or-children-live-in-a-different-home-to-you/

    Then there is the issue of your former residence commencing to earn income 2 years ago. The market value of the property at that time may be relevant in any calculations.

    Worth discussing with your accountant(s) so that you both make a correct choice and understand your precise issues.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    There are websites out there that say all sorts of things that are not true. The first thing to do is to look up the actual legislation, s118-145 ITAA 97 and look at the law
    http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.145.html

    This is the primary source to concentrate on and then look for secondary sources to help you understand this. Google "118-145 ITAA" and you should find a heap. But look at the ones with some authority such as ATO publications - but keep in mind these are not law but only the ATOs interpretation of the law, which may be wrong and/or in their favour (to allow them to collect more tax). Then read general articles - but make sure you check who they are written by.

    Just the other day someone told me that you could transfer property to your children and pay no stamp duty if the property was a gift for their wedding. You hear all sorts of things out there, you just have to be careful what you believe.
     
  5. albanga

    albanga Well-Known Member

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    Thanks Paul and Terry
    This stuff is very confusing! The link you referred to Paul is confusing because it mentions owning a percentage. My mother in law owns none of her new husbands home and vice versa.

    She will receive proper tax advice but just for my own understanding. It seems as though her and her husband can claim a full exemption of this home, even though it was income producing BUT a CGT will be payable for 2 years on the husbands home when sold? Or am I way off?
     
  6. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Al, you dont have to own property for the main res exemption to be affected. If MIL moves into BF home she may have to choose between his exemption or hers.

    income producing homes will be liable to some cgt at some point
     
  7. albanga

    albanga Well-Known Member

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    Hey Guys,
    Sorry to bring up this thread again but just wanted to make sure I understand correctly as I want to let me mother in-law know she does have options.

    1986 - Mother In-Law buys home and moves straight in.
    2010 - Marries and moves into husbands home.
    2010 - 2013 - Daughter stays in home no rent.
    2013 - 2015 - Becomes rental property.
    2015 - SOLD

    As per above her and her husband can only claim one PPOR from 2010-2015.
    Option 1 - Claim husbands home, pay CGT on 5 years she moved out? Or would it only be 2 years it was income producing? This option seems bad either way because her suburb has had exceptional growth in the past 3 years (40%) and 18% in the last year alone.

    Option 2 - Claim her home as PPOR for the 5 or 2 years? She will not have to pay any CGT on the sale of her home. Her husbands home (even though they lived in this) would then lose the exemption for that same period. Then when this home is eventually sold a CGT will be payable for that period?
    Given this property has only had 17% growth in the past 3 years and 3% in the past year it seems a better idea?

    So from my understanding, option 2 seems far better: NO CGT payable on the current sale as it is exempt. A CGT later payable when the husband house sold but only on the 2-5 years the other property was PPOR and given it had little growth in that time, it would be a far better of financial outcome?
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Option 2 may be better because any CGT would potentially be a long way off. Also possibly exempt if the main residence at the husband's death.
     
  9. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Generally speaking, if there is a CGT impact and deferral is available then you should. However it does mean that Option 2 results in a future 50% CGT issue for that period of time on hubbies home. They may never sell it ?
     
  10. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    Many always forget about the third element of the cost base. So for hubby any costs such as interest, repairs and maintenance, council rates, insurance, etc will all form part of the cost base which will reduce any CGT payable on that property. If property 2 is highly geared then it will be worth doing the analysis.
     
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  11. albanga

    albanga Well-Known Member

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    Alright gentlemen hopefully last email regarding this but just wanted to ensure I have got my head around how it works. I have looked up the growth of the 2 suburbs (I understand this is not exactly how it would be done) but just for an idea. And this is what I have come up with:
    Note - There is no doubt a few other important things to consider, especially what can be added into the cost base to reduce it.

    The sold property is in a suburb that has experienced 38% in the past 5 years.
    If the husbands house was claimed as PPOR:
    $690,000 Sale Price
    40k added to the cost base (agents fees, renovations, staging.etc) = $650,000
    38% growth of $650,000 = $247,000
    Then apply the 50% CGT discount which equates to a CGT of $123,500
    This then gets applied to mother in laws salary which say is roughly 40k.
    So payable CGT would roughly equate to $47,000

    VERSUS - Claiming Mother In Laws-Home
    Note - This is only applicable if the husbands house is ever sold.

    As there is no sales price then all you can roughly work off is current median price of $460,000 and the 5 year growth has been 22%.
    So in that period 460,000 * 22% = $101,200. You then get the 50% CGT discount so $50,600
    This then gets applied to your wage at that time but let’s say you do the same at 40k it would mean 90k which would mean tax payable is roughly $21,000

    Is this "Sort Of" how it works, or am I wayyyy of the mark.
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Sort of but you have left a lot out. What about the interest and other costs of the husband's house. Same with mum's house - interest while she was living there and while the daughter was living there. Other costs too.
     
  13. albanga

    albanga Well-Known Member

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    I am fairly confident both homes were unencumbered in that time so no interest was paid.
    Do other costs include:
    Rates
    Insurance
    Repairs/maintenance (I know for example a new roof was put on hubbies house)
    Improvements

    Anything else?
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  15. albanga

    albanga Well-Known Member

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    That is fantastic, thanks Terry!
     
  16. albanga

    albanga Well-Known Member

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    Hey All,
    Terry I started a new thread about cost base but remembered I had started this thread a while back which is regarding the situation and has more detail.

    Based upon this thread they needed to choose between her or his place as PPOR for the 5 years they have been together and she moved out. They just want to sort it now and pay the CGT this year so are going to select his home as PPOR.

    So am I right in assuming the following:
    • No CGT payable from when she acquired the house until she moved out 5 years ago.
    • CGT payable from the time she moved out until the time sold in which time it was occupied by her daughter paying no rent for 2 years and income producing for the final 3.
    • She will need a professional valuer to value the property now for a price of 5 years ago. This will form the basis of the gain, for example if they value it at 550 and it sold for 700 there was a gain of 150k.
    • She would then need to add expenses into her cost base which is my previous question. I estimate around 100k had been spent in total in the past 5 years with around 40k in sales costs (but perhaps not all these expenses can be added??).
    • If it all could be added then the 100k would come of the 150k CG to make it now 50k.
    • She then applies the 50% discount to now have a gain of 25k.
    • This gain then gets added to her taxable income and taxed at her marginal rate?

    Is that right? I just don't have the most faith in her accountant but she has used him forever!
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yeah, that is roughly how it will work. Assuming she doesn't claim the main residence exemption
     
  18. albanga

    albanga Well-Known Member

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    Thanks Terry, no they have decided to not claim the main exemption and instead will choose the main exemption on hubbies house when they sell that.

    The only part I am still having trouble getting my head around is:
    http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s110.25.html

    (5) The fourth element is capital expenditure you incurred:
    (a) the purpose or the expected effect of which is to increase or preserve the asset's value.

    Is it written anywhere what deems to be "Capital expenditure" to increase or preserve an asset's value? As per my other post there are two parts to this:

    Part 1 = Selling of the home:
    16k agent fees, 5k advertising, 5k staging, 1k solicitor fees, 20k on renovations which included landscaping, painting, fences, fittings.etc

    Part 2 = Holding of the home for 5 years whilst moved out:
    Interest on loan, rates, insurance I know can be added. But also in the past 5 years they had new blinds, carpets, tiles, hot water system, oven, stove, light fittings all added to the home.
    Would add this be deemed as "capital expenditure".

    And finally if so, I am guessing she would have needed to claim it in a previous tax year for it to be valid.
     
  19. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Google "elements of cost base"..Then click the + against heading.
    Third element costs should be considered too
     
  20. albanga

    albanga Well-Known Member

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    Oh WOW! So really:
    Element 1 - Not applicable
    Element 2 - All sales costs can be added to the capital base
    Element 3 - Holding costs for the 5 years can be added BUT ONLY If she had NOT claimed these costs in previous tax returns.
    Element 4 - Too complex for me to understand but guessing some stuff can be added.
    Element 5 - Not applicable