CGT applicable on 2 main residences or exempt?

Hi Guys,

I have a question which would be best illustrated by an example:

Joe and Mary purchased a property in 2000 and have been living in the property until 2015 which was their main residence.

In 2012, Joe and Mary purchased a unregistered block of land (off the plan) which settled in 2014. They built a home on it and moved in immediately after completion of the home in 2015.

After moving into this new property, Joe and Mary then placed their old main residence on the market and contracts exchanged within 1 month of moving into their new property.

Joe and Mary then decide they want to retire and downgrade and purchased an existing unit in 2018 and moved in after settlement and decided to sell the property that they built on.

Would Joe and Mary be required to pay CGT on the unregistered vacant block of land they built and moved in because they exchanged on the contract back in 2012?

I understand the ATO legislation that says you are allowed a 6 month overlap between main residences, however, the unregistered land purchased in 2012 was unregistered and off the plan and did not physically exist until 2015? Is there a ruling or otherwise that addresses this issue?

Any responses would be greatly appreciated.

Alvaro

 

Could section 118-135 apply here meaning Joe and Mary would be entitled to the full main residence exemption for the entire period of ownership of the 2nd property?

 

look at s118-150
Its not ATO legislation - Commonwealth legislation administered by the ATO

Did they claim the MRE on the first property? If so they cannot claim it on the second property in full.

The 3rd property could potentially be exempt

 

Thanks Terry. But wouldn't 118-135 apply because Mary and Joe moved into the 2nd property as soon as practicable?

 

you wont get both to be cgt free.

if they use the 4 year construction rule on the vacant land they built on then the first property will be subject to proportionate cgt.

how did you complete your income tax return when you sold the first property ? did you claim the main residence on it ?

 

No, Look at s118-150(6) which says no other property can be the main residence if this section applies.

Therefore Mike's question is important.

 

Section 118-135 of the Income Tax Assessment Act 1997 (ITAA 1997) extends the main residence exemption to take into account the time needed to move into a dwelling. The section allows you to treat a dwelling as your main residence for the period from when you acquired it until it was first practicable to move into it.

The term 'as soon as practicable' in section 118-135 of the ITAA 1997 is used to provide some leeway from what would otherwise be a strict requirement that the full exemption would only be available if the dwelling became your main residence on the date you acquired it; that is, you would have to physically move in on the day of settlement.

The Explanatory Memorandum to the Bill which became the Tax Law Improvement Act (No.1) 1998, indicates that section 118-135 of the ITAA 1997 is intended to apply in situations where moving into the dwelling is temporarily delayed due to matters outside the persons control. The provision takes into account situations where, for example, there is a delay in moving in because of illness or other reasonable cause.

The examples provided in Taxation Determination TD 92/147 illustrate the type of situations envisaged.

The factors against concluding that you moved into the dwelling as soon as practicable include:

● the length of time between the date the dwelling was completed and the date you first occupy it; and

● what the dwelling is used for during that period (earning rental income).

 

Thanks Mike and Terry.

Doesn't it seem like it is a legal loop hole then considering Mary and Joe purchased something off the plan that did not even exist at the time and legal ownership took place 3 years after they entered into the contract? It is not like they purchased the 2nd property as a registered property and sat on it for 3 years.

 

No, it did exist - a contract involves intangible rights.

 

doesnt sound like a loophole. you cant have two main residences except for some limited circumstances like the 6 month overlap rule.

if you sold the first property and claimed the full main residence exemption on that property you wont be able to apply it to the second one until you moved into it and it will apply from that date. which means the second one will be subject to proportionate cgt

 

Thanks Mike. So does that mean Joe and Mary would need to pay CGT on the increase in value of the 2nd property (vacant land that was then built) up until the time they moved in? For example, if they purchased land at $300,000, house costs (including legals, stamp duty, interest etc) $300,000 and market value at the time would have been say $700,000, they would pay tax on $100,000?

Would a valuation be needed?

 

no it would be time based. a valuation wont be required.

 

The loophole is that each taxpayer can elect and choose which property is or isnt claimed as a main residence as they choose to minimise their tax outcomes. They may lack the knowledge to maximise this and seeking property tax advice may be a wise choice so the final tax is wisely minimised. It may be $0 BUT....That will mean there will be some deferred tax conseuence for another property.

That said this isnt always a concern as its possible to live in a property with a CGT burden and die and then it disappears...Thats a loophole !!