CGT Discount - 12 months from when?

Hi all,

I have a property that I bought close to 12 months ago and the intention was to buy, reno and hold but I now need the money for some other projects and considering selling.

I know the CGT discount applies if you've 'owned' the asset for over 12 months. Does this period start from the day you exchange or settle though?

 

Contract date if its a cgt event a1. And that date could be dependant on whether the contract was condition precedent or condition subsequent.

If you transferred it to a trust cgt e2 is the more appropriate event and so settlement might be more appropriate. Handley v fct dealt with this very issue but that was to do with shares.

Do you have evidence you planned to hold the asset ? ATO will argue its a profit from an isolated transaction and no cgt discount at all.

 

I have a recent tax tip on this

 

Thanks Terry, just read that tip.

If you start advertising the property 11 months after purchasing but exchange contracts 12+ months after, is this OK?

Mike - not sure what 'evidence' I could provide the ATO? I bought the property with the intention to renovate and hold long term, as cashflow is good, but I could use the money for other projects so it could come in handy.

If I intended to flip it, I would have sold it straight after the reno and wouldn't have bothered renting it out and tying up capital for a year.

What evidence is usually provided, and is it usually requested?

 

Given you have other projects on the go it will definitely be requested during an audit

 

Did you perhaps email your accountant when you were purchasing, renovating or discussing it last tax year talking about your intentions to keep it? That would be good evidence. Any emails with your property manager about what renovations to undertake to increase rent as you were keeping it?

 

If you bought and intended to flip it then the CGT discount likely wont apply so the date & timing will be largely irrelevant. If the intention when acquired was to rent it and hold it and some special circumstance encouraged you to sell eg impending marriage then thats arguable. But the ATO would likely consider all of the facts and circumstances and if you acquired it and then renovation closely followed by brief rental and almost immediate sale this seems like a profit making venture. You may need to defend that position. The onus is on the taxpayer.

Repetition is subsequently also a fatal concern but is not itself important on the first instance.

There are generally a range of issues more evident with renovators v's rental fixer uppers. eg

- Renters will quickly get things to a state of good repairs for fast income. Renovators tend to make the project bigger. Often with structural or physical chhanges eg spray roof tiles, render bricks, driveways etc.
- Renters tend to buy property close to ready to rent. Renovators tend to buy property where alterations can aid value changes

Images etc can assist or be a concern. The ATO may look at before and after images to assist their view that a flip has occurred. Marketing for sale often describes the recent major renovation etc.

 

Thanks all, appreciate the help.

I have kept every other property I've bought (aside from 2 I sold after 5+ years because Sydney market was dropping) and have done significant renos on most of the others I've kept, so hopefully ATO recognises my track record of renovating to retain, rather than flip.

Will search my emails, I'm sure I would have mentioned to my property manager, accountant, broker, builder etc that it's a long term hold for me etc.

Thanks

 

Surely it would be worth making sure contract to contract and settlement to settlement is over 12 months just in case. Unless you had a long settlement it would be a few weeks difference

 

Thanks Terry, yes I would ensure contract to contract is over 12 months. It's currently about 11 months since I bought it, so I'd only have to wait a few weeks before marketing it.

I'm going to consider selling a couple other properties instead, as I don't want to risk the ATO arguing that I'm not eligible for the CGT discount. And then I'll just keep the property in question long-term as originally intended.

 

Its such BS isnt it.

It should be much clearer/defined simply on time and thats it.

eg if i sell a stock after 12 months....what are they going to do claim i bought it to hold forever or to flip.

Im surprised this ATO BS hasnt been challenged in court eg 12 months = discount no ifs buts or maybe's.

Its much clearer here in the USA its all time based especially around state taxation eg 183 days and thats it.

 

What is this ATO BS you speak of Dean?

I think the law is clear. It is 12 months holding for the 50% CGT discount. No ifs or buts. But this discount only applies for capital items. If the property is not held on capital account it cannot get the 50% CGT discount. The vagueness may come from determining whether this is capital or revenue account.

but it is possible that an entity that holds assets on revenue account can hold one or more assets on capital account too. There is a case where this occured and I have explained this in one of my tax tips in the past - there are actually plenty of cases.

 

With you Terry.

Tax law and courts have always treated income arising from resale of assets as income. CGT is a modern take on this and only IF a asset is a CGT asset can the CGT discount apply instead although the taxpayer can choose (before CGT that type of gain was tax free !...In the pre-CGT days people who bought bank shares that paid a dividend could resell and get a tax free profit where those without a dividend were caught by the tax on profits.

Taxpayers who all chase the 50% discount when they may not be entitled are the concern. I would say 1 in 3 people who develop or resell property for profit all adopt this same view. Starting any venture or profit making activity without understanding all its costs including tax is the chief concern.

Like planning a reno or build, planning tax should be part of the project