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CGT exemption question

Discussion in 'Accounting & Tax' started by chylld, 29th Mar, 2016.

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  1. chylld

    chylld Well-Known Member

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    Say a property goes up from 400k (purchase price) to 600k (appraisal/valuation) over 4 years. CGT exemption used on a different property over this time.

    Over the next 4 years, the property goes up from 600k to 700k and then sold. CGT exemption is used on this property for this period.

    The total capital gain is 700k-400k = 300k. How much of this is exempt from CGT?
    1. 100k, since that is the capital gain over the last 4 years
    2. 150k, since the exemption was for half of the 8 year ownership period
    If 1., what happens if no appraisal/valuation is performed? Will the ATO order a backdated market valuation?
     
  2. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    There is insufficient information. There are many factors and some ownership / selling / puchase costs and deductions which influence CGT and the basis for calculation. Personal advice that allows for all of these would be wise.

    However in its simplest form once the total eligible "profit" is calculated it must be apportioned for the two periods based on numbers of days. Market valuation is only permitted where a former main residence first becomes an income producing property.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    s 118-185. Forumal will apply based on number fo days the residence was your main residence:

    CG or CL amount × Non-main residence days
    Days in your *ownership period
    where:

    CG or CL amount
    is the *capital gain or *capital loss you would have made from the *CGT event apart from this Subdivision.

    non-main residence days
    is the number of days in your *ownership period when the *dwelling was not your main residence.
     
  4. chylld

    chylld Well-Known Member

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    Thanks for the quick replies guys. My post was an over-complicated way of asking if the CGT exemption factored into the ownership period as a whole, or distinct time periods.

    Based on s118-185, it appears that the CGT exemption has the same effect whether it applies to the first 4 years or the last 4 years, since in both cases, the total CG and % non-main-residence days are the same?
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes,

    But if it was earning income then s118-192 would apply.
     
  6. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Yes. There are three exceptions. The first exception to pro-rata is when a former main residence since date of acquisition then first earns income. In that instance the cost base is the market value at that date. (s118-192) The second exception is when a 100% exemption applies (ie pre-CGT asset, main residence , 6 year rule etc) The third exception is when the ownership period has no exempt period. Then its all subject to tax.
     
  7. chylld

    chylld Well-Known Member

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    The property started earning income during the first 4-year period (whilst another property was considered the main residence.) Would the CGT cost base be the market value at income time, or the purchase price of the property since it's not the main residence?

    i.e.
    Years 0-2: PPOR, but another property declared as main residence
    Years 2-4: IP, another property still declared as main residence
    Years 4-8: IP, this property declared as main residence
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Cost base would be reset to the value it first became income producing.
     
  9. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    And thereafter 100% taxable NOT pro-rata.

    This post may be a good example of danger of not seeking personal advice but reading into forum replies....You said Years 4-8: IP, this property declared as main residence .....

    The IP cannot be eligible for the main residence exemption in years 4-8. A main residence exemption is not something you can choose UNLESS it satisfies the tests of having previously been a main residence. (eg absence rule) An investment property cannot commence as an exempt asset having previously been subject to CGT without you occupying it as a main residence at a time.

    The absence rule cant be used either since in Yr 2-4 the absence rule wasnt satisfied. (ie you had another residence you occupied). s118-145 has a catch - "You have not treated any other dwelling as your main residence during your absences". To restart the absence rule you must have moved back in then out again.
     
    Last edited: 31st Mar, 2016
  10. chylld

    chylld Well-Known Member

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    Thanks Paul. I trust my accountant at the end of the day, but wanted to bounce my ideas off the expert minds here so I can learn more about what goes into making the decision, and learn where I was wrong.

    e.g. the absence rule, I was under the impression that as long as I previously lived in the property at some point, I could choose any 6 year period after that for the exemption. Are you saying that the 6 year period must start while I was physically living in the property?
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You cannot be absent until you were first present.
     
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  12. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    The absence rule is very clear.

    If a dwelling that was your main residence ceases to be your main residence....and you have not treated any other dwelling as your main residence during your absence/s.

    So the simple meaning of Terry earlier post is literally true. Fact prevails over choice. That other property was your main residence. s118-145(4) contains the test that then kills it. s118-145(2) spells that out....each time the dwelling again becomes and ceases to be your main res. You occupied another property you owned for a time. So the absence rule cannot be used. Only reoccupation and leaving restarts the clock.

    There are also some curly ones in the main res exemption.
    1. Changing (6mth rule) residences
    2. Spouse with a different main residence
    3. Producing income
    4. Absence from dwelling replacing the main res comp acquired etc
    5. The destruction / loss where a property with a main residence is destroyed and sold without a replacement dwelling.
     
  13. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    No - when you occupy then leave. Bear in mind we are talking about it being your MAIN residence and being fully occupied.

    Many accountants get this one wrong and think you can always elect a choice.
     
  14. chylld

    chylld Well-Known Member

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    So using the year numbers in post 7, the 6-year absence rule must start at year 2 since that is when I ceased to occupy the property, which means just before year 2 I must be able to prove that I was occupying it, and at that point in time I cannot have declared another property as my main residence?

    Would that time be year 1.9 or 1.5? (6mth rule for changing residences)
     
  15. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    No. The 6 year rule doesnt allow a person who owns two (former ?) residences who lives in one to use the absence rule for the other. I suspect that the 0-2 year issue needs review

    6mth rule requires the former residence is SOLD within 6 months after ceasing to be main res or its not available. Cant work in tandem with 6 year rule. It is for use when you move from home 1 to 2 and then sell 1. It allows both 1 and 2 to be exempt for the overlap months it takes to sell. After 6months its game over and loss of the 6months all together. One or other becomes subject to CGT for overlap.