CGT handling for IP -> KDR -> PPOR -> add spouse to title

IP held for 10yrs (only ever as an IP) with Spouse#1 on title, Spouse#1&2 on the loan.

Current PPOR held for 10yrs as joint tenants.

The plan is to knock down the existing IP and build a new home to live in. Would stay in the current PPOR while the new home is being built and arranging for the sale to coincide with moving into the new PPOR.

Looking to add Spouse#2 to the title once moved into the new PPOR

Both properties are in SA

Spouse#1 is the higher income earner, the transfer of 50% to Spouse#2 would be for $0 consideration

Would like to confirm whether any CGT is payable when adding spouse to the title or only when the new PPOR is eventually sold after living in for say 20 years.

I had originally thought that any CGT associated with the IP (without looking too much into it) would not be payable until many years down the track when the new PPOR is eventually sold. Had thought that I would be able to get a valuation once the existing property was knocked down and then use that valuation for the CGT calculation with the cost base at the time, and then carry this value forward until sold.

Thanks to all the valuable information on this forum and the WWW, my understanding that I would like to have confirmed is now the following:

• Adding Spouse#2 to the title will trigger a CGT event (CGT_Event#1) for the 50% transfer, and will be payable by Spouse#1 in the income year that it is transferred
• The remaining 50% not transferred, will have CGT payable by Spouse#1 when eventually sold, and calculated on a time apportionment for when not a PPOR (CGT_Event#2)
• Stamp duty will not be payable when adding Spouse#2 to the title as it will be the PPOR at the time

For CGT_Event#1 the calculation will be

CGT = (Market_Value - Cost_Base#1) * 50% (CGT discount as held for more than 12 months) * 50% (percentage of property transferred) * Partial_Exemption%#1

For CGT_Event#2 the calculation will be

CGT = (Sell_Price - Cost_Base#2) * 50% (CGT discount as held for more than 12 months) * 50% (percentage of property not transferred) * Partial_Exemption%#2

The Partial_Exemption% = Non_Main_Residence_Days / Total_Days_In_Ownership

Assuming

• IP for 10 years
• 1 year from when last available to rent to when built and moved in
• Live in for further 20 years

Partial_Exemption%#1 = 95%
Non_Main_Residence_Days = 10.5 years (11 years minus 6 months allowable when changing main residences)
Total_Days_In_Ownership = 11 years

Partial_Exemption%#2 = 34% or roughly one third
Non_Main_Residence_Days = 10.5 years (11 years minus 6 months allowable when changing main residences)
Total_Days_In_Ownership = 31 years

Cost_Base#1 would be

• The initial purchase costs
• Plus any costs (3rd Element Costs) incurred during the 1 year since the IP was last available for rent to when Spouse#2 was added to the title including
  • Any interest over this period
  • Demolition and build costs
  • Any other rates, insurance and maintenance costs that would have been able to be claimed had it still been an IP

Cost_Base#2 would be

• Cost_Base#1
• Plus any costs (3rd Element Costs) incurred during the 20 years while lived in as the PPOR, including
  • Any interest over this period
  • Any other rates, insurance and maintenance costs that would have been able to be claimed had it still been an IP
  • Essentially going to need to keep receipts for the next 20 years for any light bulbs replaced and lawn mower fuel, etc. That's a lot of record keeping!

For spouse#2 the new PPOR will be CGT exempt for their 50% of the property when eventually sold in 20 years time.

Thinking that CGT_Event#1 could possibly even end up as a loss or not much of a gain once the calculations are done as the property in SA hasn't gone gang busters like it has for the eastern states . Assuming if there were a loss then it could be carried forward and applied against any gains for Spouse#1 in future income years.

Currently do not have a full grip on the calculation of the two cost bases with regards to depreciation. The IP was built in the 1960's and there has been no depreciation claimed while held as an IP.

For the new PPOR, would I need a depreciation schedule from day 1, or just keep a record of all build expenses and any improvements or repairs, for adding into the mix when eventually sold.


Some links I found along the journey so far

INCOME TAX ASSESSMENT ACT 1997 - SECT 118.140
Changing main residences
INCOME TAX ASSESSMENT ACT 1997 - SECT 118.185
Partial exemption where dwelling was your main residence during part only of ownership period

Moving into former IP

Don’t be so fearful of generating income from the main residence

Tax Tip 100: Transfers between Spouses and CGT

So Terry if your PPOR was initially an IP and you have done improvements to it whilst it's your PPOR how is CGT calculated?

KDR of IP to PPOR

Change of ownership now will be a CGT event. He will pay CGT on the 50% transferred.

Terry_w's Tax Tips: the definitive list

Terry's Tax Tips​

 

Have you sought legal advice? – on both the land tax and the CGT aspects, might also want to consider asset protection and the law of equity.


Changing names on title is generally a CGT event. Is there a trust relationship involved?

 

I would seek personalised advice. Its like doing your own dentistry.

BOTH spouses must choose a main residence exemption and its not always based on what you own. Your spouse need not be a titled owner for a 100% exemption...

 

Hi Terry, no legal advice sought at this stage. I still have a bit of time up my sleave and I was just looking to get a basic understanding of what I may be up for, and how it would all work when proceeding with the plan to develop and move.

I had a look into land tax, and as I only have the one IP, the tax isn't all that material in my case, although I see that it could get big if one had a reasonable portfolio. I did note that there was likely some relief in SA where a person is in the process of selling and moving home.

There are no trust relationships involved, and consider to be generally at low risk at this stage from what I can see with regards to a need for asset protection.

Cheers,
Ash

 

Hi Paul,
will definitely be seeking personalised advice in time. At this stage in order to be prepared to ask the right questions, just wanting to understand the basics of what is involved and what the options may be.

Any chance of some more info on "Your spouse need not be a titled owner for a 100% exemption", is this in reference to the CGT exemption for Spouse#2 when the new PPOR may be eventually sold? Understand that a transfer of a PPOR via will on death would also be CGT exempt.

From Terry's mention of considering asset protection, it seems having a spouse on the PPOR title could go some way to protecting the asset/interest should protection be needed.
Cheers,
Ash

 

My comments about asset protection were not implying there would be protection if you transferred. You should consider what could potentially happen before and after transfer if one or both went bankrupt, died, lost capacity or divorced. Especially if there is a transfer for no consideration or undermarket consideration.

Why do you want to make the transfer for no consideration?

 

The CGT main residence exemption is a strange beast and an example using two defactos who each own a property provides a great example of its complexity. Peter and Mary are 43 and each previously owned a property. Mary moves in with Peter into Peters house.

Peter and Mary can only between them claim ONE main residence exemption. They can choose how that works. Either 100% exempt for one or either property 50% each.
So in your original post you mentioned spouse transfer...That may or may not impact. Its a little complex and one of the traps.

For example its possible that you both may be able to treat the property YOU own as if it was owned by both of you for some period of time. BUT it means your spouse cant later claim exemption elsewhere. And why advice would be important so mistakes arent made. I have over simplified this issue

 

Thanks Terry, Spouse#1&2 will need to talk and do some estate planning prior to then seeking legal advice.
The comment about $0 consideration was really to indicate that a scenario where Spouse#2 takes out a loan to pay Spouse#1 wasn't being considered. Proceeds from the sale of the current PPOR would pay down the mortgage on the new PPOR, and so I guess that could be taken as consideration. What is recorded may depend on the timing of the sale of the current PPOR and when the title change on the new PPOR is actually actioned.
For SA it doesn't seem to matter whether consideration is recorded for stamp duty purposes in order to receive an exemption, other states seem to differ.
Will also seek legal advice on this with the scenarios of what could happen pre and post transfer.

 

Thanks Paul, I read some further scenarios here where the ownership percentage also plays into the calculation:
https://www.ato.gov.au/general/capital-gains-tax/your-home-and-other-real-estate/your-main-residence/when-your-spouse-or-children-live-in-a-different-home-to-you/

At this stage there is no intention to ever rent out the new PPOR , however I guess that anything could happen in the next 20 years. CGT calculations could also get further interesting/complex if the new PPOR were to get rented out at a later stage. Assuming the 6 year rule could potentially apply for Spouse#2, while Spouse#1 continues with the time apportionment.

 

I was illustrating there are many options available and choice can be determined later