CGT on a favourable purchase?

Discussion in 'Accounting & Tax' started by HonestShiba, 10th Jan, 2021.

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  1. HonestShiba

    HonestShiba Well-Known Member

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    Hi all,

    I'm looking to buy a property off an overseas friend, who is happy to sell it to me for the initial purchase price (200k under market value).

    The property was purchased 6 years ago for 400k, and is worth around 600k now.

    My questions are:
    • If I move into the property for 1 year, making it my main residence, and then sell the property for 600k, how is CGT calculated? Is the 200k gain fully exempt?
    • If I move into the property for 1 year, making it my main residence, and then move out and rent out this property, will the 6 year rule apply? Any sale within the next 6 years will be GCT exempt, provided I do not nominate another main residence?
    Thank you
     
    HonestShiba, 10th Jan, 2021
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  2. Scott No Mates

    Scott No Mates Well-Known Member

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    Your friend will pay CGT (& you will pay stamp duty) based on the market value not what you paid for it. If they aren't Aust Tax resident status CGT may not have the 6 year absence applied.

    Your questions:

    1. exempt
    2. Yes
     
    Scott No Mates, 10th Jan, 2021
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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    1. Depends on the circumstances. It could be
    2. Depends on the circumstances. It could be
     
    Terry_w, 10th Jan, 2021
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  4. HonestShiba

    HonestShiba Well-Known Member

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    If it is exempt, would it be safe to say that if the property currently has a tenant, it's better to purchase it without the tenant (later settlement, incentivise them to move out etc.), so that the 'instant' 200k capital gains isn't tax proportionally over the time when the tenant is still living and and from where I move into the property?
     
    HonestShiba, 10th Jan, 2021
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  5. HonestShiba

    HonestShiba Well-Known Member

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    Thanks Terry. Any common circumstances or pitfalls where it is not fully exempt?
     
    HonestShiba, 10th Jan, 2021
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  6. wylie

    wylie Moderator Staff Member

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    When we've completed purchases within family (to a family trust for example), the sale price has not been the market price.

    Example... my parents paid $400k for a property, current value $600k. That is a $200k gain.

    When that property was "sold" into the trust, the transaction was dealt with as if it was being sold for $600k. So stamp duty was paid by the purchaser on the market price and the capital gains tax was worked up on the market price and paid under the tax situation of the vendor.

    So your "instant gain" from $400k to $600k will be dealt with by those party to the transaction as if market price was used.

    The vendor will pay capital gains tax on the $200k gain. You will pay transfer duty as if you were paying $600k. Your cost base is set at $600k, so any future price rise (gain) will be from the starting price of $600k.

    This is my understanding, hopefully it makes sense. You need legal advice.

    @Terry_w has my explanation covered it reasonably well? I don't want to mislead, but this is my understanding of how these "less than market" transactions happened within our family.

    Nothing is hidden from the OSR or the ATO.
     
    wylie, 10th Jan, 2021
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  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Terry_w, 10th Jan, 2021
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  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes market value will be the value the vendor is taxed on (don't tell them - they will up the price!) and you would pay at market value.

    For related party transfers you should beware of under market value transfers. You would always do it at full market value because of the various clawback provisions.
     
    Terry_w, 10th Jan, 2021
    #8