Flowchart for minimisation of CGT on a main residence

1. Determine whether a CGT event has occurred for a dwelling that has been used by an individual taxpayer as their main residence.

1.1. The exemption only applies to individual taxpayers (refer section 118-110) or trustees of a special disability trust (refer section 118-218)

1.2. The exemption does not apply to the sale of land unless the land is adjacent to a dwelling which is being sold at the same time (refer section 118-120). The only exceptions to this rule are where the dwelling has been accidentally destroyed (refer section 118-160) or where land is compulsorily acquired (refer section 118-245).

1.3 Exclude property not held as a CGT asset from this flowchart. eg developers etc. Example includes TD 92/135.
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2. Calculate the ownership period of the dwelling (in days) using the respective settlement dates.

3. Calculate the period that the dwelling was used as the main residence of the taxpayer or the principal beneficiary of a special disability trust (in days).

3.1. If the taxpayer moved into the dwelling as soon as practicable after acquiring it, treat it as their main residence from the date of acquisition. Otherwise, treat it as the main residence from the date it was first occupied (refer section 118-135).

3.2. Taxpayers can choose to treat a dwelling as their main residence during absences, as long as no other dwelling is treated as a main residence for the same period and the dwelling has already been established as a main residence. If the dwelling is used to produce assessable income (e.g., rent), the dwelling can only be treated as a main residence during an absence for up to 6 years (refer section 118-145). The 6 year period can be reset by re-establishing the property as a main residence.

3.3. If a taxpayer acquires a new dwelling before disposing of an existing dwelling, both can be treated as main residences for an overlapping period of up to 6 months if certain conditions are met (refer section 118-140).​

4. Determine whether the taxpayer purchased the land and constructed the dwelling. If so, the property can qualify for the exemption for up to 4 years during periods of construction, renovation or repair if certain conditions are met (refer section 118-150).

5. Determine the size of the land sold with the dwelling. The main residence exemption can apply to up to 2 hectares of adjacent land used for private purposes and sold with the dwelling (includes the land beneath the dwelling). If it is more than 2 hectares, apportion the cost base of the property and the capital proceeds between the dwelling and 2 hectares of land (refer section 118-120).

6. Determine whether the dwelling will qualify for the full main residence exemption. If so, there is no need to calculate the capital gain or loss.

6.1. A dwelling should qualify the full exemption if it was the taxpayer’s main residence for the entire ownership period and satisfies the 2 Ha limit on size, and was never used to produce assessable income.​

7. If a full exemption is not available, calculate the capital gain or loss by comparing the capital proceeds with the cost base or reduced cost base of the dwelling and land.

7.1. If the dwelling was first used to derive assessable income on or after 20 August 1996, consider whether the cost base is reset to the market value of the dwelling when it was first used to produce income (refer section 118-192).

7.2. Don’t forget to add non-deductible holding costs to the cost base of the property if the property was acquired after 20 August 1991. (Do not add non-deductible costs for any period prior to the date first used to produce income when the first used to produce income rule is used) These cannot generally be added to the reduced cost base when calculating a capital loss.​

8. Confirm that the taxpayer has not elected to treat another dwelling as their main residence for the same period. A taxpayer can only elect to treat 1 dwelling as their main residence for a period of time. If another dwelling is elected, this dwelling will not qualify for the exemption.

9. If the dwelling was not the taxpayer’s main residence for the entire ownership period, reduce the capital gain by the proportionate number of days it was the taxpayer’s main residence (refer section 118-185).

10. Determine if the residence was used for income producing purposes. If so, calculate the proportionate income producing use. Generally, a reasonable method is to calculate the % of floor space used for income producing purposes (refer section 118-190).

11. Confirm that the taxpayer and their spouse or dependent children did not also have dwellings that qualified as their main residence during the same period. If so, they must either choose one dwelling to be treated as a main residence or elect different dwellings although each will only qualify for a partial exemption (refer section 118-170).

12. If the taxpayer acquired the dwelling from a deceased estate, consider whether a full or partial exemption can apply to the disposal of the dwelling (refer section 118-195 & section 118-200).

13. If a capital gain remains after applying the main residence exemption, consider whether the CGT discount can apply

 

The above should demonstrate that the issue of a main residence exemption isnt always straight forward. I think the numbers of threads and post on PC supports that.

It demonstrates why having a tax adviser on hand is wise. They can check and confirm quite quickly asking all the right questions. Thats not expensive but making a mistake can be. I always say you dont want to overpay or underpay tax. Both are equally as bad. Most taxpayers think some tax questions are very complex and thus expensive to address. But most tax advisers deal with this stuff day in and day out so what seems complex isnt when its discussed. Often taking 10 minutes - I wouldnt see that as an extra cost.

I suspect that the ATO will increase its emphasis on property sale audits and increase diligence over sales. A recent Asst Commissioner hinted that the potential value of declared sales is not consistent with the growth in sales volume. An easy source of tax leakage and often with high value of tax.