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"Little known tax strategy"

Discussion in 'Accounting & Tax' started by LifesGood, 24th May, 2016.

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  1. LifesGood

    LifesGood Home Building & Development Consultant Business Member

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  2. Mick Butterfield

    Mick Butterfield Well-Known Member

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  3. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    I thought the article was a bit of fluff lacking in accuracy and fact. There is no secret or misunderstanding that a person can buy a property and live it it for a very short period and move out to rented or parents friends etc and they retain the CGT exemption for up to 6 years. And it failed to mention one of the best bits - You can renew the six years by moving back in then leaving again.

    1. The idea of living in the house for a year to access this benefit is factually incorrect. There is NO specific minimum time requirement. There is a requirement that the owner RESIDES in the new property and this would mean moving possessions in, connecting services and living there. However after a week they could choose or be forced to move. Obviously a contrived week may fail the test of being a residence. But a month or two or three may be enough. For someone else it could be a week if for example they are arrested and then jailed. Injured and forced to live with family. Or their job sends them interstate or OS. Lose their job etc...

    2. The state govt duty concessions or FHB scheme may dictate a minimum period - Often 1 year now. However the FHB and CGT concessions are unrelated. The key concern is nobody wants to repay the FHB concession.

    3. Care must be taken if during the six years if another is purchased then if you try to repeat the process. This could end the exemption for IP1 and start a new period for IP2.

    4. The exemption is NOT available to both partners / spouses etc It is UP TO one full exemption between them. They can choose how to apply this.

    5. Beware of land tax. State land tax rules need to be considered.

    6. This exemption can be retained if the taxpayer becomes a non-resident !! Normally when a taxpayer becomes non-resident the CGT 50% exemption is lost and the property reverst to 100% CGT for that period. However if the 6 year rule is met exemption is given...Not a bad outcome. All it takes is moving back in before departure.

    The article probably best serves as a reason why investors should get involved in forums like PC and have a good property savvy tax adviser.
     
  4. Marg4000

    Marg4000 Well-Known Member

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    actually it does mention the move back in and reset option towards the end, citing the case of someone who used that strategy over 20 years.

    Judging by the number of questions on this forum about this topic, there appears to be confusion even among established investors.
    Marg
     
  5. Kirsti327

    Kirsti327 Active Member

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    Paul, I hadn't realised this. Any idea what definition of "de facto" the ATO would use to enforce this?
    My boyfriend and I each owned our own homes. We have moved into a rented apartment together a few weeks ago. It is a trial run and if it works well we would look at buying a home later and selling our own properties at that stage.
    We were expecting that we could both maintain our CGT exemption, but from your note it sounds like they might disallow one exemption if we are deemed de facto?
     
  6. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    @Kirsti327 For other things like the FHBG you're counted as defacto if you've lived together for 2 yrs, so you may have some time of having both before having to have 1 exemption between you.
     
  7. Rob G

    Rob G Well-Known Member

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    Income Tax Assessment Act 1997

    "spouse "
    of an individual includes:

    (a) another individual (whether of the same sex or a different sex) with whom the individual is in a relationship that is registered under a * State law or * Territory law prescribed for the purposes of section 2E of the Acts Interpretation Act 1901 as a kind of relationship prescribed for the purposes of that section; and

    (b) another individual who, although not legally married to the individual, lives with the individual on a genuine domestic basis in a relationship as a couple.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Not much wiggle room there.
     
  9. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Terry has explained tax definition of "spouse". Its a bit stricter than family law when (b) is considered. Congrats. The trial run issue is fine however later on you will have to refer back to that date as when the defacto relationship commenced. There is no waiting period. You must both choose his place, your place or 50% each for the 6 year absence rule. Generally that choice is made when one or other property is sold. Just remember that then commits the other to tax if it is also sold.

    Nobody disallows it. You have no entitlement to claim it. Same also applies for land tax. The property you both live in is the one exempt from land tax.
     
  10. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Read (b) in Robs post. Tax law isnt that generous
    (I originally credited Terry as the source)
     
    Last edited: 30th May, 2016
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  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    That was RobG's post Paul.
     
  12. Kirsti327

    Kirsti327 Active Member

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    damn, glad I found out now. Thanks guys
     
  13. Elives

    Elives Well-Known Member

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    Would it be risky if you bought a house as ppor with the main purpose of renting it out to get cgt exempt?

    etc i purposely go out as i don't have a ppor buy a place live in it for 6 months change all bills / mail and then move out afterwards with the aim of it being a ip? i would not want to do this if its a "maybe"

    if this is fine and the ato is fine with this, could i also get the...

    • 0.2% discount with my bank?
    • lower council rates?
    • lower stamp duty?
    • the 600k (i think) land tax exempt in qld?

    Cheers, Elives
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Part IVA could be applied if the dominant purpose was a tax deduction - but very unlikely as the main purpose would be to buy a home
     
  15. Elives

    Elives Well-Known Member

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    what is IVA?
     
  16. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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    It is an accountant/lawyer's euphemism for " You dodgy bas****, keep me out of it" ;)
     
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  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Sorry, Part IVA of the 1936 Tax act used to deny deductions on schemes with a dominant purpose of increasing a tax deduction.
     
  18. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    dominant purpose only needs to be a tax benefit.
     
  19. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Oh yes - poor wording on my part.
    Part VIA could even be applied to negative gearing in general - except the ATO have said that it wouldn't be.
     
  20. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    There is an inherent defect with Part IVA despite it being amended. The Commissioner has no ability to exclude income under Part IVA. Only to deny a deduction in whole or part. I would argue its a weakness since in some cases the Commissioner could need to reduce income. Or exclude income so that a s8-1 deduction nexus isnt met etc.