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Off The Plan - Mistaken Main residence Exemption

Discussion in 'Accounting & Tax' started by Paul@PFI, 20th Apr, 2016.

  1. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    I'm receiving a number of enquiries each week that revolve around a common theme. A feature of the rise in value for OTP build in Sydney together with a number of these projects coming to completion.

    Here is issue in a nutshell....Person sign a OTP contract and pays a deposit say in 2013. Only now is the property nearing completion. Plan is to move in as soon as completed. Live there 3, 6 months or so and in that time list it for sale. Property is eligible as taxpayers main residence so the CGT on the sale will be zero. Right ?

    Problem is that is just not correct. I have to explain that CGT is based on "CGT events" defined by law rather than a purchase and sale in the commercial sense.

    The creation of the CGT asset occurs when the contract to acquire is created.
    The CGT event relating to disposal also is based on when the contract is made for disposal.
    Settlement dates are not relevant.

    So in its simplest form a main residence exemption can only commence when the property commences to be the taxpayers main residence. The period ownership of the CGT asset (a right to acquire) exists well before that date.

    So an apportionment of the final "profit" must be made and the period after occupancy until sale may well be exempt.
     
  2. BennEznElle

    BennEznElle Well-Known Member

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    Location:
    Adelaide
    Whilst I understand your point of view, does this not become an issue when every property is purchased, i.e that the contract is signed at some point in time prior to settlement and therefore there is always going to be that lag time?

    s118.135 states that if it becomes your main residence by the time it was first practicable for you to move into after you acquired your ownership interest, it is treated as your main residence from when you acquired the interest.

    Surely from a practical point of view 'first practicable for you to move in' means settlement, as it is not practicable to move in during construction. My thoughts are that this section is really to prevent people from claiming main residence when there is still a tenant in place for a period of time after purchase.

    I'd be interested to know if you have a PBR on this..

    The other question arises though, is that if a couple purchase a property off the plan with the view to move in, in a few years and sell their current property prior to this, then if the main residence exemption is allowable on the OTP property from contract date, then there is a long period of time where there are 2 main residences which will exceed the 6 months allowable on changeover.

    Edit (Extra Thoughts)
     
  3. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    That can often be the issue. I merely address that its not clear cut. (I also did not address the 12month issue).

    There can be two CGT assets.
    1. A contractual right to acquire which rolls over into a property if & when settled
    2. The property.
    Each is separately subject to the 12 month rule.
    And if its capable of being argued its also possible that CGT rules may not apply too. This can occur when a taxpayers buys three OTPs in the same building and sells two prior to completion.

    Problems may be more evident when a OTP is sold prior to completion or when there are multiple OTPs etc. Can also create issues when the property settles and then sells a carpark, wharf etc that was a element to the original contract etc.

    Message is it isnt always simple.

    You can't have a MRE on a intended future residence and cant have two overlapping MRE's other than in one other specific circumstance. Only the actual residence would be exempt. No choice is available until occupancy commences.
     
  4. Rob G

    Rob G Well-Known Member

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    Melbourne
    MRE 'ownership period' relates to an 'ownership interest' which includes a legal or equitable interest as well as a right to occupy, s.118-130(1).

    However, start date under a contract is when you obtain legal ownership unless you have an earlier right to occupy, s.118-130(2).

    In other words, MRE is apportioned using dates between contract settlements unless there is an earlier right to occupy.

    If you sign an OTP contract and then on-sell before settlement then you cannot have any main residence exemption because there is no interest in the dwelling for this purpose unless you had an earlier right to occupy (e.g. instalment purchase agreement and you move in).
     
    Last edited: 20th Apr, 2016