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PPOR 6 year rule and buy IP

Discussion in 'Accounting & Tax' started by camp, 13th Mar, 2016.

  1. camp

    camp Member

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    I was speaking to a friend at dinner tonight, as he was advised by his tax accountant the PPOR 6 year rule is only applicable if he's not buying any property, including IP. Is it true?

    Basically he's planning to move out from his current PPOR, rent out the PPOR and himself will be renting. He was advised, he can be exempted from CGT for that property for 6 years, provided that's the only property he owns over that time period, so he can't buy any IP in the next 6 year after he move out from PPOR.

    I read on the 6 years rule on ATO site, couldn't find anything specifically to confirm this. I thought I ask for clarification here.

    tx
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  3. Simon Moore

    Simon Moore Mortgage Broker - Melbourne Business Member

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    +1 for @Terry_w, that is also my understanding.
     
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  4. WattleIdo

    WattleIdo renovating Premium Member

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    Subsection 4 provides an example only. You don't have to move os. My understanding is that what you have suggested is acceptable. Your friend can also purchase other properties if they're considered IPs. Your friend can live in one of the IPs as long as when it comes to the crunch, he claims only his PPOR as his PPOR. That is my understanding. I have seen this discusssed many times, including on PC and it is always the same answer.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You might always want to search the private ruling database (search for '118-145') as you should be able to find actual examples.

    And don't forget to sack your accountant.
     
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  6. Yangaz

    Yangaz New Member

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    Hi, i've been discussing this with my accountant recently as well and can come across confusing at times. Post speaking to him, my findings are:
    1. The 6 year CGT exemption period starts from the first date you rent it out (going from PPOR to IP)
    2. The PPOR needs to show evidence that the owner lived in it (even if it is to show intent).
    3. If you sell within the 6 year period, you do not get taxed on your capital gains. Anything beyond this e.g. say 7 years means that a certified valuer will assess what it was worth at year 6 and then determine the growth in year 6 to 7 and you get taxed on that component. Previously there was a ruling where it would be pro-rated but that doesn't exist anymore.
    4. In summary if you can sell at year 6 (subject to your circumstance) to avoid the valuers discretion do it.
    5. You can purchase any many IP's as you want but you can only have 1 PPOR at a point in time. You can sell your first PPOR and then buy another PPOR where this CGT exemption rule applies again.
    Thanks
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    1. depends on the circumstances. First available to rent possible if you are no longer living in itn

    2 - intent really doesn't matter. The facts matter - whether you lived in it as the main residence or not.

    I don't think 3 is correct.

    4. not sure what you mean here about valuers discretion, no valuer needed at this point.

    5. You can have more than one main residence at any point in time, but you can only claim one as the main residence for any one period. one exception is where you buy a new main residence and sell the old one where you can count 2 for 6 months.
     
  8. WattleIdo

    WattleIdo renovating Premium Member

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    The other option is that you can move back into it, rather than selling.
     
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  9. Rob G

    Rob G Well-Known Member

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    If s.118-192 applies, then you are deemed to have acquired the property at date first used to earn income.

    NOT the date your 6 year absence under s.118-145 times out.

    See note 2 to ATO ID 2003/113.
     
  10. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    Last edited: 13th Mar, 2016
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  11. WattleIdo

    WattleIdo renovating Premium Member

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  12. Yangaz

    Yangaz New Member

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  13. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    Yangaz

    Suggest you read the link i posted as some of the advice you have been given from your accountant isnt correct
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    1. You may be living in another property at the time.
    2. No you would not be able to class the property as the main residence in this case because you never moved in. Intention is not relevant.
    3. what is this ruling you refer to?\
    4. not sure what you mean by back dating.
    5. cool
     
  15. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    A property will not be treated as your main residence during the period from when you acquired the dwelling until when you occupied the dwelling if you did not move into it as soon as practicable after you acquired it under section 118-135.

    The term 'as soon as practicable' is used in section 118-135 of the ITAA 1997 to provide some leeway from what would otherwise be a strict requirement that the full exemption would only be available if the property became your main residence on the date you acquired it (i.e. you would have to physically move in on that day.)

    Chapter 2.12 of the Explanatory Memorandum for Tax Law Improvement Act (No 1) 1998 advises that:

    The rewritten provision takes account of situations where, for example, there is a delay in moving in because of illness or other reasonable cause.

    Taxation Determination TD 92/147 advises that whether the dwelling becomes your main residence 'as soon as practicable' depends on the facts of the case.

    Taxation Determination TD 92/147 further provides two examples of situations where a short delay in moving into a dwelling was accepted as being as soon as practicable and one that wasn't accepted. In none of these examples did the taxpayer take up residence elsewhere between acquiring the dwelling and moving into it.

    The Courts have determined that 'as soon as practicable' means 'as soon as reasonably practicable', which is a lesser requirement than 'as soon as possible' (Wills v Whiteside, ex parte Wills (1987) 2 Qd R 284 at 288) but means more than 'as soon as practicable for your convenience' (Anglo-American Oil Co Ltd v Port of London Authority [1914] 1 KB 14 at 24).

    The Explanatory Memorandum indicates that section 118-135 of the ITAA 1997 is intended to apply in situations where moving into the home is temporarily delayed due to matters outside the person's control and, during the delay, they don't take up residence elsewhere for any substantial period. Taxation Determination TD 92/147 supports this approach.
     
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  16. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    And for clarity sake - Being unable to move in due to the former owner or some other person renting the place when its acquired isn't accepted by ATO as a reason for a delay. And if that occurs and you don't occupy the property as the main residence as soon as practicable then s118-192 cant later be used as a pro-rata basis is required.
     
  17. RiMo

    RiMo Well-Known Member

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    Sorry guys, I'm a bit confused after reading those previous comments.

    I have a situation where a former residence (bought in 2005) was turned into an IP (in 2013) but the owner forgot to do a house valuation before he started taking in the rents. If the owner ends up selling this IP in 2020, is the CGT applicable for the whole 15 years or 7 years or just 1 year? And would the purchase price be based on the year he first bought the property (2005) or the year the PPOR became an IP (2013)? And if that's the case, how do you determine market value in 2013 if no valuation had ever been done at the time?

    I wonder if @Terry_w or @Paul@PFI would be kind enough to explain this for me. Thanks in advance! :)

    RiMo
     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If he sells in 2020 that is 7 years after the property started to become income producing.
    So the revent time for the valuation would be in 2013. Valuers should be able to go back and say what the place would have been worth then.
     
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  19. RiMo

    RiMo Well-Known Member

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    Excellent! Thank you for your clarification, Terry.
     
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  20. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    The sooner that this is done the better. While 2013 is recent history the accuracy of a taxpayer to self assess value based on sales data would be error prone. A experienced licensed local agent opinion in writing (provided they know the area well) may be sufficient esp if they now manage the tenancy.

    Also bear in mind CGT costs before 2013 are disregarded - Only CGT costs post the date of first earning income are relevant. The valuation draws that line in the sand.
     
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