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PPOR - Meaning of "Soon as Practicable"

Discussion in 'Accounting & Tax' started by Paul@PFI, 28th Jan, 2016.

  1. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    I'm often receiving contact from buyers of properties which are intended to become the taxpayers PPOR however they have given the former owners a right to rent for a short period of time. They ask if the main residence may have a CGT issue for that period. And in some cases they seek to rely on the "as soon as practicable rule"

    Three enquiries this week alone means its time to review this issue.

    Is the property subject to CGT for the period rented. Yes
    Can the PPOR exemption be used ? Not for the period it was rented.

    s118-135 of ITAA97 uses the term "as soon as practicable" to the main residence exemption. Does this mean I can apply this rule to the period rented. After all, I cant move into my new PPOR until the short rental period has passed. That is as soon as practicable as far as I'm concerned.

    No. The ATO have an Interpretative Decision (ID 2001/744) about this issue. The ATO rely on the explanatory memorandum which explains the intended meaning of proposed tax law to the MPs and Senators at the time the Bill was presented to Parliament. The EM clearly indicates that waiting for a occupancy under a lease or other impediment such as a tenant who wont vacate from a lease is not sufficient reason to claim the main residence test is satisfied using the as soon as practicable rule.

    In these examples the total capital gain must be pro-rata'd between the taxable number of days (rented) and the exempt days (main residence).
     
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  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Long term the CGT would be negligible too as the % decreases with time. Also various expenses can be added to the cost base to reduce the gain.

    Not worth worrying about really unless you sell within the first few years for a large gain.
     
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  3. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Yep. The two months represents 2/12th after 12months, 1/12th after 2 years and after 10 years its 2/120ths. And then just 50% and possibly split by joint owners.

    The unknown is future value. Using a example lets say two months on a 1990 acquisition it may seem trivial at the time if property cost $100K. That property in Sydney now worth $700K. So taxable prop rata (ignoring all other costs etc) would be :

    $700K - $100K cost = 600K profit. 2months taxable / 312 month owned.
    So 6.25% x $600K = $37,500
    Less 50% = $18,750 taxable

    The key issue in that time is improvements and other CGT matters will reduce / affect the CGT profit. ie a $100K extension to accommodate that new child in 1993 might eliminate the CGT gain altogether. And other costs... No big deal but not automatically exempt as such. Pain to calculate and confirm no tax due.
     
  4. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    with third element costs added to the cost base the CGT might be nil anyway.

    if you had a loan for $100k and was interest only for 10 years at 6% then looking at about $60k in interest that couldn't have been claimed as it was the PPOR that would be added to the cost base. add council rates, insurance, etc and that CGT liability is getting right down.

    but agreed it still needs to be calculated and it is a pain.
     
  5. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    "$700K - $100K cost = 600K profit. 2months taxable / 312 month owned.
    So 6.25% x $600K = $37,500
    Less 50% = $18,750 taxable"

    2 months / 312 months is only 0.64% so only looking at $ 3,840.

    third element would wipe it all out
     
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  6. bob shovel

    bob shovel Well-Known Member

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    Practicable is an interesting word.sounds made up and isn't in my spell checker.

    I started seeing it for the first time after the introduction of the latest WHS act 2011 for work place safety etc and after a quick google it appears to be coming back

    Screenshot_2016-01-28-15-55-18.png

    Is it also new to other areas? It's a good word

    practicable
    ˈpraktɪkəb(ə)l/
    adjective
    adjective: practicable
    1. able to be done or put into practice successfully.
      "the measures will be put into effect as soon as is reasonably practicable"
      • able to be used; useful.
        "signal processing can let you transform a signal into a practicable form"
     
  7. Perthguy

    Perthguy Well-Known Member

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    New?

    practicable - definition of practicable in English from the Oxford dictionary

    I am aware of this word from the ATO main residence exemption going back more than 10 years...

    If a dwelling was not your main residence for the whole time you owned it, some special rules may entitle you to a full exemption or to extend the partial exemption you would otherwise obtain. These rules apply to land or a dwelling if:

    Is the dwelling your main residence? | Australian Taxation Office

    I moved into my main residence the day after settlement. I felt that met the definition of "as soon as practicable" after purchase :D
     
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  8. Cia

    Cia Active Member

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    I've just bought a new apartment ppor but the tenants lease doesn't expire until mid march 2017 ie about 4 months. I bought it about $90k under market value. I will renovate fully ie kitchen bathroom walls, floor etc. so I'll add value before I move in in April.
    Should I get it revalued before I start renos to pay cgt only on the gain over those 4 mths?
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No point in getting a valuation on this as cost base will be worked out on a time lived in basis.
     
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  10. Bran

    Bran Well-Known Member

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    Not new. I use it whenever it is practical to throw in an extra syllable for no reason.
     
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  11. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Practicable is a word from a language called English. Its commonly found in things with pages which are bound into books. These days those words are often digitally represented on screen. Small screens have a bastardised version of English which gets more bastardised as the screen size reduces. ie SMS msgs get vry short. This bastardry is becoming more common place so that old words are getting used less. However the terminology / definition given to words gives more or less precise explanation.

    Courts use those words to determine judgements based on people who dispute those words when used in conjunction with others in things like laws. Fancy places like Courts and Parliaments tend to use these words to make common law and statutory law, respectively.

    The words practicable means "capable of being used" which in the main residence exemption provides a very clear explanation of that law.

    A copy of a Binding Private Ruling explains the application of the term practicable in the ATO's ruling opinion : Austax
     
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  12. Cia

    Cia Active Member

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    Thanks v much @Terry_w
     
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  13. Ouchmyknees

    Ouchmyknees Well-Known Member

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    Is it worth it to get a depreciation schedule done for the period when leased back to the original owner?
    I think a rental contract needs to be drafted for the lease back, but I'm not sure if a PM is willing to manage a property for only 2-3 months?
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Keep in mind there are statutory minimum lease periods. In NSW it is 6 months.
     
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