PPR exceptions to 6 month rule

I was debating whether a PPR owned for less than 6 mths could be sold without CGT.
he says there's no way it can escape CGT.
I say it can for extenuating circumstances such as loss of job, job transfer, health reasons.

Who is right?

And for the sake of brevity, presume the owner did move into it and met all ATO rules for having it meet PPR status.

 

Who is 'he'?

The main residence exemption could apply.

 

A mate who gets paid a lot of money who works for Optus.

"could apply" really!

 

Why wouldn't it apply? What is his reasoning?

 

We both thought there was a condition on how often one could change PPRs before losing 100% CGT exemption status. i.e. many people used to buy a PPR, fix and flick it within a few months, rinse and repeat. My mate thought you have to hold a PPR for 12 months to claim 100% cgt, and if you sold it prior you would trigger a cgt event. I thought it was 6 mths with exceptions such as I mentioned originally.

 

Their is no mandatory time period in the legislation. It is a question of fact and depends on each case. As a practice we consider (among others):

1. length of time taxpayer has lived there

2. where the taxpayer’s immediate family members reside

3. the taxpayer’s mailing address

4. location of personal belongings

5. electoral roll address, or

6. whether utility connections were made in the taxpayer’s name.

No one factor is absolute. It is a holistic review. If somebody lived their for 6 months but did not say, use any water in the house, it is hard to imagine how they made it their home.

 

Thanks, but I am confused by what you say. i.e.

"there is no mandatory time period in the legislation"
versus
"1. length of time taxpayer has lived there"

Based on your response there's nothing to stop a high energy couple renovating 6 PPRs a year and not create a CGT event (presuming they can flick em quickly enough).

 

If you are doing this as a profit making scheme then the main residence exemption won't apply.

 

Correct. One night doesn't count. However, there is no set time frame set out in the legislation.

The point is to genuinely occupy the dwelling as your main residence and to keep documentary evidence to prove that is what you did.

For example:- when I moved into my first house, this is what I did:
- connected water, gas and power in my name at that address
- had bank statements sent to that address
- changed my driver’s licence to that address
- updated vehicle registration to that address
- informed Council so they could send rates to that address
- changed my address on the electoral roll to that address

Then I kept documentary evidence of the statements, bills etc over a number of months. I did this in case I had to move suddenly for work so I could prove that it was my main residence for some time. Ultimately I didn’t need it because I ended up living there for nearly 2 years but I could have proved it was my home if it only lasted a few months.

 

thanks. ok so at least theoretically the ATO doesn't try to catch fix and flickers these days, as long as you can be bothered proving you are f&f'ing your PPR each time.

 

I would say that depends on frequency. If you were doing 4 a year you would probably raise questions. If you were going less than one a year, maybe not. You would have to demonstrate that to did not renovate with a profit making intention. You might be able to do that once, but 4 times in a year? I doubt it. There are also GST implications when selling a substantially renovated property.

TD 92/135 states that if a property is built or renovated with a profit making intention the main residence exemption cannot apply. This is because the main residence exemption only applies to profits that are subject to CGT and CGT only applies if normal income tax does not. In the case of building or renovation with a profit motive (rather than as a rental property or private home) the profit would be caught as normal income.​

http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf

 

They do try to catch them - there is a ATO ID on this.

 

​

This is the one I was thinking of
TD 92/135 - Income tax: capital gains: is the main residence exemption relevant when the proceeds of sale of a dwelling are treated as income under ordinary concepts? (As at 12 May 2010)

 

Yeah don't do that. If you do a bank loan application with the words "I am just going to move in, renovate, and then sell within 6 months" you are on a hiding to nothing.

It will come down to the facts of each case. So it can be taxable depending on the facts.

 

There are frequent questions about "how long must I reside in a property for the 6 year absence rule"

The answer is that there is no statutory period. In theory the period could be as little as one day. That would be very rare but could be attained. eg : A soldier buys a home and intends to reside for the forseeable future. The day he moves in he is ordered to redeploy to another state commencing the following day. The key attribute in that example is the soldier MUST have moved into the property to occupy it. If he was "ready to occupy" he would not satisfy the test of residency. (Couch Case)

The other key concept is that the taxpayer(s) make the property their MAIN residence. (s118-110) The factors include length of time, where the family resided, where the taxpayer(2) belongings are, mailing address, electoral roll, services connection.Some of the above factors are not essential elements but merely indicators that may assist a taxpayer and the Commissioner. The key fact is that the burden of proving an assessment is excessive is always a burden upon the taxpayer, not the Commsssioner. So a taxpayer seeking to claim a property was exempt when it was occupied for a very short period or without all of the above indicators should retain as much supporting material to support their position. eg Copies of the orders in writing to redeploy that indicate the date etc. Also evidence of actual occupancy eg removal costs, photo's etc !!

However, the key consideration is the taxpayers entitlement to claim the main residence exemption. If that isn't satisfied there is no 6 year absence rule. eg The example above if the soldier does not physically commence occupation.


Why do I keep writing taxpayer(s) rather than owners ?
There is also a catch to the exemption. A coupe (married, defactor or same sex) who each own a property cannot both claim a exemption using the absence rule. The taxpayers must at all times elect which property is exempt and this imposes CGT on the other property. In such instances personal tax advice may be wise.

 

Thanks. That's someone building a new house, and the builder could no doubt claim building materials and labor against the capital improvement profit.

To counter that scenario, consider this:

a soldier is relocated from his original PPR twice in one year, meaning he has 3 different PPRs in 12 months. He does minor capital improvements, maybe re-landscape, fix a fence, and re-paint the house. Say he makes for argument's sake due to a fast moving market, 7% profit on each sale. These capital gains are arguably the same gains a person would have experienced owning one house, though the latter are just not realized. It would be logical to presume the soldier should not have the three PPR profits subjected to CGT.

I honestly don't know how the tax commissioner could determine that capital gains available to someone who holds a property for a year and sells, are not available to someone who moves 3 times due to work.

 

It is not just for builders. The same could apply where there is any profit making intention.

 

You couldnt buy and sell three homes is a short period of time. After the delays involved with buying settlement, occupancy, moving out, buying anothere etc...then selling etc and the costs of duty etc and selling costs such as agents etc you may be broke - No profit. And you can only claim ONE main residence exemption for any day of the year. You can only ever have ONE main residence.

Under self assessment its a easy issue. The Commissioner can revisit undeclared income at any time. Taxpayers self assess. Stupidity, reckless or just carelessness / ignorance are forms of evasion. The ATO have databases of property transactions and compare this to tax returns. I get the client letters that ask why a sale may have not be reported.

 

It was common in the early noughties for speculators to fix and flick at that rate. Steven Knight had many adherents doing it.

Regarding claiming one main residence for any one day, how does that accommodate the ATO guideline below?


Selling your home

Moving from one main residence to another
If you acquire a new home before you dispose of your old one, both dwellings are treated as your main residence for an overlap period of up to six months if:

• you lived in your old home and it was your main residence for a continuous period of at least three months in the 12 months before you disposed of it
• you didn't use it to produce assessable income (such as rent) in any part of that last 12 months when it was not your new main residence, and
• the new dwelling becomes your main residence.

 

You left out the 6 months part

This section is only relevant when selling one main residence and moving into another - in limited circumstances.