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Question on 6 year rule

Discussion in 'Accounting & Tax' started by albanga, 14th Dec, 2015.

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  1. albanga

    albanga Well-Known Member

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    I sort of understand the basics of the 6 year exemption rule but had a few additional questions (to assist a friend as he has stated he has received conflicting advice from accountants):

    Scenario would be something as follows:
    Purchased property and moved in for 12 months.
    Moved out and rented elsewhere whilst renting it out, never purchased another PPOR in that time.
    So from my understanding if it was sold at the 6 year mark there would be no CGT.

    Say however that it remained rented for 4 additional years (10 in total), what would be the outcome of selling:
    Is it 4 years of CGT? Meaning you get the 6 years exemption but then need to pay CGT on the remaining 4? OR because the 6 lapsed are you required to pay CGT on all 10 years?

    What about if you moved in for 6 months before selling? Does that do anything? He was informed that it would make it CGT exempt but i just dont think that sounds right?

    Finally what would have happened if he moved back in after 6 years for another year and then rented it out again for another 5 years? Does the 6 year clock "reset"?

    Thanks in advance
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  3. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    1. Yes correct.
    2. The 10 years of ownership would be apportioned so that 4/10th is exempt with the balance assessable. The value at the date first rented may be important and determine the initial cost base. If that applies then the whole of the period rented within 6 years is exempt and valuation is basically ignored.
    3. If in the example of 2. The 4.5/10.5 would be the exempt portion.
    4. Yes. The 6 year rule can be applied more than once.

    Just watch for matters that affect the MRE involving a spouse. If your mate has a GF/BF/Spouse/Partner/Defacto/Lover who owns a property and he lived with her he may not have the exemption.
     
  4. wogitalia

    wogitalia Well-Known Member

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    This is all correct.




    Based on the information provided and the basis it first earned income after August 1996...

    The cost base of the asset is the market value when it first earned income, so the point that they moved out and found a tenant. Capital gain would be proceeds less that cost base.

    The gain is then apportioned against exempt days, so essentially the actual gain will be 40% (note you use days on the actual calculation and I'm simplifying it) of the difference between cost base and capital proceeds. (ownership for CGT purposes is taken to be the day it first earned income, not the actual acquisition date so that first period is irrelevant). Given ownership time the CGT discount would also apply.

    To my understanding this is incorrect, the 6 months he lived in would be exempt and would increase the above exemption days part of the calculation (would become 6.5 years over 10.5 for the apportionment).


    Yes it does but you need to be able to prove that you moved back in and then why you moved back out (resetting the 6 year rule would not be an acceptable reason). Obviously when you're claiming an exemption and the ATO will have records that the property was used to earn income the likelihood of an audit by the ATO is far greater so important to do it all above board.
     
  5. wogitalia

    wogitalia Well-Known Member

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    I'm slopoke on this one :)


    Think you mean 6/10 are exempt on point 3 and 6.5 on point 3?

    Otherwise I agree fully with this more succinct version of my drivel :)
     
  6. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Yes. The period between date acquired and first rented is NOT a factor in any calc. Apportion only the period after first rented. However for a property that wasn't first a PPOR this formula requires apportioning and using the cost base.
     
  7. albanga

    albanga Well-Known Member

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    Your all brilliant! Thank You, I will advise my friend and let him know to find a new accountant ASAP.
    Cheers
     
  8. newbie property

    newbie property Active Member

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    Hi @Paul@PFI ,

    One more question from here, please help...
    In regarding to your answer point 2 where it says the value at the date first rented may be important and determine the initial cost base, I'd like to know does it mean when owner moved out of PPOR and start to rent it out, it's better for them to get a valuation done at the time? is there a requirement as to what kind of valuation is acceptable? is the one from real estate agent OK? or does it have to come from a qualified valuer?

    So say I bought my PPOR 10 yrs ago for $200K, then lived there for 10 yr and start to rent it out, at this point, the PPOR is worth $600K, then I sell it in another 5 yrs, say it's sold for $1mil, regardless all other costs, does it mean I pay CGT on $1mil - $600K (being the initial cost when rented) = $400K?

    Thank you very much for your time! appreciate the help!
     
  9. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    OR YOUR SPOUSE
    s118.192 of ITAA97 requires (no option) that the cost base for the property is reset to its market value on the date the property FIRST earns income. The valuation need not be by a reg valuer but it needs more than be a number plucked from the air and you should be able to support how that value was arrived at. A agent opinion etc may assist. Best in writing etc.

    Your example is correct except the $400K may only be half assessable AND even shared by two taxpayers so that $100K each is assessable. Any selling costs (legals, agent etc) may reduce the profit too. Any CGT costs of ownership in the period when it was a PPOR cannot be used as the cost base IS the market value on date first rented. . Obviously in this example if you also satisfy the 6 year absence rule then it may prevail so that the 5 years is exempt and no CGT is payable. But if you moved out of the former PPOR to another new PPOR you cannot choose the absence rule apply to that home other than as permitted by a change of PPOR... s118-140. The 6 year rule s118.145 is explained here. The absence rule requires you do not reside in aother property you OR YOUR SPOUSE own. eg parents, rented etc all OK. Even a overseas property can fail that test. There is a complex interaction between spouse property and your property with the exemption too.

    So often all three rules must all be considered together.
     
    Last edited: 18th Dec, 2015
    albanga likes this.
  10. newbie property

    newbie property Active Member

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    Paul, Thank you very much for your great explanation!! @Paul@PFI