Tax Tip 109: CGT and Being absent from the main residence for more than 6 years

Discussion in 'Accounting & Tax' started by Terry_w, 11th Apr, 2016.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    CGT and Being absent from the main residence for more than 6 years


    I have outlined the 6-year rule here
    Tax Tip 23: The 6 year Absent from Main Residence Rule

    Quick summary – it is possible to be absent from your main residence for up to 6 years and not lose the CGT exemption when you sell. But what happens what you are absent for more than 6 years?

    The short answer is that you get some CGT relief as the period subject to CGT is apportioned.

    Example
    Bic Dong purchased a home in 2000 and moved in straight away. It is a small residential block and is his main residence and only property.

    On 01 Jan 2004, Bic moves out. He ends up renting a property while renting out his main residence. Mr. Dong then sells the property in 2015.

    What happens with the main residence exemption? Because Dong was absent for more than 6 years – he was away for 11 years in total.

    Bic must first work out the value of the property when it was first used to produce income which occurred on 01 Jan 2004. He can do this by employing a valuer who will estimate what it was worth back at that point in time.

    Then he must work out how long the property was rented for (in days to be exact). 2004 to 2015 is 11 years (approx.). 6 of those 11 years are able to be counted as the main residence. Therefore 6/11th of the gain will be exempt and 5/11ths will be subject to tax.

    Let's add in some values:

    2000 $200,000 purchase price

    2004 $300,000 value at the date he moved out

    2015 $800,000

    The capital gain to work the tax out on is $800,000 - $300,000 = $500,000

    Some expense can be used to reduce this – agents fees on sale, conveyance on the sale etc, but not stamp duty on the purchase or other purchase costs because Bic is deemed to have acquired the property in 2004 at its value then (s118-192 ITAA97). Also, capital works deductions would need to be added back.

    Assuming all these amounts to $30,000 the gain would be $480,000

    Then the 50% CGT discount will be applied. $480,000 x 50% = $240,000

    Only 5/11ths of this would be taxable = $109,090

    $109,090 is the taxable gain that would be added to Bic’s other taxable income for the year. The maximum tax he would pay on this would be $53,454 but he may pay much less if his other income was very low.

    Had Bic moved back in before 01 Jan 2010 and then later moved out again, he would not have paid any CGT tax. He didn’t do this because he didn’t want the hassle of having to move.

    Had Bic decided not to keep claiming the property as his main residence after moving out (e.g. because he claimed another property) then the cost base for CGT purposes would have been the value at the time of moving out which was $300,000

    The CG would have been $800,000 - $300,000 = $500,000

    Reduce this by the selling costs of $30,000

    $480,000 gain

    $240,000 after applying the 50% CGT discount because held longer than 12 months.

    Tax would be less than $240,000 x 49% (top rate plus Medicare) = $117,600


    See

    ATO ID 2003/1113
    Income Tax
    Capital gains tax: main residence exemption - interaction between the 'absence' rule and the 'first used to produce income' rule
    ATO ID 2003/1113 - Capital gains tax: main residence exemption - interaction between the 'absence' rule and the 'first used to produce income' rule


    Section 118-192 of the Income Tax Assessment Act 1997
    INCOME TAX ASSESSMENT ACT 1997 - SECT 118.192 Special rule for first use to produce income


    Section 118-145 of the Income Tax Assessment Act 1997
    INCOME TAX ASSESSMENT ACT 1997 - SECT 118.145 Absences
     
    Redwing, d_walsh, Parkzilla and 4 others like this.
  2. L3ha7

    L3ha7 Well-Known Member

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    @Terry_w -mate hats off to you. Very good and detailed information. Msny of my wuestions has been answered but got some new one's ;)

    I am gonna use numbers more along our current situestion in the following example:-


    Property A purchased in 2001 for $210,000 after living in for 2 years, put the property on rent and dince then it has been rented out with some vacancy period during the course of changing tenants.

    There was no valuation was carried out in 2003 so the fees to hire a valuer to get the market estimate as per 2003 can also be claimed once property sold?

    Can the following items be claimed?;-
    • Council Rates since 2001
    • Water bill since 2001
    • Strata Chsrges dince 2001
    • Interest paid to bank since 2001
    • Property Management Fee dince 2003
    • Tax return charges since 2003
    • Maintenance and Repairs since 2001
    • Selling Agent Commission
    • Conveysncing fee from year 2001 and 2018
    At the end:

    2001 pp $210,000
    2003 MV $300,000 (Assumption)
    2018 MV $ 410,000 but sold for $420,000

    CG: $420,000 - $300,000 = $120,000

    After 50% (property kept more than 12 months) : $60,000

    2003 to 2009 will be exempt due to 6 year rule and the CGT will apply from 2010 to 2018 only for 8 years, what is the method to calculate CGT only for 8 years?

    Assuming Yes to the Can the following items be claimed question, I am sure all those things will add up equal to or bit more than the amount of 8 years CGT then will ATO will give back some money ????

    Current Scenario: Mrs is not working at the moment but receiving rent from another IP and little centerlink payments which are about to stop.

    So the final rough amount to pay would be .........(need to calculate 8 years cgt first)


    Isn't the gain be $470K or am I reading it wrong or missing something?

    Hope to get some clarity with your reply @Terry_w

    Rgds
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    When the cost base is reset you cannot claim any expenses incurred prior to that.
    Anyway, If an expense has been claimed against income you could not take that expense into account when working out the cost base as that would be double dipping.
     
  4. L3ha7

    L3ha7 Well-Known Member

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    So in simple words only selling fees and conveyencing fee (2018) is the only thing that can only be claimed + Valuer fee.

    Thanks for clarifying @Terry_w .

    Could you please advise the formula to calculate CGT for 8 years

    Thanks
     
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  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    You should be able to work out a formula based on the example
     
  6. L3ha7

    L3ha7 Well-Known Member

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    Thanks @Terry_w

    Got it-I think I was bit tired to understand the calculation at 2am, it is pretty simple ;)

    How that goes-give a man a fish vs teach a man to fish ;)
     
  7. L3ha7

    L3ha7 Well-Known Member

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    One last question @Terry_w in this regard- does anything change in relation to 6 year exump if the person was living overseas from 2003 to 2008 ?
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    yes it could be different for non-residents.
     
  9. L3ha7

    L3ha7 Well-Known Member

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    Thanks @Terry_w
     
  10. dd81

    dd81 Member

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    @Terry_w

    Hi Terry,

    You mentioned "Had Bic moved back in before 01 Jan 2010 and then later moved out again, he would not have paid any CGT tax."
    --> how long Bic had to stay at this place every 6 yrs so he doesn't have to pay any CGT when he sell the property? is there any minimum period of stay required?

    I have been in living in my PPOR for 10 yrs, and moving out soon the next 2 months or so. Let's call this "p1", and I own it in my name only. From the above I know i need to get a valuation report, do I have to hire a valuer for this purpose? or I can just get a few appraisals from realestate agent and keep the highest valuation? is there any rules on how the valuation report should look like so it will be acceptable by tax office in the future?

    I will be moving into a new place soon, let's call it "p2", which is under my husband and my name. Assuming I have to move back to "p1" (for a few months?) every 6 yrs, do i need to provide any proof that i did move back? since most bills are electronics these days, I can just amend any bank statement to use address "p1", would that be enough?

    I am planning to do some reno for "p1" (eg. reno the kitchen), is it ok to start it now when I am still living here? or best to start it after the property is advertised for rental?

    Thanks so much!!
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    The legislation has no minimum time requirement. It is a question of fact - either a property is your main residence or its not.
     
  12. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    And the spouse property WILL mean both taxpayers both need to make choices. You dont BOTH get a 100% main residence exemption each. Your exemption also applies to the spouse for any overlapping days (excepting the 6 month rule)

    Addresses on bills arent a requirement at all of the main residence exemption. However incurring expenses while resident may be important evidence. Failure to produce evidence of a part exemption can mean 100% is cancelled you must object and produce evidence - The onus is on the taxpayer to disprove the ATO views if that occurs . Take care with embellishing a main residence exemption. Every taxpayer I have met has asked the question and the ATO know and expect that one.

    Reno before you move out means no div 40 depreciation. After you move out may mean its not available to rent BUT is eligible for Div 40, Its one for some advice.
     
  13. timetoact

    timetoact Well-Known Member

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    I have done this.
    It is advisable to keep copies of power bills, internet, foxtel etc in your name at said address in order to prove that you in fact did reside at that address at the time you claim.

    I also had correspondence with my managing agent telling them the property would no longer be available for lease as I was moving in. Obviously this took some advance planning as notice must be given to tenants etc.

    As Terry says, there is no set time frame that you have to live in it, however the ATO does have rules about intentionally avoiding tax that they can use. So best not to get cute about it, live there for a reasonable stint.

    My accountant provided all the above detail to the ATO with the relevant tax return after I sold.
    Which I don't believe is necessary but it outlines the reasons for no CGT liability and I did not hear back from the ATO.
     
  14. Property101

    Property101 Well-Known Member

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    Hello..thanks for all the great info on this thread. I am hoping you might be able to help enlighten me on this situation.
    Claimed PPR....this residence needs either a full renovation or knock down rebuild.

    Move part time to investment property to also work there and access costs and attempt to renovate ppr. Had crippling accident couldn't drive for 2 months further putting project behind.
    Put a lot of money into PPR to discover really wasting time and money so then decide on complete knock down and rebuild to discover can no longer borrow money due to bank tightening up leading requirements.

    So problem discovered now is you cannot live in another building owned whilst renovating....hence losing ppr on property 1 and creating ppr on property 2...bringing in a much greater Land tax bill.

    But I have been informed if I had of stayed with friends etc...I would be still able to claim ppr on building 1 whilst doing work.
     
    Last edited: 4th Sep, 2018
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    See s118.150 re knockdown and build.
     
  16. Property101

    Property101 Well-Known Member

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    Thank You
     
  17. PKFFW

    PKFFW Well-Known Member

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    Firstly, my wife and I have no other properties which we could possibly claim the PPoR 6 exemption for.

    We bought our PPoR in 2010, lived in it until December 2013. Since moving to Dubbo in December 2013 we've been renting and are now contemplating selling our PPoR. (should have done it early last year but oh well) So I wanted to make sure my thinking was correct.

    If we go past the 6 year point then the cost base for CGT is reset to market value as at December 2013. For arguments sake lets say the following;

    2013 value: $650k
    2019 value: $900k
    Capital gain: $250k

    If we sell now we will pay no CGT because of the 6 year absence rule.

    Assuming we decide to keep the property for another 6 years and then sell we will have to pay CGT for whatever gain is achieved based on $650k.

    Now, personally I don't think it is likely the Sydney market is going to show much if any CG over the next 6 years.

    If that is the case we would end up in a situation where our CG is assessed as $250k, for which we have to pay tax on 50% of it (6 year exempt out of 12 years held as IP). So that's $125k CG of which the 50% exemption (held longer than 12 months applies). So tax is payable on $62.5K.

    So, if I am confident in my assessment of little to no capital gain potential over the next 6 years I we are going to be better off selling now and avoiding the tax. (even though it wont actually be much) Correct?
     
  18. Starbright

    Starbright Well-Known Member

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    @Terry_w if there are two periods of absence, with the first <6 years and the second >6 years, does the cost base get reset to the first period of absence or second period?
     
  19. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    See my tip on the 6 year rule when absent for longer than 6 years.
     
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    No.