Tax Tip 485: The Main Residence for CGT might not be the PPOR for Land Tax

Please note that the 6 year rule for CGT is different to the 6 year rule for land tax.

For CGT the main residence might be exempt from CGT even while you are renting it out. But that doesn’t mean the property will be exempt from land tax as it may not be your PPOR.


Example

Homer owns a property in NSW and it is his main residence for CGT purposes and his PPOR for land tax purposes. It is exempt from both CGT and land tax.



Homer then goes and rents a new property and moves into it. Homer could continue to tread the first property as his main residence for CGT. But he is unable to treat it as his PPOR for land tax purposes because it is income producing.



The property he owns is his main residence but not his PPOR!

It is exempt from CGT but not land tax.



On the NSW 6 year rule for land tax see my tip
Tax Tip 479: The 6 Year Rule for Land Tax NSW Tax Tip 479: The 6 Year Rule for Land Tax NSW

 

Land tax can also allow exemption for a property INTENDED as a future PPOR (under construct usually) where the main residence exemption usually requires initial occupancy. The main residence exemption doesnt allow for intentions.

BUT Tax law has one exception for renovated / constructed new residences. s118.150 allows a main residence exemption to backdate up to 4 years if some basic conditions are met after its completed. BUT
1. That backdating cant overlap another main residence or a period of non-residency as a taxpayer usually
2. Subject to diffferent names too. Eg spouse name

Then there is s118.140 which allows a dual main residence exemption in limited cases of no more than 6 months. Generally you must move out of one and into a new residence and then sell the old one. So lets assume Dave and Mabel move out of old home that is up for sale. Then move into new home. Old home sells 5 months later for double its expected price. That further gain is exempt AND their new home is also exempt from day one.

A further land tax issues can be satisfying the initial rules for exemption. Legal advice may sometimes be needed. eg Owners can be exempt from basic land tax on their own home but a joint foreign purchaser could still be subject to land tax surcharge on their portion of the home in some states eg NSW.

It can be confusing. Basic tax advice may avoid assumptions being incorrect. For land tax (PPOR) carefully consider each specific state law and its exemptions. Many are not automatic and must be applied for.

 

A main residence also may not be a exempt main residence.
A PPOR may not necessarily be a PPOR in the eyes of the Commisisoner of State Revenue.

A single example may indicate this issue. It is based on a client experience.
Mr X and Ms Y meet as a mature couple. They each have a home. It is both their main residence and PPOR. They decide aftre a period of time to live together but maintain their respective homes. They are not spouses at that time. However they may be if they mutually co-habitate etc. This poses no major concerns. However at some point Mr X decides he will mostly live at Ms Ys home and she finds this arrangement suitable. They are not married each preferring not to marry. This continues for 2 years.
Later the Commisisoner of State Revenue uses Service NSW data that indicates MrX has a license, rego and other matters which feature Ms Y address. He asks questions.
1. Mr X home may not longer be his PPOR and be liable for land tax. The OSR seeks to assess arrears
2. Mr X may even have a possible issue with where his main residence is. Yes he can use the 6 year absence rule. However... Ms Y home is where they each live. The ATO considers the family rule which applies to spouses.

Both the OSR and ATO may conclude Mr X is absent from his main residence/PPOR. He resides at Ms Y home which is his PRINCIPAL place of residence and also his main residence. Each of them are affected by this reality so that Mr X cant elect to have a PPOR where he doesnt live. The family rule applies for both land tax and also CGT. State tax law is not forgiving and there is no choice and the test considers the taxing date of 31 December. Mr X predominantly resides with Ms Y so her home is exempt for land tax. Mr X is assessed for land tax and arrears. His harbour front home is worth much much more. He objects. It is refused. Ms Y and Ms X later must consider how CGT laws work. While then reside together they may have a mutual decision to consider:

They may elect :
1. Ms Y home is their actual main residence. Ms Y may enjoy a 100% CGT exemption IF they mutually agree or.
2. Mr X may use the absence rule allowing him a 50% CGT exemption for his former home and Ms Y enjoys a 50% exemption as well for her property. However this may last only up to 6 years if Mr X rents his home or may be unlimited if its kept vacant.
They could move into Mr X's home but then Ms Ys home is affected. BUT they cant choose this unless they make that physical movement as a main residence (or PPOR) cant be intended or chosen. It may only be based on fact.

s118-170 ITAA97 and NSW Land Tax laws are different but sometimes equally as cruel.