Tax Tip 76: Calculating the Cost Base for CGT purposes.

Discussion in 'Accounting & Tax' started by Terry_w, 2nd Nov, 2015.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    The bloody ATO keep changing their links

    You can find it by going to their legal data base and searching for the ruling by the number.
     
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  2. Macfanboy

    Macfanboy New Member

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    Terry_W

    "There is a CGT property flowchart I have seen that includes approximately 50++ different steps to determining CGT profit for property."

    You can't just say this and not provide a link !!
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I don't recall seeing that now. Might have been in a book
     
  4. Macfanboy

    Macfanboy New Member

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  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The is a flowchart in the tax act. But it relies on a good understanding of tax law principles and terms and applying this to property issues. I have never seen something comprehensive a lay person could follow with any reliability. Such a flow chart would be massive and unlikely to fit on a basketball court eg How may the CGT main residence exemption apply ? What is the costbase ?

    And on a simple "property basis", What is a third element CGT cost ?

    I often find major defects in taxpayer understanding of how to calculate property capital gains.
     
  6. Macfanboy

    Macfanboy New Member

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    I agree it is a complex issue and most taxpayers don't come close to understanding it.

    My original background was in engineering and I built many complex flowcharts and appreciate the beauty of them to breakdown complex issues by simplifying them.

    Now that my occupation is tax-related, I have often thought of devising elegant ones to simplify some of the more complex issues.

    Yes, they couldn't be complete, because that would be just plain silly and enormous, but they could streamlined into basic yes/no principals and offers notes to acts/tax rulings that would assist.

    The purpose of a flowchart is to guide you through a series of questions, helping arrive at a better understanding and position.

    Unfortunately, they do require a lot of time to generate and test, etc.
    Maybe in a few more years when I have more time...
     
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  7. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Ahhh an engineer. Enough said.

    A checklist isnt as smart as a good tax adviser. Its one of the first things we teach newbs...Use your head not a form. Thats why its called tax advice and not tax facts. My greatest professional library is between my ears. And my mouth and hand. I can listen, interpret and advise clearly and explain the key elements. I will also check with supporting matters such as tax law, case law and other matters that support each position both for and against.

    Q : What does reside mean in a flow chart ? Or occupancy, Or absence Or re-occupy. Or the old chestnut - Emigrate. And how may that also interact with non-resident taxation v resident taxation ? A engineer says you get on a plane you are absent and non-resident. A tax adviser may suggest the absence is not yet permanent at that point. But it is triggered sometime later - maybe. A massive tax difference.
     
    Last edited: 15th Jan, 2020
  8. Macfanboy

    Macfanboy New Member

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    Was an engineer, now merely a Tax Agent for the past 10 years.

    Yes I know things aren't always black and white in Taxation, just different shades of gray...

    My brain still argues with the concept to this day..
     
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  9. shorty

    shorty Well-Known Member

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    Just wondering, does the CGT discount apply to a property that hasn't been used to produce income but is not a main residence? Like a second property that extended family lives in, land banking, etc.
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes
     
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  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    With the exception of non-residents the 50% GENERAL CGT discount applies to all CGT events and CGT assets where the asset interest has been owned for greater than 1 year. That said it can be lost or eroded..

    eg Eroded

    Fred has an accumulated CGT loss of $25,000. He produces a profit on his IP of $50K. The CGT flowchart contained in the act requires that the gain is FIRST reduced by available losses eg $50,000 less $25,000 = $25,000. Then provided that the gain relates to a discounted gain (yes) it is then halved. ie $12,500 is taxable.

    Many taxpayers think it works the other way eg $50,000 x 50% = 425,000 less the loss $25,000 = $0.

    eg Lost

    Fred has been non-resident since 2017 and retained his IP that he acquired the week prior to relocation to his new Irish home. He eventually sells the property. It is not eligible for the main residence exemption. The profit is $50,000. As a non-resident Fred obtains no general 50% discount on property based on the Rudd era stripping of this discount for non-residents after May . He is subject to tax on the whole profit. Fred is not happy. He says he is a citizen. This makes no difference. It is based on tax residency. Ironically his brother in-law moved from Ireland toAustralia in 2017 and sold his Irish former home in 2018 and was able to use the main residence exemption on Irish property so Fred is understandably unimpressed with Australia's tax laws.
     
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  12. Sgav

    Sgav Well-Known Member

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    Hi all, regarding calculating the cost base for CGT purposes, if a PPOR that has remained your primary residence and has exceeded the 6 year exempt from main residence rule (say you return after 7 years living interstate), is an evaluation of the new cost base required when the property was first rented out ? (year 1 of 7 you were away), or at the end of the 6 year exemption? (year 6 of 7 you were away). Example of timings below:

    2010 Jan - House purchased for $500k and Rented out for a year.
    2011 Jan - Move in to home (house valued $550k), becomes PPOR
    2013 Jan - move interstate for work, rent, house stays 'main residence' as per '6 year absent rule'
    2019 Jan - (house valued $900k)
    2020 Jan - move back to the home (house valued $1 million) still PPOR

    Is a cost base adjustment required? If so, is it Jan 2013 or Jan 2020?
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Since it was rented out before you lived in it there is no cost base reset
    apportionment method used.
     
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  14. DanM

    DanM New Member

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    Hi All,

    Question specific to item 5 - Capital expenditure you incur to preserve or defend your title rights to the asset.

    Does this include legal costs defending title to a property through separation / divorce. For instance, the property was purchased 12 months before marriage, no contribution was made from the partner, the marriage was short (less than 1 year). Can the court and legal fees to defend claim against the property be counted as part of the cost base?
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I would think no to that
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    but you should get some advice as the act doesn’t exclude family law challenges
     
  17. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    No. It is in a tax ruling. A matrimonial property settlement is relating to the marriage not the property. The division of assets is not a defence but a legal consequence. However there can be cases it could apply. It may then impact a costbase on disposal.
     
  18. Loverenting

    Loverenting Well-Known Member

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    Can I defer the loan interest deduction from any year's rent income (where my marginal income tax rate is low) to use it to increase the property cost base at selling (when the marginal income tax rate is higher, speculatively)?

    Thank you.
     
  19. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    there is a tax tip on this.
     
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  20. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes. However the value of doing this may halve since a discount gain is only taxed on half.
     
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