When Your Former Home First Produces Income

Discussion in 'Accounting & Tax' started by Paul@PAS, 29th Nov, 2016.

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  1. Paul@PAS

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

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    s118-192 ITAA97 contains the requirement that a former main residence has its costbase reset to market value when it first produces assessable income. This rule appears to be compulsory.

    However there is a class of taxpayer who may hate this rule. Think of a taxpayer who owns a home in an area of Australia experiencing a property downturn. ie a regional mining town, Perth perhaps, Shepparton or other fruit districts etc...If they purchased their property for more than its current value and they are made redundant and then forced to relocate for work they may affected by s118-192, adversely. Their cost base subject to CGT may be less than the actual cost of the property !!. This can result in more tax at some time than would otherwise occur.

    This absurdity seems very unfair and harms those who are often vulnerable. Their property has lost value, they lose their job, may be unable to sell without taking a massive loss and are FORCED to relocate and now they have a potential to pay more CGT than would otherwise occur if they had never lived in the property. They may end up paying what appears to be tax on some of the value while they lived in the property. Unfair. UnAustralian. This law shouldnt exist. The law should be rewritten so that the costbase cannot be lower than the costbase under normal principles. Higher, sure, but never lower.

    Many will advise that s118-192 is a requirement. You cannot opt out. I dont agree. There is a loophole.

    s118-192(1)b. contains a condition that may apply to some. That is that the property was always your exempt main residence home up until it first earns income. The following steps may assist to avoid s118-192 sometimes.
    1. Move from the former home. DO NOT RENT THE HOUSE OUT
    2. Occupy another property that you, or your spouse, own for TWO days or more
    3. Then commence to make the former home available to rent.

    This critical process will ensure that the condition is s118-192(1)b. is not met and mean the market value rule (The Special Rule) cannot be used. This requires that a CGT period of at least one day applies to the former home. This means that the proportioning rule must be used instead and that the costbase will be the higher actual costbase reflecting the purchase price, duty, legals and other CGT cost elements.

    Why did I say TWO days ? One day may be ambiguous. Two days avoids the issue.
    Tip : Dont engage a local agent to rent out the former home until the passage of those two days.

    When does this process not operate ?
    When the taxpayers do not have another CGT residence to move into. The six year absence rule would then apply.The six year absence rule can also leave a higher CGT issue later. I wont dwell on that point here. It is important that the residence moved into is owned by ANY one of the taxpayers. Tax advice on the specific consequences of this and how it affects a main residence should be obtained but both taxpayers do NOT need to own the new residence. Just one of them. It may also be possible in some states to effect a transfer to joint names without paying duty eg NSW / VIC. This may even open opportunity to refresh the cost base on the new home....Higher / Lower as the case may be. Perhaps even the opposite of the former home ?

    Could Part IVA operate to deny this arrangement as a scheme ?
    Compliance with tax law does not give rise to Part IVA concerns. This arrangement merely allows a taxpayer to elect how to most efficiently expose themselves to tax. In the absence of a ruling on this issue I would not consider Part IVA could apply.
     
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  2. Rob G

    Rob G Well-Known Member

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    Or rent out a room at some time in the period prior to vacating.

    Or use part of the premises as a place of business in the period prior to vacating.

    In both cases, make sure it is again 100% your PPOR immediately prior to vacating if you are going to rely on the absence rule.
     
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  3. Paul@PAS

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

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    Excellent ideas. I would think that AibBnB could also be a strategy. Take a weekend away before vacating ? Then back home and move out.

    Of course its not possible to treat your home as if it has been a place of business for merely one day. That argument may be very difficult to run.
     
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