Tax-free property
It has come to the attention of inTAX that large numbers of tax
agents are failing to claim the 'double dip' tax benefits to
people selling properties which have been used at various times as a
home and as an investment property. While almost everyone is aware
of the CGT time-based pro-rata concession, many are not aware that
the six-year main residence exemption ('absence' rule) and
a simultaneous cost base uplift apply to property which becomes
income producing after 20 August 1996.
Double dip benefit
If a person
rents out their home after 20 August 1996, under the 'absence'
rule the person can choose to continue to treat the home as their
main residence while it is being rented for a maximum of six
years.
This is provided that the taxpayer does not treat any other property
as their main residence during this period.
In addition
to this, the taxpayer can simultaneously apply section 118-192,
which deems the taxpayer to have acquired the home for its market
value on the day when the property was first used to produce
assessable income. This provides a huge tax benefit for homes that
have been rented for more than six years (by way of a cost base
uplift to market value of the property from the date it was rented).
A home
advantage
For example,
Jerry purchased an apartment in Perth in 1990 for $150,000 that he
lived in from the date of purchase until he rented it out on 15
December 1996. The market value of the apartment at that time was
$250,000. From that date Jerry moved to Brisbane to work, and he
rented a house there to live in. Jerry now wants to stay in Brisbane
and sells his apartment in Perth for $325,000 on 15 December 2006.
What is
the capital gain or loss on the sale of the Perth apartment?
Jerry will be
taken to have acquired the apartment in Perth for its market value
of $250,000 on 15 December 1996 (the date that the property was
first used for income producing purposes) as he satisfies the
following three conditions for the partial exemption rule under
section 118-192(1) (per ATO ID 2004/950):
-
Jerry
rented the apartment in Perth for more than six years (and he
does not have any other property which is his main residence);
-
he
started renting the apartment after 20 August 1996; and
-
he would
have been entitled to the full main residence exemption if he
had sold the apartment just before he rented it out.
Jerry must
satisfy all three conditions above to be entitled to use the market
value cost base uplift in calculating the capital gain or loss on
the sale of the apartment.
When Jerry
sells the apartment, the taxable capital gain or loss will be
calculated as follows:
| Consideration |
325,000 |
| Less:
Market value cost base of the apartment at 15 December 1996 |
250,000 |
| Capital
gain/loss |
75,000 |
| The
capital gain is then pro-rated: |
|
Capital
gain/loss × Non-main residence days*
Days
of ownership**
|
|
=
$75,000 × 1,461
3,652 |
|
| =
$30,004 |
|
* (15 December 2002 to 15
December 2006)
** (15 December 1996 to 15 December 2006)
Then Jerry can apply the 50% CGT discount. Hence
the capital gain on the sale of the Perth apartment will be $15,002.
Determining
market value
To
determine the market value of the apartment for CGT purposes,
Taxation Determination TD 10 states that Jerry can choose to:
This
is an excerpt from an article that appeared in Thomson's InTax
magazine (December 2006); Australia's best independent monthly tax
magazine. It provides concise reports of the latest tax news, plus
the practical implications of tax developments in an easy-to-read
magazine format. To find out more, phone Thomson Customer
Service on 1300 304 197 or click
here.
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