19/06/2008
Q. I bought a property in October 2003 and rented it out for 11 months before moving into it myself in September 2004. I am thinking of moving and renting it out again. What are the CGT implications when I do sell the property, which will probably be within the next two years?
A. The disposal of any land or building attracts capital gains tax (CGT). You make a capital gain if you dispose of a CGT asset and the capital proceeds exceed the asset’s cost base.
The property in question would be a CGT asset, as defined by tax law.
The first question to be resolved is whether a capital gain has arisen following the disposal of the property. This means, will the sale price exceed the cost base of the property? If no capital gain has in fact been made, then you may not have to go any further for the purposes of calculating any liability in relation to the disposal of the property.
For example, if your property cost $150,000 and expenses such as stamp duty increased your cost base to $170,000, and you then sold the property for $160,000, you have experienced a capital loss of $10,000.If a capital loss is made, you may wish to calculate the loss so that it may be offset against a capital gain from another asset, or offset it against capital gains derived in future years. However, if a capital gain is made, then as a consequence of the property being your main residence for a period, tax law (Subdivision 118-B of the Income Tax Assessment Act 1997) applies.
Section 118-110 provides that you can disregard any capital gain or loss you make from the disposal of a CGT asset if you are an individual and the dwelling was your main residence throughout the period of ownership. In other words, if the property was your principal place of residence, you are exempt from paying CGT.
In this case, where we have a mixture of main residence occupancy and income producing periods, section 118-185(2) provides a formula for calculating the capital gain or loss. This formula applies the proportion of non-main residence days over total days of ownership to the capital gain or loss.
The ownership period is the total length of time that the property has been owned.
Non-main residence days refer to the number of days that you owned the property and it was not your main residence. In this case, this would be the first 11 months of ownership when the property was rented to tenants, and any further period that you wish to rent out the property.
In determining the number of non-main residence days, the taxpayer may wish to take advantage of the ‘absence provision’ contained in section 118-145. The section provides that if you cease using a dwelling as your main residence and use the dwelling for income producing purposes, you may treat it as your main residence for up to six years from the date it ceased being your main residence.
Therefore, in this case, you could rent it out for a period of up to six years from today (or the date upon which you cease to use the property as your primary place of residence), and you would not attract CGT liability for that portion of time. The non-main residence days in the above formula would then only be the days in the initial period, being October 2003 to September 2004.
Note, you may only have one main residence at any one period. If you use the absence provision for your current property, you will not be eligible to receive the main residence exemption for any other properties you own during this period.
The experts
Greg Clough
is a mortgage broker and CEO of Onyx Home Loans, a privately-owned mortgage originator retailing its own brand of home loan products. Visit: www.onyxfinance.com.au
Margaret Lomas
is the founder of Destiny Financial Solutions, a qualified financial advisor and the author of five bestselling property investment books. She is the 2006 Telstra NSW Businesswoman of the Year. Visit: www.destiny.net.au
Christopher Battern
is a tax specialist and the CEO of InvestorOne.com.au, a web portal that provides tools for investors and small business owners to help them navigate the challenges of investing, developing, acquiring property and running a self managed superfund. Visit: www.investorone.com.au
