Tax Q&A: Are there any CGT exemptions for previous settlements?

Q: I bought a property with my partner under 50/50 ownership in April 2010. We lived in it together until April 2013, when we broke up. At around this time I took on full ownership of the property as part of our separation, and I rented it out. It was rented out for the first time in May 2013 and has been rented out until the present day.

I separated from my partner and settled the property (so that I now own 100%) on 10 June 2013.

My question is: are there any CGT implications for the settlement that occurred in 2013, when I became the sole owner of the property?

I have lived in a rented property ever since. What would be my capital gains tax obligations if I sold this property in 2019 or 2020?

Many thanks, Kristie

A: Capital gains tax (CGT) applies when a CGT event (usually a sale at contract date) occurs.

You may be able to claim an exemption from CGT for a period of up to six years on a property that has been your principal place of residence (PPOR). The CGT main residence exemption is most often calculated based on the number of eligible exempt days relative to total days held.

If you sell the property after six years of rental, you are considered to have acquired the dwelling at its market value at the time you first used it to produce income, if all of the following conditions apply:

• You acquired the dwelling on or after 20 September 1985
• You first used the dwelling to produce income after 20 August 1996
• At the time of the sale, you would get only a partial exemption, because you used the dwelling to produce assessable income during the period you owned it, and
• You would have been entitled to a full exemption if the sale happened to the dwelling immediately before you fi rst used it to produce income.

You must therefore calculate your capital gain or loss using the market value of the dwelling at the time you fi rst used it to produce income. You cannot choose to calculate the gain on any other basis. Follow these steps:

a. Determine your proceeds of sale

b. Determine your cost base, being the market value when first rented plus any additional costs like selling agent’s fees and legal fees

c. Calculate your notional capital gain: a – b = c

d. Calculate your non-resident days – but include the fi rst six years absent as resident days. For instance, if you sell the property seven years after moving out, then the fi rst six years would be included as ‘resident’ days. Only the fi nal, seventh year (365 days) is calculated as non-resident days.

e. Calculate the total days from the first day rented, eg in your case this might be 10 years = 3,650 days.

f. Calculate your % = d / e (eg 365/3,650).

g. Calculate your total capital gain = f (%). In this example, it is 10%. You would then multiply the value at ‘c’ by 10%, resulting in your notional capital gain.

h. Finally, apply the general CGT discount of 50% if the asset has been held for longer than 12 months.

You must calculate your capital gain or loss using the market value of the dwelling at the time you fi rst used it to produce income

Keep in mind that when you claim CGT relief on this property, you cannot claim any other property as your PPOR for the same period of time, except for a limited time; refer to the six-month rule.

Need to know

• The main residence exemption is typically based on eligible exempt days as a proportion of total days the property is held.
• If a property is sold after six years of renting it out, the cost base is calculated as the dwelling’s value when it was first rented out.
• No other property can be claimed as your PPOR during that six-year period to gain exemption.

Janelle Bartlett

is partner at Chan & Naylor

Redlands