Our tax experts are on hand to answer any tax queries you may have regarding your property investments and wealth creation strategies. Email editor@yipmag.com.au
Q: I was hoping you could shed some light on our tax circumstances. My wife and I purchased Property A in 2010 in Victoria. The land title was under my wife's name only, but the loan and mortgage were in both our names.
The contract date was May 2010 and settlement date was November 2010.
The property was immediately rented out after settlement to the original vendor from November 2010 to November 2011, as the original vendor wished to lease the property back from us for a period of 12 months and it was a condition of the sale.
In December 2011, my wife and I moved in and then lived in the property as our principal place of residence until June 2013. In July 2013, we moved out as we had to temporarily relocate overseas to care of a sick parent. The house has been rented out from July 2013 until now.
We now want to transfer the land title from my wife's name to my name only. If we do this, will my wife be subject to CGT on the property transfer, or will we be able to claim the main residence exemption and/or the six-year rule and be fully exempted from CGT?
Between 2010 and now, my wife and I have not owned any other property. Our driver's licences are still showing Property A as our permanent address, and in our tax returns we have always listed Property A as our home address.
Upon our eventual return home, we will be moving back into and living in Property A. Your help and advice/ feedback are greatly appreciated.
Many thanks, Victor
A: Based on the information provided, it seems that it would not be possible to apply a full exemption under the main residence rules in this case, because the property was not established as your main
residence as soon as practicable after it was acquired.
Given that settlement occurred in November 2010 but you were unable to move into the property until December 2011, because the property was being rented back to the former owners during this period, the ATO’s view is likely to be that you did not establish the property as your main residence as soon as practicable after it was acquired.
However, you should be able to use the absence rule to continue treating the property as if it was your main residence from July 2013 (assuming the rental period does not extend beyond six years).
This means that you cannot apply a full exemption on the property and that the partial exemption will need to be calculated based on the number of days it was your main residence (or deemed to be your main residence under the absence rule) over the ownership period, and using the original purchase price to determine the cost base of the property
“Because the property was being rented back to the former owners … the ATO’s view is likely to be that you did not establish the property as your main residence as soon as practicable”
- David Shaw
Q: I have been a non-resident since 1995. In June 2013, I decided to return to Australia. At that time I purchased a house with the intention of making it my main residence. In July 2013, I was offered another position abroad and accepted, so I rented the house out.
Due to issues with tenants, I have decided to let my university student children live in the house from July 2016 and spend more time there myself when I'm on holiday.
My question is, does the classification of my house change from investment property to main residence once I am no longer receiving rent? Am I able to claim it as my principal residence in Australia, as I have no other houses in Australia?
Thanks, Stephen
A: Based on the facts you have provided, it would appear that the property in question was never your main residence for capital gains tax (CGT) purposes from the time you bought it to when your tenants vacated and the property was no longer available for rent.
Strictly speaking, whether or not the property became your main residence after it was no longer available for rent will depend on whether the property became your primary home and whether you owned any other property that was your main residence in Australia or anywhere else in the world.
If the property never became your primary home, which is a question of fact(eg have you been using the property as your main dwelling? Have you moved your personal effects into the property? Have you designated a bedroom in the property where you sleep?), the property would not have been covered by the main residence exemption even though it was no longer available for rent.
In other words, it will still be subject to full capital gains tax if the property is sold and you make a capital gain on the sale. However, you are allowed to include certain non-deductible expenses you incur on the property in the cost base for calculating your CGT liability.
If the property did become your main residence (ie you moved in and lived there with your children and it was clear that you were not just staying there for a short time as temporary accommodation) and you were not using any other property as your main residence in Australia or anywhere else in the world, then the property would have been considered your main residence when you moved in, and would have been covered by the main residence exemption from that point on.
Therefore, if you sell the property in the future and make a capital gain, the capital gain can be apportioned to exclude the period during which the property was your main residence. Once you have established the dwelling as your main residence and if you subsequently decide to move out, there are complex rules that may allow you to continue to treat it as your main residence for CGT purposes in some circumstances.
What is missing from the facts given is whether you have resumed your tax residency status in Australia, and, if so, at what point did that happen. Logically, if the property became your main residence, it would have been expected that you would resume your tax residency status in Australia. Assuming that you were a non-resident for Australian tax purposes when you bought the property, and subsequently resumed your tax residency status in Australia, your entitlement to any 50% CGT discount on the future sale of the property would also need to be apportioned, as the CGT discount is not available while you are a non-resident.
As is common with many tax issues, a seemingly simple situation may actually contains a few ‘shades of grey’ when you start analysing the tax implications, so it is strongly recommended that you seek professional advice from your trusted property tax advisor.
“A seemingly simple situation may actually contains a few ‘shades of grey’ when you start analysing the tax implications”
- Eddie Chung
Q: I have two properties: an investment property that I built and an existing home that I live in.
By July 2017, I will have owned my investment property for two years, and at that stage I am planning to move into it as my own home.
I paid $750,000 for the land and construction costs. I have no plans at the moment to sell this property, unless my job situation changes.
At the same time, I am planning to convert my current existing residence into an investment property. I owe $350,000 on the loan and the median price of houses in the area is $550,000–$575,000. Can we maximise the loan on this property by refinancing so that I can gain negative gearing benefits as well?
Overall, what are the tax implications of what I am planning to do? Can you please advise of any CGT implications or other issues to do with tax?
Best regards, Madhav
A: As soon as you convert your current existing residence into an investment property, and provided it is available for rent and for income-producing purposes, the current debt of $350,000 converts to an investment debt. (Note that an investment property can also be a property that you decide to keep vacant, which therefore generally precludes you from negatively gearing the property for tax purposes in this instance.)
The interest expense on your loan, which is now an investment debt, can be tax deductible, as well as the other additional outgoings of the property, such as council rates, maintenance, real estate agent fees, insurance and depreciation for income tax purposes.
If you maximise and increase the current debt over and above $350,000, then the question becomes: what is the purpose of increasing the loan?
If there is a legitimate investment reason as to why you wish to increase the current loan (for example, you wish to borrow additional funds for repairs to the investment property and/or to renovate the investment property), then you may be eligible to claim the additional interest expense as a tax deduction for income tax purposes.
If there is no investment purpose for increasing the debt, then you will not be allowed to claim the additional interest expense as an income tax deduction. Merely increasing the debt because your property has now increased in value and gained equity is not an investment purpose, and therefore you will be unable to claim the additional interest expense as an income tax deduction.
Be mindful that if the dominant purpose of doing something is to obtain a tax benefit, then Part IVA of the Tax Act will disallow you from claiming such costs as income tax deductions – and the ATO will also impose substantial fines and penalties as well.
Furthermore, there are potential capital gains tax (CGT) considerations to bear in mind, in that from the moment you convert your current principal place of residence (PPOR) to an investment property, it then becomes subject to CGT if you sell it in the future.
Provided this property is held in your own individual name and was never used for income-producing purposes in the past, then the period prior to this should be CGT-free.
Similarly, your current investment property will be subject to CGT up until the moment you move into this property as your new PPOR. However, post this date it should be CGT-free.
“Be mindful that if the dominant purpose of doing something is to obtain a tax benefit, then Part IVA of the Tax Act will disallow you from claiming such costs as income tax deductions – and the ATO will also impose substantial fines and penalties”
- Angelo Panagopoulos
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