Capital Gains Tax On Property Sales – The Basics
When Is A Dwelling Exempt From CGT?
A property first established as a Main Residence (MR) immediately after acquisition will be exempt from capital gains tax (CGT) when sold at a profit.
While ATO mentions 3 months of occupation, 6 months is required for the Home Owner’s Grant. Our opinion is 12 months or more is preferable.
Establishing The Property As A Main Residence
Establishing the property as a MR requires the property to be occupied after settlement including moving the family and furniture. Other indicators include enrolling on the electoral roll for that electorate.
ATO also looks for connecting services such as telephone, power and gas. Having the mail directed to that address is another of the indicators of establishing the property as the MR.
Where it is not possible to move in due to tenants continuing to lease the property, then on sale partial CGT may apply.
Extending The Mr Exemption From CGT – 6 year absence rule
The MR can continue to be exempt while nominated as the MR for another 6 years while rented. So if sold within those 6 years it will be exempt from CGT.
Where the property is ‘re-established’ as the MR before the expiry of the 6 years, then an additional 6 year extension may be possible
If sold after the 6 years, those 6 years will be considered exempt portion.
The condition is that no other property can be nominated as the main residence.
When Is A Dwelling Subject To CGT?
Where a property is first established as a rental it will be liable to CGT when sold at a profit/gain.
Capital Gain on Land, holiday houses and other property not generating income is also subject to tax.
CGT is payable regardless of how the proceeds of sale are used and regardless of what loan is outstanding at the time of sale
How Is CGT Calculated?
CG is calculated as the difference between the sale price and the cost base.
For CGT purposes, the cost base will include the purchase price, stamp duty, legal fees on purchase and sale as well as agent commission on sale. Renovation costs will also add to the cost base. Renovation costs will also add to the cost base
For land and other non-income generating property purchased after 1991, the cost base will also include interest, rates and another maintenance costs. For situations where a property was used both as a rental and a Main Residence then the interest and rates incurred during the MR period will add to the cost base, reducing the capital gain
Where it was first established as a MR the cost base of the property will be the market value when first rented.
What Is The Major Concession For CGT?
A concession is available where a property is held for longer than 12 months – 50% discount on capital gain – only 50% is assessable. This amount would be included on the income tax return for the financial year when the sale occurred.
The 50% discount concession for non-residents has been abolished since May 2012
On Audit, ATO will review the situation in hindsight. Where they determine the facts show that the intention was that the property was always intended as a rental investment that is how it will be treated for CGT purposes
More Than One Owner
Where a property is owned by more than one person, CGT is split between them based on title. If either person has no other income in the year in which the tax is derived then CGT will be lower.
Depending on how it was first established, CG calculated may need to be apportioned between the periods the property was occupied as a MR and period it was a rental investment
Transfers Of Property
The above will apply regardless of whether or not the property is transferred to a relative e.g. daughter i.e. CGT will payable by the vendor
Also Stamp duty may be payable. See OSR of NSW for rates http://www.osr.nsw.gov.au/taxes/transfer-land/about
Regardless of whether or not money changes hands, the market value is considered the sale value.
Market value can be determined by a valuer.
Other costs of transfer is conveyancing/legal fees.
Where the MR was purchased in an overseas location the same principles will apply.
Where the taxpayers were non-residents for tax purposes at the time, the main difference is that where the property was an investment property its cost base will be the market value when the taxpayers became residents of Australia for tax purposes.