Tax Q&A: What Will The New CGT Impacts Be?
Q: My wife and I purchased a property in Melbourne in December 2010 as our PPOR, but due to a change in circumstances we left Australia in June 2011 to live overseas again. We have rented the property since then. It was the only property we considered our principal place of residence in Australia.
We understand that if we sell the property before June 2017 it would allow us to invoke the capital gains tax exemption, as six years have passed without us buying another PPOR. Is this correct?
Alternatively, if we retain the property for two years beyond June 2017 (to June 2019), what will the CGT impact be? Will we pay CGT on the gain since December 2010, or only on the gain since June 2017 (assuming we get a valuation in June 2017)?
A: As a general rule, a dwelling is no longer your main residence once you stop living in it. However, you can choose to continue treating a dwelling as your main residence for capital gains tax (CGT) purposes even though you no longer live in it.
“Because you would have held the property for more than 12 months you would be eligible for the 50% CGT discount”
Generally, you can treat the dwelling as your main residence for up to six years if it is used to produce income, and/or indefinitely if it is not used to produce income.
That said, for the above CGT exemptions to apply, you cannot treat any other dwelling as your main residence for that period (this also means that you cannot own property overseas as your main residence), and the property must not be owned/held in a company or trust structure as it must be owned/held in personal individual name(s).
You also cannot make this choice for a period before your dwelling first becomes your main residence.
Therefore, based on your situation, if you were to sell the property before June 2017 (please also note that for CGT purposes the sale is applicable from contract date and not settlement date), then you would be eligible to apply the CGT main residence the CGT main residence exemption based on the six-year rule up to June 2017, and then for the period June 2017 to June 2019 you will be assessed for CGT.
Because you would have held the property for more than 12 months you would be eligible for the CGT 50% discount concession. You would also be required to obtain a valuation of the property as at June 2017.
For example, if the property is valued at $1m in June 2017 and sold for $1.6m in June 2019, then the capital gain for this period is $600,000, and applying the CGT 50% discount you would be assessed for capital gains tax on $300,000 of this amount. Income tax would be applied at your marginal income tax rates.
Need to know
• You can only treat one dwelling as your main residence at any given time.
• Generally, you can treat the dwelling as your main residence for up to six years after moving out and renting it.
• To use the six-year rule the property must not be owned/held in a company or trust.
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