Tax Q&A: Your Tax Questions On Property Investment Education – CGT, Answered
Q: Here is my scenario: I have an owner-occupied property that settled in July 2015.
In September 2015 a tenancy agreement was made to rent out 75% of the property to other family members. That tenancy agreement is still in place. As of July 2016, I am still living in the property and plan to keep the tenancy structure the same for some time.
Is the CGT exemption still valid as it has still been my principal place of residence for the 12-month period? For the 2015/16 financial year is it still tax deductible based on the 75% apportioning?
A: For capital gains tax (CGT) purposes, the applicable date is the contract date, not the settlement date.
Assuming you purchased your principal place of residence in your individual name with a three-month settlement, the contract date would have therefore been April 2015. This is important from a CGT perspective.
To be eligible for the full CGT exemption on your principal place of residence you will need to satisfy a few criteria, with the main ones being that the property must be in your own individual name(s); must not be used for income-producing purposes; and you must not nominate any other dwelling as your principal place of residence during this period.
That is, you can’t nominate more than one dwelling at a time as your principal place of residence.
There are two elements to this question, firstly the tax deductions that you are eligible to claim, and secondly the CGT considerations.
As you are using 75% of the property for income-producing purposes, you are eligible to claim 75% of all the total outgoings of the property, which includes but is not limited to interest on the loan, council and water rates, insurance, repairs and maintenance and depreciation.
However, as you are renting your property to other family members, you must charge them rent at the full market rate, on an arm’s length basis. You must ensure that you actually receive the funds and declare this as assessable income in your tax return, otherwise the amount of tax deductions that you will be eligible to claim will be reduced to below 75% of the outgoings of the property.
In relation to CGT, for the period between April 2015 and August 2015 (being the contract date to the end of August 2015, when you weren’t using the property for income-producing purposes), you will be eligible for the full CGT exemption, therefore CGT will not apply.
However, from September 2015 until the period when your property ceases to be used for income-producing purposes (whether rented to family members or otherwise), your CGT exemption will be reduced to 25% of the capital gain if you sell the property in the future.
For example, if you sold the property and the capital gain from September 2015 was $200,000, then the taxable capital gain would be $150,000 (being 75% of $200,000), and as you have held the property for more than 12 months then you would be eligible for the 50% CGT discount concession, which would then reduce your taxable capital gain to $75,000 (being 50% of $150,000).
The actual CGT would be $75,000 added to your other overall assessable income multiplied by your marginal rate of income tax – and say this was 37% plus 2% Medicare Levy, the tax payable on this capital gain would be $29,250 (being 39% of $75,000).
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