All Topics / Help Needed! / Capital Gains Tax – My $60k Mistake??

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  • Profile photo of brunowabrunowa
    Participant
    @brunowa
    Join Date: 2008
    Post Count: 27

    Hi there,

    I have a quick question about capital gains tax and the exemption you can get if you move out of your main residence (and rent it) and then sell it within 6 years.

    In 2010, I was a first home-buyer and I bought a unit that already had tenants in it. They had 3 months left on the lease and I was living with my parents so I figured that’s fine – they can complete their lease. My intention was to always make it my main residence and I got the first-home owners grant because I moved in within 6 months and it became my main residence.

    After a year of living in it, I went to work overseas in London and then came home two years later and decided to just live at my parents place to save some money.

    However, now I plan to sell it and apparently I can’t claim the Capital Gains Tax Exemption because it was initially leased out for 3 months before I moved in. Ultimately, this is a 60k mistake. I had no idea at the time that I had to kick out the tenants and move straight in. I was just doing the best thing by the tenants and letting them finish their lease.

    Is there any way to claim the Capital Gains Tax Exemption in this situation? It seems highly unfair that I can’t, considering I was a first home-buyer and living with parents and the ATO knows it was intended to be my main residence because I moved in within 6 months and got the first home-owners grant.

    Any help would be greatly appreciated!

    • This topic was modified 6 years, 6 months ago by Profile photo of brunowa brunowa.
    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    That is not correct. You can claim a partial exemption. s118-192 ITAA97 from memory.

    Also any expenses you have not otherwise claimed can be used to reduce the CGT, including interest while you were living there.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of brunowabrunowa
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    @brunowa
    Join Date: 2008
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    Hi Terry, thanks for reply.

    Yes, my accountant said I can claim a partial exemption for the 1 year that I lived in it but that is it… I can’t claim the time I was over in London or afterwards. Whereas if I moved in straight away I would be 100% Capital Gains Tax Exempt for the full ownership period.

    Profile photo of TerrywTerryw
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    @terryw
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    That is not correct. tell your accountant to look at s118-145. Initial period it can’t be your main residece, but once you had lived in it you could still claim it as the main residence for up to a 6 year absence.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of BuyersAgentBuyersAgent
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    @knightm
    Join Date: 2005
    Post Count: 338

    You need a new accountant. See Terry’s post above.

    BuyersAgent | Precium
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    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi Brunowa,
    I bet you are delighted that you asked on forum eh? There are so many of these little traps that “the average Joe” leaves to their professionals. If accountants got it wrong, how would you have known? I’m glad you thought to get a second opinion.

    As you said, it didn’t sound right, and could have cost you dearly. But now it won’t – and you should reach around and pat yourself on the back for “double-checking”, rather than just accepting that “my accountant knows best”.

    Well done champ, :)
    Benny

    Profile photo of brunowabrunowa
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    @brunowa
    Join Date: 2008
    Post Count: 27

    Thanks all.

    I’m still confused though. Based on the clause that Terry mentioned, does that mean I should only be paying CGT on that initial 3 months where there was a tenant from the lease rolled over from the previous owner? Even though it was rented out again after I had lived in it for a year?

    • This reply was modified 6 years, 6 months ago by Profile photo of brunowa brunowa.
    Profile photo of TerrywTerryw
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    @terryw
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    If you were absent for more than 6 years there may be some more CGT to pay, but it shouldn’t be as much as you expected.

    Don’t forget the s110-25 costs you can claim

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of Jacqui MiddletonJacqui Middleton
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    @jacm
    Join Date: 2009
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    This is a great thread. A dilemma that is not uncommon, so I think it will be re-read by plenty of folks sifting for answers in the future. Great straight-to-the-point answers from Terry also :)

    Jacqui Middleton | Middleton Buyers Advocates
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    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of jaredjared
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    @waxie
    Join Date: 2015
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    Wow this is a great thread to have read, Helps me alot. Thanks Guys

    Profile photo of BennyBenny
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    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi Bruno,
    I just noticed that your last question did not seem to get answered :-

    I’m still confused though. Based on the clause that Terry mentioned, does that mean I should only be paying CGT on that initial 3 months where there was a tenant from the lease rolled over from the previous owner? Even though it was rented out again after I had lived in it for a year?

    Though I am not an accredited adviser, I believe the answer to Bruno’s question is “Yes”!

    I believe it is CGT exempt from the moment he moved in, AND for the years that he was in London as
    (a) he had made it his PPOR by living in it, and
    (b) while living in London he had made no other property his PPOR, and
    (c) On returning, he moved back in with his folks, so not claiming another property as PPOR either.

    On that basis I believe his property is CGT exempt for up to 6 years after he moved out of it to go to London.

    I am NOT sure whether it can be CGT exempt while it was still leased (before he moved into it). Since his intent was to make it his PPOR, and he moved in as soon as practicable, I would not be surprised to hear that it is CGT exempt for the whole time since purchase. (It passes the “reasonable man” test for mine…)

    But I will leave that question for Terry and the other advisers who are qualified in this area.

    Benny

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
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    If you rented it out for 3 months and it was then your main residence, including any absence where you are still claiming it as the main reisdence then you can use the formula at s118-185 ITAA97

    http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.185.html

    CG x non main residence days/ days owned

    (i had the wrong section above – s118-192 is for moving out of a main residence and renting)

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of BennyBenny
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    @benny
    Join Date: 2002
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    Thanks Terry. Always good to get clarification from those who KNOW !!

    So, for Bruno (and interested others) I want to flesh out the likely situation and maybe determine what amount Bruno ended up paying in CGT.

    First, the title says he was looking at a $60k mistake – from that, I infer that he was looking at having to pay that much to the ATO. Wow !! That is a big gain – how could that be?

    Let me assume that Bruno earns money at the top marginal rate – let’s say 50% for ease. So, that means he has made a Taxable gain of $120k, or a Nett Gain of $240k over those 5 years with the 50% discount. Near enough?

    OK, but now, with Terry’s help, we know that the actual Taxable gain is calculated by dividing 90 days by total days owned. Bruno is talking around 5 years, but could be as short as 4 years. So let’s say 1500 days (about 4 years) and calculate CGT from that.

    Nett Gain was still $240k, but then take 50% off as a discount for holding it more than 12 months. So $120k is Taxable Gain, but then take 90/1500 of that to get $7200 Taxable Gain. Bruno would then (at top Marginal Tax Rate) pay 50% of that, so $3600.

    WAY better than the $60k he was initially looking at, wouldn’t you say?

    Benny

    Profile photo of TerrywTerryw
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    @terryw
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    Or to put it another way, Bruno’s accountant almost cost him $56,000 on top of his other fees.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of BuyersAgentBuyersAgent
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    @knightm
    Join Date: 2005
    Post Count: 338

    Or to put it another way, Bruno’s accountant almost cost him $56,000 on top of his other fees.

    I hate to think how many times this happens @terryw! Imagine if the forum distributed dividends for all good advice leading to savings made or costs avoided???

    BuyersAgent | Precium
    http://www.precium.com.au
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    South Coast NSW Independent Buyers Agent - Wollongong to Batemans Bay and Regional NSW. DOWNLOAD OUR FREE 14 POINT PROPERTY BUYER'S CHEATSHEET to avoid painful mistakes at precium.com.au

    Profile photo of TerrywTerryw
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    @terryw
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    It happens heaps, but often the other way around. Accountants may tell a client they can claim something when they cannot. This is very common with interest. Probably half clients that come to see me are probably claiming more than they are entitled to, while the other half is claiming less.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of SiteManagerSiteManager
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    @sitemanager
    Join Date: 2015
    Post Count: 56

    It happens heaps, but often the other way around. Accountants may tell a client they can claim something when they cannot. This is very common with interest. Probably half clients that come to see me are probably claiming more than they are entitled to, while the other half is claiming less.

    @terryw in the case for the Accountant over claimed what cannot be claimed, who’s fault is this when the client gets audited by ATO red handed ?

    SiteManager

    Investing for a better future

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
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    The client is at fault and will wear any penalties. but they may be able to sue the accountant for negligence and breach of contract.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

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