Capital Gains Tax Rate
We had a discussion with Ben from AH Jackson &CO to explain more about the Capital Gains Tax Rate and other aspects of Capital Gains Tax that involves the following:
Capital Gains on Primary Residence
Long Term Capital Gains Tax
Short Term Capital Gains Tax
Capital Gain Exclusion for sale of Primary Residence
What is the “main residence exemption”….or Exclusion?
Generally, a property, including a taxpayer’s main residence, i.e. their family home, is considered to be a Capital Gain Tax (CGT) asset. The Capital Gains Tax Rate should be calculated by a professional. When CGT assets are sold, taxpayers may be liable to pay tax on all, or part, of the capital gain.
However, tax law provides an exemption for a dwelling that is the taxpayer’s main residence, where certain criteria are satisfied. This exemption means there will generally be no tax liability for the taxpayer upon the sale of the main residence.
To be eligible for the main residence exemption, the following conditions must be satisfied:
- the taxpayer is an individual
- the taxpayer is an Australian tax resident
- the dwelling was the taxpayer’s main residence throughout the ‘ownership period’, and
- the dwelling was not transferred to the taxpayer as a beneficiary in, or as the trustee of, a deceased estate.
When, is a dwelling considered the main residence?
A number of factors are taken into consideration when determining whether or not a dwelling is the taxpayer’s main residence, including:
- the length of time the taxpayer has lived in the dwelling
- the place of residence of the taxpayer’s family
- whether the taxpayer’s personal belongings are located at the residence
- the taxpayer’s address on the electoral roll
- the address to which the taxpayer’s mail is delivered
- the connection of gas, telephone or electricity services
- the taxpayer’s intention in occupying the dwelling
It is important to note that a mere intention to live in a dwelling as your main residence, without actually doing so, is insufficient to be eligible for the exemption – the taxpayer must actually occupy the dwelling.
Full and partial Residency Exemption
You’re eligible for a full main residence exemption if the dwelling:
- has been the home of you, your partner and other dependants for the whole period you’ve owned it
- has not been used to produce assessable income – that is, you’ve not run a business from it, rented it out or flipped it, and
- is on land of two hectares or less.
If the full exemption applies your capital gain or loss is disregarded – you don’t pay tax on any capital gain, but nor can you use any capital loss to reduce your assessable income.
Alternatively, you may be entitled to a partial exemption.
Can a person have more than one main residence?
Where a taxpayer acquires a dwelling that is to become the main residence whilst at the same time still owning an existing main residence, the taxpayer is allowed to treat both dwellings as their main residence for the shorter of:
- six months, or
- the period between the acquisition of the new residence and disposal of the existing residence.
This exemption on both dwellings will only apply if:
- the old dwelling was the taxpayer’s main residence for a continuous period of at least three months in the 12 months before it was disposed of
- the taxpayer did not use the old dwelling for income-producing purposes in any part of that 12 months when it was not the main residence, and
- the new dwelling becomes the taxpayer’s main residence.
If it takes longer than six months to dispose of the old dwelling, the taxpayer may choose to treat it as the main residence in order to obtain a full exemption on this dwelling. This however may impact on the taxpayer’s ability to receive the full exemption on the new main residence when that dwelling is disposed of at some point in the future.
What happens when a taxpayer is absent from their main residence?
Where a main residence is vacated and not rented out (and no other main residence election is made in respect of another property), the property will maintain its exemption status indefinitely.
Where the dwelling is used to produce assessable income when the taxpayer is absent (for example, is rented out), the exemption will apply for a period of up to six years.
Lists of the qualifying reasons for a property owner to move from their Permanent Place of Residence as:
- accepting a new job interstate or overseas
- staying with a sick relative long term or
- going on an extended holiday.
If a property owner moves back into the property and afterwards moves out again then a new six year period commences from the time they last moved out.
If the dwelling is re-established as the taxpayer’s main residence, another maximum period of six years applies if the dwelling is again vacated. The property owner can only continue to apply the main residence exemption to the vacated property where no other dwelling is treated as a main residence during the period of absence.
What if a taxpayer and their spouse have different residences?
Only one full main residence is permitted per family. In instances where a couple has more than one dwelling they must choose one of the properties as their main residence.
Where separate dwellings are maintained and both are elected as main residences (one by the taxpayer and the other by the taxpayer’s spouse), special rules will apply and the exemption will be split. This is typically based on the ownership percentages, to determine the extent of the exemption for each dwelling.
Is PPR Concession available on property held in Trust?
With a few minor exemptions, property can only be claimed as a main residence if held in individual names. Property held in a company or trust therefore can’t claim the CGT break.
Note: Because of this significant tax implication, most people hold their home in their personal names. If asset protection is an issue, best to consider holding it in just one partner’s name which still allows you to access the CGT benefits while affording some asset protection.
Transferring real estate to family or friends
If you give a property to family or friends, or sell it to them for less than market value, and you’re entitled to the main residence exemption, there will be main residence exemption.
However, if you’re not entitled to the main residence exemption for the property – or you’re entitled to only a partial exemption – CGT will apply. Even if you receive nothing for your property, you’re taken to have received its market value at the time you disposed of it.
This means you would have to pay capital gains tax on any capital gain for the part of the property that was not exempt.
If you subdivide a block of land, each resulting block is registered with a separate title. For capital gain tax (CGT) purposes, the original land parcel is divided into two or more separate assets.
Subdividing land is not a CGT event if you retain ownership of the subdivided blocks, so you don’t make a capital gain or loss at the time of the subdivision. However, you may make a capital gain or loss when you sell the subdivided blocks.
The date you acquired the subdivided blocks is the date you acquired the original parcel of land. The cost base of the original land is divided between the subdivided blocks on a reasonable basis.