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My question is regarding CGT. I bought a house in 2007 so my son (disability pensioner) had somewhere to live. He paid below market rent but I did use the property as a tax deduction. In 2020 I retired and the house became my PPOR. I extensively renovated it at that time. I’m now looking to sell but am unsure whether if I sell before 1/7/27 I pay according to current arrangement and if I sell after that time do I still pay old arrangement or the new rules? I’m not a wealthy person and I’m almost 73. I am very worried how this additional tax is going to affect my capacity to buy somewhere else to live. Also, can I request some kind of reduction or consideration in regards to renting to my son at less than market rate?
Answer
Sorry I have no tricks for you other that don’t move! The CGT is going to be large. Do you need to sell? If it is being covered by your main residence exemption when you die your heirs will inherit it with a cost base of the market value at the date of your death and all of that CGT liability will disappear.
What are your reasons for wanting to sell? Is it important for you to live elsewhere or is it to release some equity? If it is the latter I think a reverse mortgage might solve your problems you can get a lump sum but the interest rate is 9%. If it is just to help subsidise the pension then there is an equity access scheme through Centrelink that will pay you another 50% of the full age pension and only charges 3.95% https://www.servicesaustralia.gov.au/home-equity-access-scheme
Directly to your question:
There is no concession for under market rent, in fact because it was below market rent you should not have been able to negatively gear the property. There is no reset for market value anywhere along either. You start with the original purchase price add legals and stamp duty and any improvements. If you have been claiming div 43 depreciation (building/capital works) you have to reduce the cost base by the amount claimed. You can increase the cost base by anything associated with owning the property that has not otherwise been claimed as a tax deduction. This will be valuable for the time you live there, consider rates, insurance, interest, repairs and maintenance which can include lawn mowing and cleaning materials, even consider light globes! I attach the Protecting Your Home from CGT spreadsheet that will help you keep all these records and explains them in detail.
The spreadsheet includes a CGT estimate but it does not take into account the budget proposals, I will wait and see if they get through. Fortunately, for your situation, based on the information that is available I think you will get the full 50% CGT discount no matter when you sell because after 1-7-2027 it will be fully covered by your main residence exemption but of course we don’t have that nitty gritty detail yet.
The budget announcement does not put you in a disadvantage to sell after the 1-7-2027. What happens on that date is there will be a split of the capital gain into two separate calculations, pre and post 1-7-2027. There is a formula for setting the value at this time or you can get a market valuation. I expect that the market valuation will provide the best result in most circumstances though as Accountants we will probably have to do both to be sure we have got the absolute best outcome. Any gain before 1-7-2027 is entitled to the 50% CGT discount and any gain after that date is indexed with no discount and a minimum tax of 30%. So delaying selling will not change the outcome. Your gain before 1-7-2027 is locked in. Now we don’t have any legislation to go by yet but I expect it will look at the time after 1-7-2027 and say how many of those days are covered by your main residence exemption. It should be all of them so no CGT for that period. It is the period before 1-7-2027 that is going to hurt. It is worked on a per day basis but to keep in simple I will just use years. So you bought the property in 2007 and will own in for 20 years by 1-7-2027 it was being used to produce income up to 2020, 13 years out of 20 or 65% exposed to CGT. You work out all the cost base items discussed above, including the renovation and holding costs up to 1-7-2027 and deduct them from the market value at 1-7-2027 let’s say this shows a $100,000 capital gain 65% of that is taxable $65,000 but you are entitled to the 50% CGT discount so only $32,500 will be add to your taxable income, with no minimum tax rate of 30%, just at your marginal rate which if you are only on the pension will be around 15%. Of course the gain might be much bigger than that and push you into the higher tax brackets.
No guarantees that this is the way that the legislation will eventually come through but it is clear the government’s intent is to leave pre 1-7-2027 gains taxed as they always have been.
Another two significant factors that will affect your ability to buy elsewhere is the real estate agent fee to sell and stamp duty when you buy.
Please note this answer is limited by the information you have provided and should not be relied upon without further professional advice on your particular circumstances.
