Further to my email 23/9/2014. Subject: MakoShark CGT obligation
I have sold a property and triggered a CGT obligation. I am having trouble understanding how the numerous "rules and exemptions" (i.e. 6 Year Rule, 4 Year Rule, 6 Month Exemption, etc.) apply in my situation.
Please refer to my email for a .pdf explaining the events, timing and $ amounts.
Well this is a very interesting situation because you were not entitled to completely cover the north St house with your main residence exemption but now the time to amend your tax return has expired the ATO cannot do anything about it.
You could try and argue they can’t touch what you did with the North st house but they still have to give you your main residence exemption on the South st house for the time that your main residence exemption couldn’t technically have covered the north st house.
If you wanted to push this further you could also argue that you didn’t utilise the election your are entitled to make under section 118-150 on the north st house. TD 2000/14 would all the north street house to be covered by your main residence exemption back to 13th March 1995 as per Here is a link to the ruling which covers a situation very similar to yours http://law.ato.gov.au/atolaw/view.htm?locid=%27TXD/TD200014/NAT/ATO%27
The key paragraph being:
3. Under section 118-150, dwelling B is treated as your main residence for the shorter of 4 years before it actually becomes your main residence or the period starting when you acquired your ownership interest in the land on which dwelling B was later built and ending when dwelling B became your main residence.
Unfortunately you cannot even utilise section 110-25(4) to increase the cost base by interest, rates, insurance and other holding costs because you purchased the property prior to 20th August 1991.
On the basis that you did elect to utilise section 118-150 you will not be entitled to reset the cost base of the South Street house under section 118-192 as this requires the property to have been 100% covered by your main residence exemption up to the date it was first used to produce income. It was used as your home but without being covered by your main residence exemption before it produced income. Even if you argue section 118-150 was not used on the North St house you would have to have continued to cover the South St house, under section 118-145, with your main residence exemption to trigger the section 118-192 reset and you just didn’t because you have already sold North St with your main residence exemption.
Now I am sure in an audit situation the ATO would try and argue that even though you didn’t technically qualify to cover the north Street house 100% with your main residence exemption it is a fact that you did so you are not entitled to cover the South street house at all during that time because you can only have one main residence. There is of course the exception of the 6 months overlap rule, section 118-140. That is you can cover two properties with your main residence exemption for the 6 months before you sell the first property. This has some conditions that the property must have been used as your home for at least 3 months during the previous 12 months and that it was not used to produce income in that 12 months at any time when you weren’t living there. Looks like you qualify for this so really you can only be sure to cover the south St house with you main residence exemption from Nov 1999 but what about the house you are living in now? Do you want to expose that to CGT?
Complicated I know but in summary I am saying it would be a hard line to spin that you did not fully use your main residence exemption on the North St house, accordingly you can’t even look at protecting another property until Nov 1999 and then from June 2000 onwards you will have to choose which house you want to cover. And then don’t forget that you can only cover, should you choose to do so, South Street with your main residence exemption for a period of up to 6 years while you are not living there and it is producing income, under section 118-145 and then only providing you are not coving another. Note this section uses the words:
118-145(1) If a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence. ….
This suggests that you cannot pick and choose when the 6 years will apply it implies that the period starts the minute your main residence exemption is no longer on the property so you may not even be able to jump back to covering South Street unless you moved back into it.
You will not be able to utilise the 6 months overlap concession with South St and your new home because you have not lived in South St for 3 months in the 12 months before it is sold and it is producing income.
I think you have to accept that South Street has absolutely no protection from your main residence exemption and no reset of the cost base to market value but you were lucky to get away with North St and your new house is fully protected by your main residence exemption. Your exposure to CGT on South St is huge and will be measured on an amount that is far greater than your true profit because you will not be allowed to increase the cost base of South street by all the real costs of holding it such as interest, rates, insurance, repairs, etc. even though they weren’t claimed as a tax deduction when you were living there.