My situation is as follows:
– I left Australia to work in South Africa 5 years ago and plan now to return in around 2 years from now.
– when I left I had a residential house (primary) and holiday residence
– 2 years after leaving I sold the residential house and retained the holiday residence.
– the holiday residence land size is 5.1 acres
– the holiday residence, I have had for around 10 years and it has been a part-time rental since purchase until we left Australia, and from that time until now has been rented out 100%. I claim accordingly on tax return as a negative geared asset.
– I am now evacuating the tenants (due to finish there rental term in December)and wanting to undertake significant renovations to the property over a 12 month period.
– I plan to then move into the property on return to Australia and after renovations and improvements.
given the above, I understand that I will be subject to Capital Gains tax until now, however what is the best strategy to take from here on?
I am under the impression that I may be able to do the following:
1. Get a professional valuation of the property in December and that will then be the basis for capital calculation at a later time.
2. change the status of the property at next tax return.
3. CGT would not be payable until sale of property (far down track) and the CGT payable would be that due based on the current valuation and not improved value.
Is this correct?
As I intend to spend a lot on renovations next year and will no longer be renting the property out, I do not want the capital value increase to cause a significant increase in payable CGT down the track.
Please provide as much guidance to this issue as possible.
2. It will just be a matter of whether you include any rent as income
3. True no CGT payable until sale but gain for whole period of ownership is considered on a pro rata basis.
The key date for a valuation is 8th May 2012? That is when non residents for tax purposes lost the 50% CGT discount. I have included an article on this below if you want to know more detail. Basically the CGT calculation when you eventually sell (you are right no CGT until you actually sell) will be an apportionment of the total gain pro rata between days not covered by your main residence exemption but where the 50% CGT discount applies, days neither covered by your main residence exemption or the 50% CGT discount and days exempt from CGT as your main residence. And in another twist you can only cover 5 acres with your main residence exemption so there will be one tenth of an acre that will be subject to CGT all the way through. A valuer will need to apportion part of the purchase price and part of the selling price to that one tenth of an acre.
You start with your original cost base there is no resetting of it. So you look at your purchase price, purchase costs, anything you have spent on the property and selling costs. You deduct this from your selling price to get your capital gain.
It is the gain for the whole period that is apportioned pro rata over these different tax treatments. This means that costs associated with the time it is completely exempt from CGT can proportionally reduce the capital gain on the other periods. So you need to make sure you take full advantage of section 110-25(4) ITAA 1997. This allows you to increase the cost base by absolutely everything associated with the house, right down to cleaning materials. Also interest, rates, insurance, repairs, gardening etc. Just as long as these costs have not otherwise been claimed as a tax deduction. So it is more about the times it is not rented, including when you live there. Just keep records.
Of course the renovations will increase the cost base as well. Now here is a little trick that might work for you. You have to be a resident of Australia for tax purposes to establish a place as your main residence. Now section 118-150 allows you to cover a place with your main residence exemption for up to 4 years before you move into it as long as you move into it asap after the renovations are finished. There is no residency qualification for this back date. Obviously, you have to be a resident when you move in straight after the renovations but the section appears to allow you to back date through a period you were not a resident. Note section 118-150 only allows the back date period to be either 4 years or the period of time no one has lived in the house, whichever is the shortest period.
You should find our Expats Booklet interesting reading
Loss of 50% CGT Discount for Non Residents.
From 8th May, 2012 non-residents for tax purposes and temporary residents (ie 457 visa) will not be entitled to the 50% CGT discount. This will even apply to Australian citizens who may work overseas for a while. The legislation provides for an apportionment of the 50% discount based on the number of days you are a resident of Australia compared with the number of days you are not.
How the Capital Gains Tax Discount is Calculated
When you eventually sell the property the formula starts with the gain up to the market value at 8th May, 2012 and checks whether this is less than the gain for the whole period. Initially this will be quite likely because the selling costs will reduce the total gain but not the gain before 8th May 2012. If there is no real gain since 8th May, 2012 then the full 50% CGT discount will apply.
The capital gain that relates to the period after 8th May, 2012 is calculated by deducting from the total capital gain, the capital gain made up until 8th May, 2012. The amount of 50% CGT discount you qualify for on the gain applicable to the period after 8th May, 2012 is relative to the number of days you were a resident to the number you are not. But it gets more complicated than that because the formula needs to come up with a percentage that applies to the whole gain apportioning between the pre and post gain figures. So it takes into account the pre 8th May, 2012 days at 50% discount and the post days at the ratio of resident to non-resident days and then apportions this over each periodâ€™s relative gains. So letâ€™s assume the property made a $200,000 capital gain pre 8th May, 2012 and a total capital gain of $300,000. Also assume you owned the property for 1,000 days before 8th May, 2012 and the date you sell the property is 1,000 days after the 8th May, 2012 but for 500 of those days you were a resident. You will be entitled to a 41.667% CGT discount on the total gain over the whole period of ownership:
$200,000 pre gain + ($100,000 post gain x 500 resident days/ 1000 post 8th May 2012 days)
$600,000 twice the total gain
Well that is the formula, another way of looking at it is that two thirds of the gain was made pre May 2012 when the 50% discount applied and one third afterwards when the owner was only a resident for half the time. Two lots of 50% and one of 25% equals 125% divided by 3 to average them out is 41.667%.
If you do not have a valuation then you will lose the 50% CGT discount for the pre 8th May, 2012 period.