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Maintaining the Main Residence Exemption from CGT through the generations
BACKGROUND
Reference is made to two residences: one on the “Coast” and one in the “City”.
Mum was living alone in her main residence on the Coast (land 400 square meters) which qualifies for the main residence exemption.
Mum decided to enter permanent residential aged care in January.
Mum’s will has her estate being left to a testamentary trust with me as primary executor and trustee. A lawyer recommended this for simplicity. I intend to transfer her main residence to my wife and I as tenants in common when Mum’s will takes effect.
Mum has always intended that my wife and I be able to move into her main residence at the Coast when she is no longer there.
My wife and I own our main residence in the City (land 600 square meters) (post 1985) but with no CGT exposure i.e., never rented etc. I believe we have a full main residence exemption there.
Our daughter and her partner rent elsewhere.
QUESTION
What if any modification is needed to the following steps to preserve the Main Residence Exemption from CGT for Mum, my wife and me, and establish it for my daughter and her partner:
Mum retains main residence exemption at the Coast (even though she moved into aged care) as it is not rented out.
Wife and I move to Mum’s Coast residence and also make it our main residence (even though Mum may still be alive and well and the only name on the title deed. Verbal advice from the ATO was that this was okay).
Set the start date for the above.
Apply the 6 month overlap rule – so value and transfer our City residence to our daughter and her partner (as tenants in common) to settle before within 6 months. Set up an interest free loan arrangement to maintain parity with our other daughter and her partner.
Change our address from City to Coast for our drivers licence, and electoral roll. Would we also need to do that for our Family Trust (for which my wife and I are trustees)?
Change electricity from Mum’s name to ours.
Does having a PO Box at the Coast give substantially extra weight to the case?
My wife and I live at the Coast residence for at least 3 months to establish it as our main residence.
Then, we pay to heavily renovate / demolish it and rebuild.
My wife has a disability and rebuilding would greatly improve the function of it as our family home.
(ATO advise verbally that if Mum sadly passed away at during demolition / construction / renovation time (before lock up stage), then my wife and my main residence exemption would still prevail over it.)
We temporarily stay with a relative in the City during renovations / construction. Perhaps we use their address as our postal address until we can move back to the Coast.
We move in as soon as possible back to the Coast and do not rent out or have any income derived from the Coast residence.
We plan to live in the new / refurbished Coast residence dwelling for the long term – but understand that should be for a minimum of 3 months.
Further Info
1970 demolished and rebuilt the house at the Coast. Rented it out as a holiday home mainly just each December – January for several years.
Pre 1985 Mum and Dad stopped renting it out and moved there making it their main residence.
I continued to live in their City home which they purchased in 1967 and continue it to now as my main residence. Mum and Dad transferred that to my wife and I as tenants in common in the 1990s – not sure of exactly when – and am not sure how I’d find out.
Before 1985, Mum and Dad purchased the block as joint tenants, demolished a dwelling, rebuilt, rented it out for holiday rentals, and stopped renting it out.
Then 2010, Dad passed away so the full title then passed to Mum.
Answer
Thank you so much for making this question available to be published as it has some very exciting twists and turns that should interest readers.
Relevant sections are:
Here is section 118-145 ITAA 1997 in particular look at sub section 3
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.
118-145(2)
If you use the part of the *dwelling that was your main residence for the *purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.
118-145(3)
If you do not use the *dwelling for that purpose, you can treat it as your main residence under this section indefinitely.
This section does not apply if the *dwelling was your main residence because of section 118-147 and ceases to be your main residence because of subsections 118-147(3) and (4) .
If you make the choice, you cannot treat any other *dwelling as your main residence while you apply this section, except if section 118-140 (about changing main residences) applies.
Example:
You live in a house for 3 years. You are posted overseas for 5 years and you rent it out during your absence. On your return you move back into it for 2 years. You are then posted overseas again for 4 years (again renting it out). You then move back into it for 3 years, after which you sell the house.
You have not treated any other dwelling as your main residence during your absences.
You may choose to continue to treat the house as your main residence during both absences because each absence is less than 6 years.
You can make this choice when preparing your income tax return for the income year in which you sold the house.
And Section 128-50 in particular sub section 4
Special rules for joint tenants
128-50(1)
This section has rules that are relevant if a *CGT asset is owned by joint tenants and one of them dies.
128-50(2)
The survivor is taken to have *acquired (on the day the individual died) the individual’s interest in the asset. If there are 2 or more survivors, they are taken to have acquired that interest in equal shares.
Note:
Joint tenants are treated as owning a CGT asset in equal shares: see section 108-7 .
128-50(3)
If the individual who died *acquired his or her interest in the asset on or after 20 September 1985, the first element of the *cost base of the interest each survivor is taken to have acquired is:
| Cost base of the interest of the individual who died (worked out on the day the individual died) Number of survivors |
The first element of the *reduced cost base of the interest each survivor is taken to have *acquired is worked out similarly.
Example:
In 1999 2 individuals buy land for $50,000 as joint tenants. Each one is taken to have a 50% interest in it. On 1 May 2001 one of them dies.
The survivor is taken to have acquired the interest of the individual who died on 1 May 2001. If the cost base of that interest on that day is $27,000, the survivor is taken to have acquired that interest for that amount.
If the individual who died *acquired his or her interest in the asset before 20 September 1985, the first element of the *cost base and *reduced cost base of the interest each survivor is taken to have acquired is:
| *Market value of the interest of the individual who died (worked out on the day the individual died) Number of survivors |
Note:
There is a special indexation rule for surviving joint tenants: see section 114-10 .
And section 128-15 items 3 and 4 Note below is about a sole ownership or tenants in common, above is about joint ownership
128-15(4)
This table sets out the modifications to the *cost base and *reduced cost base of the *CGT asset in the hands of the *legal personal representative or beneficiary.
| Modifications to cost base and reduced cost base | |||
| Item | For this kind of CGT asset: | The first element of the asset ‘ s cost base is: | The first element of the asset ‘ s reduced cost base is: |
| 1 | One you *acquired on or after 20 September 1985, except one covered by item 2, 3, 3A or 3B | the *cost base of the asset on the day you died | the *reduced cost base of the asset on the day you died |
| 2 | One that was *trading stock in your hands just before you died | the amount worked out under section 70-105 | the amount worked out under section 70-105 |
| 3 | A *dwelling that was your main residence just before you died if: (a) the dwelling was not then being used for the *purpose of producing assessable income; and (b) you were not then an *excluded foreign resident | the *market value of the *dwelling on the day you died | the market value of the *dwelling on the day you died |
| 3A | If you were a foreign resident just before you died – an asset that was not *taxable Australian property just before you died, except one covered by item 2 | the *market value of the asset on the day you died | the market value of the asset on the day you died |
| 3B | One that *passes to a trustee of a *special disability trust | the *market value of the asset on the day you died | the market value of the asset on the day you died |
| 4 | One you *acquired before 20 September 1985 | the *market value of the asset on the day you died | the market value of the asset on the day you died |
And Section 118-150 in particular subsection 3
SECTION 118-150 If you build, repair or renovate a dwelling
118-150(1)
This section applies to land in which you have an *ownership interest (except a life interest) if you build a *dwelling on the land, or repair, renovate or finish building a dwelling on the land.
118-150(2)
You can choose to apply this Subdivision as if the *dwelling that you are building, repairing or renovating on the land were your main residence from the time you *acquired the *ownership interest.
118-150(3)
You can make the choice only if:
(a) a *dwelling on the land that you construct, repair or renovate becomes your main residence (except because of section 118-147 ) as soon as practicable after the work is finished; and
(b) it continues to be your main residence for at least 3 months.
View history note
118-150(4)
There is a time limit during which the choice can operate. This is the shorter of:
(a) 4 years, or a longer time allowed by the Commissioner, before the *dwelling becomes your main residence; and
Key Principles:
The best CGT protection is a pre 20th September, 1985 asset, second best is covering the asset with your main residence exemption. Though there is every chance in your family’s circumstances they will produce the same result.
The best asset protection you can give your children is usually keeping their assets in their parents’ name though this becomes a problem when they want to borrow against the asset
With the extremely limited concession of the 6 months overlap rule you can only cover one property with your main residence exemption.
Your mother has two separate assets. The half of the Coast property she owned before your father died and the half she acquired on his DOD. The latter being a post CGT asset.
If a new house is built on the coast land while it is in her name then she has 3 separate assets. A post 1985 house, that will not be covered by her main residence exemption unless she lives there as per section 118-150. A 200sqm of post 1985 land that will not be covered by her main residence exemption unless she lives in the house on it and a 200sqm of pre 1985 land.
Except for the unusual circumstances of a bare trust the person living in the house (or who has lived in the house) has to have their name on the deed to cover it with their main residence exemption. I think the ATO were only talking about the concessions that would come into play after your mother died before it was transferred into your name. You making the coast house your main residence while it is owned by your mother has no benefit.
As you can see from section 118-145 as long as you have lived in a property as your home you can continue to cover it with your main residence exemption according to subsection 3 for an indefinite period providing it is not being used to produce income and the owner is not covering another place with their main residence exemption. This means both the city and coast home are quite safe at the moment. In both cases the person who is on the deed has lived in the place and it is not being used to produce income. So the city is covered by your main residence exemption and the coast by your mother’s.
There are two things that are going to upset this perfect situation. The demolition of the house your mother was covering with her main residence exemption and possibly your daughter wanting to borrow money against the city house to pay you something to help with the building process. The bank is going to want it to be in her name. Even if this second problem is not the case. The first problem is going to be enough to set the dominos falling.
I anticipate the perfect situation is going to come unstuck when you want to build the new house on the property. That is unless you can, as in accordance with section 118-150 move your mother straight into that new house and have her live there for 3 months (there is a concession later on in section 118-150 if she dies during construction or within the 3 months). Assuming moving her back into the house is not an option you are going to need to transfer the coast property into your name before you demolish the old house, which is a bit of a shame because it will lose its partial pre 1985 status but that is going to happen in the event of your mother’s death anyway. Now as soon as the coast property becomes yours you need move your main residence to it, exposing the city so that is then (or before then) best transferred into your daughter’s name. You can see what I mean by the dominos. Whole lot of stamp duty cost here that wouldn’t happen if the properties were inherited but at least with the coast property it is at its lowest value, before the new build.
Important note if you are not going to move your mother back into the new coastal house you must make sure it is transferred to your name before you demolish the house as it is the house that makes the land entitled to the main residence exemption. No house on the land at time of transfer, no main residence exemption back to your father’s DOD on half the land.
Just one more point before I move on from the idea of moving your mother into the new home for 3 months. If this property is still covered by her main residence exemption when she dies, which it can be simply by the new building being her home and her living there for 3 months as soon as it is completed, then section 128-15 gives it to you with a cost base of market value at the date of her death. There is a line in the sand that no matter what you do to upset your main residence exemption after that (ie be living overseas when you sell it) you get that higher cost base of market value at her DOD and of course no stamp duty to transfer it into your name. Just a thought, if you are interested we need to re look at the situation.
Getting back to the idea of all properties changing hands when you are ready to build on the coast. If all this runs smoothly there should be no CGT as follows:
Coast property transferred from your mother to you:
Any income producing use only happened before 1985 so is ignored. When your father died your mother received it from him as joint tenant survivor post CGT but continued to use it as only her home. This means that when she moves into the care facility she continues to cover it with her main residence exemption under section 118-145 indefinitely because it is not earning income. That is the half that she received from your father and as she has always used it as her home before that that half is completely protected by her main residence exemption. The other half that she has always owned is a pre CGT asset to her so completely protected from CGT too.
Coast Property in your hands:
Related party transaction so you cost base is the market value at the date of transfer. If you choose to continue to cover it with your main residence exemption then no CGT when you sell. Key trap is that you must move into the new house as soon as certificate of completion is issued and cover it with your main residence exemption for at least 3 months, as per section 118-150. Even if you mess up that main residence concession coverage some time during ownership, as long as it is your home when you die section 128-15 item 3 will still pass it onto your heirs with a cost base of market value at the date of your death.
City Property transferred to your daughter:
You can cover this with your main residence right up to the time you transfer it to your daughter, providing you continue to cover it (and not the coast property) with your main residence exemption up to that time. So the idea is to transfer to her at the same time your mother transfers to you, so that no CGT is payable on the transaction. At all times you all only own one property that qualifies as your main residence. The 6 month over lap rule is problematic because you have to have lived in the property in the 12 months before hand. Can be done but with the transfers all happening on the same day you don’t need to go through that.
Establishing your main residence – This needs to be done by your daughter on the city property and you on the coast property effectively on the same day or before hand. It is about address on the electoral roll, licence, directors ID, electricity in your name, MYGOV and actually living there.
