PPR and Rental Property

Question

I signed a contract on 15 Dec 1987 to purchase a property.
Settlement was on 15 Feb 1988
The purchase price was $80,000.
The property was immediately tenanted.
I have never owned any other premises.
I moved into the property in 1991 and resided there for approx. 10 months.
When I moved out the property was again tenanted.
In May 2003 I moved back into the property.
I lived there until the property was sold at auction for $360.000,on 15 Dec 2012.
Settlement was on 15 Feb 2013.
This is the only property I have owned and is my Primary Place of Residence.
I am now trying to do my tax and I want to reduce my CGT.Is it possible to calculate the CGT based on a valuation of the property when I moved there permanently from May 2003 until I sold it in 2013.

If not please advise how the CGT should be calculated and any suggestions you may have.

Kind regards,
Carolyn

Answer

The only time you can use a valuation is if it was first your main residence and then became a rental. As there was someone living in it before you moved into it for the first time, you are only entitled to cover it with your main residence exemption from the point in time that you moved into it. The capital gain for the whole period is calculated and then apportioned on a per day basis between the time it was covered by your main residence exemption and the time it wasn’t, the latter being the portion that is taxable. I am assuming the property is owned in your own name and that you did not have a spouse who owned a home at any time between 1987 and 2013. Unfortunately, because you purchased the property before 20th August 1991 you will not be able to increase your cost base by any of the normal costs associated with holding the property such as interest, rates, insurance, maintenance etc. You are limited to costs associated with the buying, selling and maintaining title plus any expenditure, intended at the time to improve the place. In other words you get all the costs of taking care of the place and the ATO just ignores this and claims you have made a profit that they want to tax. Fortunately, you will be able to utilise the main residence exemption to protect some of the gain.
The apportionment is done on an actual number of days basis over your entire ownership period ie settlement date to settlement date. Here is a link to the relevant section http://law.ato.gov.au/atolaw/print.htm?DocID=PAC%2F19970038%2F118-185&PiT=99991231235958&Life=10010101000001-99991231235959 To keep it simple I will use months and assume you first moved into the house in Feb 1991. From Feb 1988 to Feb 1991 = 3 years the property was exposed to CGT. Section 118-145 allows you to cover a property with your main residence exemption after you move out if you are not covering another property with your main residence exemption (note spouses only get half a main residence exemption each). Section 118-145 covers the property for another 6 years after you move out if it is income producing. Any periods it is not income producing do not contribute to the 6 year period and if it is not earning income there is no limit on the amount of time you can cover it with your main residence exemption. I am assuming it was producing income 100% of the time you did not live there. So assuming you moved out of the property in Jan 1992 and it was rented all the time then you can cover it up to Jan 1998 (6 years) with your main residence exemption. Between Jan 1998 and May 2003 the property is again exposed to CGT, ie 5 years and 4 months. In total the property is exposed to CGT for 8 years and 4 months in the 25 years that you owned it 8.33/25= 33.3% or 1/3rd of the gain is subject to CGT
Here is an example of your CGT calculation, you will have to change some of my figures as they are guestimates just to show you how the numbers work.

Original purchase price $80,000
less value of plant & equipment $7,000
————
$73,000
Stamp Duty on Purchase 2,000
Solicitors Fees on Purchase 500
Kitchen Renovation (exclude P&E ie stove) 8,000
Selling costs ie Auction 10,000
Solicitors fees on sale 800
———-
Cost base 94,300
Sale Price $360,00
Less value of plant & equip 10,000
————
$350,000
——————–
Capital gain $255,700
Divide by 3 85,233
Less 50% CGT discount 42,616
———–
Taxable capital gain 42,617
Which will be taxed at your marginal rates.

Please don’t try and do your tax return yourself for this year, get an accountant to quiz you on everything you have done to the house to see what can be included in the cost base.

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