Proportion of capital gains liable

Question

I purchased my unit in Australia in an of the plan contract dated 23 August 1994 (the transaction date was 13 November 1995) for $179,900 while I was working in Papua New Guinea as a non resident of Australia I did not occupy the unit until 14/12/2000.

When I brought the unit it was always my intention to live in it as soon as my contract in PNG ended and only rent it while working overseas.

My contract ended on 17 October 1996 but was to be renewed so I returned to Australia 18 October 1996 to sort out some family issues.

As I knew I was returning to PNG I did not live in my unit. I only intended to stay a short period in Australia then return to PNG; it took a bit longer and I did not leave for PNG until
16 December 1997. As mentioned I did not live in the unit for this period as I thought I was only in Australia for a few months so it remained rented out.

The new contract ended 13 December 2000 and I returned to Australia and lived in my unit from 14 December 2000.

However I left and worked in PNG again 18 March 2003 I also got married in PNG in November 2006. I rented the unit from 17 March 2003 until my wife moved in to the unit on 22 November 2007. I finished my PNG contract and moved into the unit on 19 March 2010 also.

She or I have lived in it ever since until it was sold 5 July 2013 for $415,000 as we separated (we separated 16/9/2011 and I moved out my wife continued to live in the unit so no rent was received; the unit was in my sole name) and the consent orders stated that the property was to be sold and she was to receive $40,000 from the sale (other money was paid to her from my super).

I brought a new house in Australia to live in March 2014 for $203, 000 from the proceeds of the sale and deposited the bulk of the remaining proceeds I my accumulation super account, I am 63 and still looking for work.

We have only ever had this unit I did not buy it as an investment although I did rent it while working in PNG, it has not been rented since Nov 2007.

I was not a resident of Australia while working in PNG for periods

18/10/1991 to 17/10/1996
16/12/1997 to 13/12/2000
18/3/2003 to 19/3/2010

The unit was rented for periods

13/11/1995 to 14/12/2000
18/3/2003 to 22/11/2007

I am wondering if there are any deductions I can claim of the capital gain ($415,000 – $179,900) and what proportion of the capital gain to I need to include in my calculation prior claiming 50% discount?

Answer

You are fortunate in that you miss out on the terrible CGT rules if you own a property in Australia while a non resident for tax purposes after 8th May 2012. All you need to be concerned about is the initial period before the property became your home.
So you start with the cost base of $179,900 plus buying and selling costs, add any improvements remove the value of plant and equipment that was used to start your depreciation schedule when you first rented the property out. You will have to reduce the cost base by any building depreciation you have claimed during the rental period. Section 110-25(4) also allows you to increase the cost base by any holding costs that you have not otherwise claimed as a tax deduction. This will apply to the period you or your wife lived there or for that matter, if applicable, when it was vacant and you couldn’t claim these expenses as a tax deduction. Holding costs include rates, interest, body corporate fees, insurance, cleaning materials, light globes, repairs and maintenance. Just about anything associated with the property. Limited by your imagination and record keeping.
The selling price is reduced by the value of plant and equipment. This is a complex calculation based on continuing to depreciate the plant and equipment after you stopped renting the property including new purchases.
The capital gain calculated as discussed above is then apportioned between days covered by your main residence exemption and days not. For this particular section of the law it is based on your ownership period so it is from date of settlement. The calculation is done on a number of days basis but to keep this simply my example is in years. Your ownership period started in 1995 but you can’t cover it with your main residence until 2000. As a member of a couple you can only have one whole main residence exemption between you so I am assuming here that neither your wife nor yourself covered another property with your main residence exemption. Your wife moving back into the unit is as good as if you did. Section 118-145 allows you to cover a property that you once lived in for up to 6 years after you move out and rent it out. This 6 years resets every time you move back in. Even though she was no longer your wife your main residence exemption continues to protect the property for an infinite period if it is not earning income while you are absent. So in short from 2000 to sale it is covered by your main residence exemption ie 13 years of the 18 years you owned it. Therefore only 5/18ths of the gain is subject to CGT, approximately, you will need to work it out more exactly on number of days.

References:

SECTION 118-185 Partial exemption where dwelling was your main residence during part only of ownership period ITAA 36

118-185(1)
You get only a partial exemption for a *CGT event that happens in relation to a *dwelling or your *ownership interest in it if:

(a) you are an individual; and

(b) the dwelling was your main residence for part only of your *ownership period; and

(c) the interest did not *pass to you as a beneficiary in, and you did not *acquire it as a trustee of, the estate of a deceased person.
118-185(2)
You calculate your *capital gain or *capital loss using the formula:
CG or CL amount ×   Non-main residence days 
Days in your *ownership period

where:
CG or CL amount is the *capital gain or *capital loss you would have made from the *CGT event apart from this Subdivision.
non-main residence days is the number of days in your *ownership period when the *dwelling was not your main residence.
Note:
The capital gain or loss may be further adjusted if the dwelling was used to produce assessable income: see section 118-190.

Example:
You bought a house in July 1990 and moved in immediately. In July 1993, you moved out and began to rent it. You sold it in July 2000, making (apart from this Subdivision) a capital gain of $10,000.
You choose to continue to treat the dwelling as your main residence under section 118-145 (about absences) for the first 6 of the 7 years during which you rented the house out.
Under this section, you will be taken to have made a capital gain of:
$10,000 ×  365 
3,650 = $1,000

Ownership interest is settlement date or right to occupy section 118-130.
http://law.ato.gov.au/atolaw/view.htm?dbwidetocone=08%3APLR%3ATaxation%3AINCOME%20TAX%20ASSESSMENT%20ACT%201997%3ACHAPTER%203%20-%20SPECIALIST%20LIABILITY%20RULES%3APART%203-1%20-%20CAPITAL%20GAINS%20AND%20LOSSES%26c%20GENERAL%20TOPICS%3ADivision%20118%20-%20Exemptions%3ASubdivision%20118-B%20-%20Main%20residence%3A%23001250%23SECTION%20118-130%20Meaning%20of%20ownership%20interest%20in%20land%20or%20a%20dwelling%3B

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