Ask Ban Tacs Question
Hi Julia,
Thank you for responding to me recently regarding the best way to go to minimise CGT for our situation.
To recap, my wife is 56 and on a disability pension and I am 69 and on a carers pension.
Neither of us has any Super left as that was used up early on after my wife was diagnosed with MS and I was able to access it on compassionate grounds at the time.
Just so you know, I looked at the link to the Excel sheet and haven’t purchased it just yet until I hear back from you regarding this query.
The following is what I wrote to you a week back and I’m pasting it here to refresh your memory.
We have a home in Ipswich which we bought in 2014 and we now own outright. In 2019 we bought a property of 5 acres with a building on it for $95,000 but the dwelling was not council approved.
However, after making enquiries at the local council, I found out that the building originally had plans lodged but the inspection was never completed and I was able to make a payment to reopen the plans and complete the dwelling to 1980 standards to gain council approval for the building.
My wife and I have been going back and forth to the property since purchasing it and I have been renovating it and am probably about 6 months away from completing it and getting it approved by council which will increase the value of the property by a fair bit.
I don’t know what the best process is to minimise CGT but as we’re spending a lot more time up there to try and complete it, we have changed our drivers licences and treat that as our main residence at the moment.
Our other house in Ipswich is now the one we visit.
What is the best scenario to minimise CGT in this case?
We bought our Ipswich house for $180k in 2014 and it would now be up around the $7-800k mark and the Kingaroy property will probably be up around the $500k mark by the time it’s finished next year provided the market doesn’t crash in the meantime.
What is your advice in this matter please?
Just to add to this, our Ipswich property will be our forever home.
So although we currently spend most of our time at the Kingaroy property (which we own outright), that is only for the purpose of completing the renovation.
Once it’s completed, we will want to sell it but there’s no rush to do so.
It will depend on what the best scenario is to minimise CGT.
As far as receipts go, I’ve bought most things to renovate the property second hand or bargains I’ve found on marketplace so as far as receipts go, they’re minimal to non-existent.
I do however have multiple photos taken throughout the progression from “dump” to “hey, that’s looking pretty good” so I don’t know if they can be used along with a stat dec as evidence of estimated monies spent.
We’ve also spent a fair amount of money travelling back and forth from Ipswich to Kingaroy so I’m not sure if that counts.
Neither property has ever been rented out or occupied by anyone other than us for as long as we’ve owned them.
Hopefully this is enough information for you to advise if my next step is to still go ahead and get the spreadsheet that you sent the link to and fill that in as much as possible.
Any advice would be immensely appreciated.
Thank you for your time.
Answer
I attach the spreadsheet (Main Residence). It has very useful instructions to help you understand what is included in the cost base. I gave you the link because I thought it would be useful if you didn’t utilise askbantacs. You can’t include travel costs in the cost base but you can include holding costs such as rates, insurance, interest, repairs and maintenance, more detail in the spreadsheet.
Duplicate the spreadsheet and do one for each property. There is a CGT estimator there that will allow you to work out the likely CGT on each property. The ATO requires you to have records of the expenses you put in the calculator. It is not the strict substantiation requirements for work related expenses. Surprisingly enough I have seen the ATO be lenient when it comes to CGT records. Nevertheless collect as much detail as you can. Bank statements are a great resource.
I am assuming that the gap between purchasing the 5 acres in 2019 and you being able to live there is less than 4 years. It is a question of whether you are living there not whether council has signed off.
Section 118-150 1997 ITAA allows you to cover a property with your main residence exemption for up to 4 years before you move into it as long as you move in asap after the renovations are finished and cover it with your main residence exemption for at least 3 months after council has signed off.
Section 118-145 1997 ITAA allows you to choose which property you cover with your main residence exemption if both qualify and both qualify. Further, because neither is earning income there is no 6 year limit it is infinite. The catch is of course you can only cover one property with your main residence exemption. In very limited circumstances you maybe able to cover both for 6 months but that is just a bonus if you qualify. Fortunately, you do not have to choose which property until you sell one.
With no super I gather you would prefer to sell sooner than later unless there was a tax benefit in waiting. In actual fact I think the tax benefit is better sooner. Firstly, the money is best put into super and you can’t do that once you reach 75 years of age. Secondly the value of the property when finished may affect your pension. There are some super products where only a portion of the money invested is counted for pension purposes. Thirdly, you are concerned that the market is at its peak.
Of course there could be reason that I am not aware of that mean you don’t want to sell so please don’t let me influence the discission too much.
Section 128-15 ITAA 1997 says that the cost base of the deceased’s home is reset to market value at DOD. Providing it is not also being used to produce income while the deceased lives there.
Section 128-50 ITAA 1997 does not allow the cost base to be reset to market value at DOD if the property is held as joint tenants (most couples hold properties this way). This doesn’t matter if the survivor ends up dying in the home as well but best to give them the option of being able to sell with at least half the property having its cost base reset to market value at DOD. Changing from joint tenants to tenants in common should not cost anything in stamp duty and will not trigger CGT because the ratio of ownership is not changing. Changing to tenants in common will mean a reset to cost base on half the house when one of you dies, to market value at DOD.
Why am I telling you all this?
Well I have a suggestion but ultimately the decision should be what suites your lifestyle and future needs.
You say Ipswich will be your forever home. So the property you are most likely to be covering with your main residence exemption when you die. Section 128-15 will forgive and forget any CGT exposure between 2019 and when you sell Kingaroy because the cost base will be reset to market value. First half of the property when one of you dies then when the other one dies your heirs will inherit the whole property at market value at the survivor’s death. Or if the survivor sells well at least half the property, the half inherited from the spouse that dies first, will be completely exempt as their main residence. Just part of the capital gain on their original half will be subject to tax if you expose Ipswich to CGT to benefit Kingaroy. That is why you should keep the spreadsheet for both properties the whole time you own them.
Exposing Ipswich will allow you to sell Kingaroy completely free of CGT by covering it since 2019 with your main residence exemption.
Please note this answer is limited by the information you have provided and should not be relied upon without further professional advice on your particular circumstances.
