Capital gains tax (CGT) generally does not apply to assets acquired before 20 September 1985 (pre CGT assets).

 

However in particular it should be remembered that CGT event K6 can result in capital gains (but not capital losses) if certain CGT events happen to pre-CGT shares in a ‘private’ company or pre-CGT interests in a ‘private’ trust where the market value of its post-CGT property is at least 75% of its net value (‘the 75% test’). 

 

Refer to TR 2004/18 below in the links.

 

 

Subsection 110-25(4) of the ITAA 1997 provides that the third element of the cost base of an asset acquired after 20 August 1991 is the costs of owning the asset. The costs include, but are not limited to, costs of maintaining, repairing or insuring it, interest on money borrowed to acquire the asset or to refinance such a borrowing, interest on money borrowed to finance capital improvements to the asset, and if the asset is land, rates and land tax 

For costs to fall within the third element of the cost base of an asset, they must be costs of owning the asset. Travel and accommodation costs will be costs of owning the asset where the carrying out of the repairs on the asset is the sole or main purpose of the travel and accommodation.

You cannot include them at all in the cost base of collectables or personal use assets.

You cannot index these costs or use them to increase a capital loss

Tip!

This element is particularly useful in relation to holiday homes that are not made available to earn income the whole year.

NB! Who is keeping the records?

It is advisable to keep records of the amounts spent on an annual basis, as they can be very difficult to find and substantiate many years later when the property is sold.

Refer to the links below on the Third Element. 

 

Market Valuation Required

Where a taxpayer’s main residence was first acquired after 19 September 1985, and first used to produce income after 7.30pm on 20 August 1996, the taxpayer is generally deemed to have acquired the property, for CGT purposes, at the market value at the time it was first used to produce income.  This means for main residences converted to income producing after 20 August 1996, a capital gain or loss is calculated on the difference between the market value at the date of change of use and the net sale price when subsequently sold.

 

A market value must be obtained at the date the home first became available to produce income if it:

 

• was first used as a main residence and

• was first used to produce income after 20 August 1996 and

• was rented out for more than 6 years or the taxpayer elects another home as their main residence for tax purposes

The market value on that date is used as the cost base for CGT purposes, rather than the original cost. This will usually reduce the CGT payable.

 

Double Dip! Even though the capital gain is not determined by reference to the original cost, the taxable capital gain/loss will still be determined by apportioning the gain/loss calculated using the market value as the cost base between the rental period (taxable) and the actual and deemed residence period (tax free).

Market Valuation Not Required

However, the market value at the date of change of use is not relevant if:

 

• the home was first used to produce income before 21 August 1996 or

• the home was first used to produce income before it became the taxpayer’s main residence or

• the property was purchased pre-20 September 1985

Unless the property was acquired pre-20 September 1985, you will be required to calculate the capital gain over the whole period you have owned it and then apportion the gain between the number of days it was covered by your main residence exemption and the number of days it was not.

The costs, including 3rd element costs of ownership (see container above and Section 110-25(4) of the Income Tax Act) that are associated with the period you lived in it, count proportionally towards reducing CGT on the period when it was rented and so exposed to CGT, if you have not already previously claimed them as a tax deduction

The six-year absence rule

Where a taxpayer’s main residence is acquired after 19 September 1985, the taxpayer can elect to continue to treat the home as their main residence for a maximum of six consecutive years while it is being rented out, provided that they do not elect to treat any other property as their main residence during this period. Each time they re-occupy the home as their only principal residence the six-year concession starts again.

If your vacated home is not used to produce income, you can elect to treat it as your only main residence for an unlimited period.

Cost base adjustments for capital works deductions

 

In working out a capital gain or capital loss from a rental property, you may need to reduce the cost base and reduced cost base of the property to the extent that it includes construction expenditure for which you claimed, or were entitled to claim, a capital works deduction.

 

 

Cost base

 

You must exclude from a cost base of a CGT asset (including a building, structure or other capital improvement to land that is treated as a separate asset for CGT purposes) the amount of capital works deductions you claimed or were entitled to claim in respect of the asset if:

 

> you acquired the asset after 7:30pm (by legal time in the ACT) on 13 May 1997, or

 

> you acquired the asset before that time and the expenditure that gave rise to the capital works deductions was incurred after 30 June 1999.

 

 

Reduced cost base

 

The amount of the capital works deductions you claimed or were entitled to claim for expenditure you incurred in respect of an asset is excluded from the reduced cost base.

 

Bonus - No claw-back of capital works deductions for property which still qualifies as main residence

If a property,  that you previously rented out and for which you claimed Division 43 capital works deductions, is still regarded as your main residence (e.g. 6-year rule), at the time you sell the property , there is no requirement to give back the Capital Works deductions claimed while you were renting it out.

 

Use the indexation method to calculate your capital gain if:

 

> a CGT event happens to an asset you acquired before 11.45am (AEST) on 21 September 1999, and

 

> you owned the asset for 12 months or more (excluding day of purchase and day of sale).

 

If you are not a company and you meet the 2 conditions above and you wish to use the indexation method, you must choose to do so, otherwise the discount method will apply. If you are a company (other than a listed investment company) and the capital gain meets the above conditions, you must use the indexation method to calculate the capital gain.  The discount method does not apply to a company.

 

Under the indexation method, you increase each amount included in an element of the cost base, (other than those in the third element - costs of owning the asset) by an indexation factor.

 

The indexation factor is worked out using the consumer price index (CPI).

 

If the CGT event happened on or after 11.45am (by legal time in the ACT) on 21 September 1999 you can only index the elements of your cost base up to 30 September 1999. You use this formula:

 

Indexation factor =	CPI for quarter ending 30.9.99 (123.4)
	CPI for quarter in which expenditure was incurred

 

If the CGT event happened before 11.45am (by legal time in the ACT) on 21 September 1999, you use this formula:

 

Indexation factor =	CPI for quarter when CGT event happened
	CPI for quarter in which expenditure was incurred

 

Work out the indexation factor to three decimal places, rounding up if the fourth decimal place is five or more.

 

 

 

 

 

The discount method does not apply to companies.

 

You may use the discount method if:

 

> a CGT event happens to an asset you acquired after 11.45am (AEST) on 21 September 1999, and

 

> you owned the asset for 12 months or more (excluding day of purchase and day of sale).

 

The non-indexed gain is reduced by the relevant discount, being 50% for individuals and 33⅓% for complying superfunds.  However capital losses must first be applied against the pre-discounted capital gain to be included in assessable income. [S102 – 5(1)]

 

For a year of income use this order to calculate the taxable capital gain:

 

1.       Add together current year capital gains (before discount) of each asset.

2.       Subtract the sum of all current year capital losses.

3.       Subtract eligible unrecouped previous year capital losses.

4.       This gives you the notional net capital gain.  *

5.       Subtract the sum of the discounts that may be applicable.

6.       Subtract any small business concessions that may be applicable.

7.       This equals the taxable capital gain.

 

*If this total is negative any concessions available at items 5 and 6 are effectively lost.

 

 

Main residence exemption did not apply - Erdelyi and Commissioner of Taxation (2007) AATA 1388 (31 May 2007).

The Tribunal took into account the factors in Taxation Determination TD 51 in determining whether the property was the taxpayers' main residence.  For instance the applicants had only moved the ‘bare necessities’ into the premises pending the sale by their daughter of her property.  The level of electricity consumption for the time was dramatically below what would be expected and there was no evidence of a change of residential address in official records (e.g. driver's licence, vehicle registration, address with Centrelink, electoral roll, insurance and banking institutions).

 

 

Generally, you can ignore a capital gain or loss you make when you sell your home.  However, you may have to pay capital gains tax (CGT) when you sell your home if you have used any part of it for business purposes. 

The liability for CGT is not removed just because you did not claim occupancy or running expenses as a tax deduction. The test is whether you were eligible to claim.

However, you may be eligible for the Small Business CGT Concessions, to reduce or eliminate your CGT liability.

CGT will not apply if any of the following apply:

> you do not have an area specifically set aside for your business activities or,

> you operate your business through a company or trust and you do not charge the company/trust rent for the use of your home. This applies even if the company lists the home address as its Principal Place of Business at ASIC.

Source: ATO