It is common knowledge that a person's family home (hereinafter
referred to as sole or principal place of residence) is exempt
from capital gains tax ("CGT").
What perhaps is not common knowledge is the complexity of the
legislation giving rise to this exemption.
What is Exempt?
Generally, to fall within the exemption, the residence (which
can include caravans, houseboats, mobile homes and some forms
of licences or leases) must be owned by an individual and used
as their sole or principal place of residence . Residences held
by private companies, trusts (deceased estates are subject to
separate rules) and the like will not qualify for this exemption.
This exemption from CGT extends to adjacent land on which the
dwelling is located provided the area of land does not exceed
2 hectares and the land is used for private or domestic purposes.
Difficulties may arise in determining the application of this
exemption in situations where adjacent land is in excess of two
hectares, in so far as ascertaining of the total land which two
hectares will be exempt upon sale, having regard to different
values being placed on different parts of the land.
In the case of a residence being a home unit, the exemption extends
to an associated garage or storeroom, provided the home unit is
used as the person's principal place of residence. However, where
a garage or storeroom is sold separately such a sale will not
fall within the CGT exemption.
Factors Determining Application
of Exemption
The following factors are taken into account by the Taxation Office
in determining whether or not a residence qualifies for CGT exemption
as a sole or principal place of residence:
- the
length of time the person has lived in the residence;
- the
address to which a person's mail is sent;
- the
place of residence of a person's family;
- whether
or not a person's belongings are kept at the residence;
- the
person's address on the electoral roll;
- the
person's intention in occupying the residence; and
- the
connection of services and utilities such as telephone, electricity
and gas.
It should
be noted that the mere intention to occupy a dwelling as a sole
or principal place of residence without actually residing in the
dwelling will not be sufficient to procure the exemption.
Residence Acquired or Built
for Profit-Making Purposes
It is important to note that the sole or principal place of residence
exemption only applies for CGT purposes. A person who for instance
regularly buys houses, undertakes renovations and then resells
the property for a profit may be assessable on any gain under
the normal income provisions of the income tax legislation, notwithstanding
that the person resided in the houses whilst undertaking this
work. This is so since the residence was acquired or built, not
for private or domestic reasons but for profit-making purposes.
Residence Used for Income
Producing Purposes
Where a sole or principal place of residence, which has been acquired
after 19 September, 1985 is used for income producing purposes
(for example, part of the residence is used as a place of business
such as a doctors surgery or dedicated to deriving rental income)
then upon its sale the CGT provisions will apply. The calculation
of any applicable CGT will be determined on the following bases:
1.
Where the residence is first used to produce assessable income
prior to 20 August, 1996 any CGT liability is calculated with
reference to, and apportioned over the length of time the residence
was used for income producing purposes compared to the total period
of ownership;
2.
If, on or after 20 August, 1996, a person commences to use all
or part of a principal residence for income producing purposes,
the capital gain is calculated by reference to the proceeds on
sale, the market value at the date the income producing activity
commenced and the proportion of the residence used for income
producing purposes.
In determining whether a residence has been used for income producing
purposes, it must possess the character of a place of business.
To assess whether or not this is the case, the Taxation Office
will take into account the following factors:
- Whether
the residence or part thereof has been set aside exclusively
as a place of business;
- Whether
the residence or part thereof is clearly identifiable as a place
of business;
- Whether
the residence or part thereof is not suitable or easily adaptable
for private or domestic purposes.
It is
thought that uses such as storing business records or music lessons
would not affect the exemption, but as stated above, adapting a
room as a doctors surgery would clearly have adverse implications.
As a rule of thumb the Taxation Office will consider a sole or principal
place of residence from which income has been derived to fall within
the CGT provisions where a person is entitled to claim income tax
deductions for interest, rates, rent and insurance premiums.
What If You Own More Than
One Residence
Where a person owns and lives in two houses, difficulties can
arise in determining which of the houses is exempt. This problem
typically arises when a retiree begins to spend more and more
time in a holiday home. Such factors as those noted above regarding
whether or not a residence is exempt as a sole or principal place
of residence will influence the outcome. The matter is a question
of fact.
It may be thought that these problems could be easily over come
by purchasing one house in a husband's name and the second in
the wife's name, both then claiming the exemption. Unfortunately,
such is not the case. The legislation contains nomination provisions
that have the effect of limiting this exemption as well as preventing
the exemption being applied to a child who is under 18 and dependant
on a person for economic support.
The very nature of the sole or principal place of residence exemption
implies the existence of a residence in which a person lives.
However the legislation extends to cover situations where a person:-
- builds
a dwelling to live in on a vacant block of land; or
- completes
the erection of a dwelling; or
- builds
a dwelling after demolishing an existing or partially completed
dwelling; or
- repairs
or renovates a dwelling.
In these
cases a person may claim an exemption provided that the person resides
in the dwelling for at least three months and the time from acquisition
to completion of the work is less than four years. In the event
that the person owns an existing residence during the construction
period an election should be made.
On occasions, a person may cease living at their sole or principal
place of residence. When this occurs the person may elect to have
this residence continue to be treated as their sole or principal
place of residence. If the residence is used for income producing
purposes, such as deriving rental income, the exemption runs for
a period of six years. After six years any capital gain is assessable
on a pro rata basis. This concession has particular application
in situations where work requires a temporary or extended relocation.
Another situation which may arise is where timing differences
between the purchase of a residence and sale of an existing residence
may result in a person having two residences. The legislation
allows an exemption from CGT for both residences for up to three
months, provided the residence being sold was the persons sole
or principal place of residence for a continuous three month period
during the previous twelve months up to its sale, and during this
twelve month period it was not used to produce assessable income.
Deceased Estates
The legislation contains complex provisions in regard to deceased
estates and inheritances. A full exemption from CGT applies where
the property was the deceased's sole or principal place of residence
immediately prior to death and the property is sold within two
years (previously one year) of the date of death. This exemption
also applies to a residence that was both the deceased's sole
or principal place of residence (at the time of death) and is
used by the beneficiary of the will as their sole or principal
place of residence.
Conclusion
The CGT exemption provisions relating to a sole or principal place
of residence are extremely complicated. This article outlines
some of the issues relating to CGT and the family home and in
view of the nature of this legislation it is of the utmost importance
that advice from a qualified person be obtained prior to entering.
