In today’s show Ken Raiss responds to Victor’s question about Capital Gains Tax and when it is applied if he wants to rent out his principal place of residence and then move back before he sells it.
Kevin: In today’s show, we’re going to answer a couple of questions from listeners. Thanks for sending them in. Just send them in anytime through the website. Even if we don’t answer them in the show, we will always get an answer for you.
Victor wrote to us and said, “I moved out of my principal place of residence, which I’ve been in for seven years, and then rented it out for three years. I plan to sell it. Do I have to pay capital gains tax? Do I need to move back in to sell it so I can get some exemption? The main reason I want to sell it is to avoid capital gains tax and minimize my yearly land tax. I plan to put some of the money into my self-funded superannuation fund so I can buy under that scheme.”
A number of questions in there, but I’m going to refer them all now to Ken Raiss from Chan & Naylor.
Ken: In summary, you can retain your main residence exemption for up to six years once you move out unless, of course, you’ve identified another property as your main residence. You can only have one residence for tax exemption at a time.
The beauty of it is you don’t have to identify which residence until you sell one. Then you do the numbers and you work out which property gives you the best tax advantage. The ATO in this regard is pretty good at it.
To calculate the tax, what we need to do is go back and determine the market value of the property at the time you moved out. That sets up, if you like, the cost base to determine the profit on the sale. You get the selling price less any costs, of course, and you compare it back to the market value on the date you moved out and rented the property. That creates the profit that we then look at to see how much is taxable.
The way we calculate what’s taxable is we look at the number of days you’ve owned it in total and you compare that to the number of days you had a tenant in there, while taking into account up to six years, you can have it as tax-free. So it’s a proportion of the number of days you had a tenant versus the number of days you owned it, but you only multiply that against the profit based on the market value at the time you sold.
Kevin: In Victor’s case, because he’s only been renting it out for three years, it’s not going to apply to him, is it?
Ken: Correct, but there will be a small amount of tax involved. There is still a 50% reduction on the tax because you’ve had that more than 12 months, and you actually can put part of that profit into super. Super is taxed at 15% compared to Victor’s maybe higher marginal tax rate.
But if you’re an employee, you can only put that money into super via a salary sacrifice, and the only way you can do a salary sacrifice is by advising your employer before you’ve earned the money. You can’t call in on June 30th and say, “Last month’s money that I haven’t received yet, I want to salary sacrifice that.” You have to salary sacrifice prior to earning the income.
If you’re self-employed, obviously that doesn’t come into the equation.
Kevin: There you go, Victor. That’s answered your question. Ken Raiss, of course, is from Chan & Naylor. Thanks for your time, Ken.
Ken: Thank you, and I hope that satisfies Victor.