When you sell real estate for more than you bought it for, you make a capital gain. Ordinarily, capital gains form part of your income tax, essentially increasing the tax that you are required to pay. There are however, certain types of assets that are exempt from capital gains tax (CGT). For example, you do not have to pay CGT on any capital gain you receive from disposing of a dwelling that is your main residence. But what’s a “dwelling”? And how do you prove that such dwelling is your main residence?
Is your home a “dwelling”?
A “dwelling” has been broadly defined by the Australian Tax Office (ATO) as “anything that is used wholly or mainly for residential accommodation”. The following properties are included in such definition;
- a house or cottage
- an apartment or flat
- a strata title unit
- a unit in a retirement village
- a caravan, houseboat or other mobile home
Is your home your Principal Place of Residence (PPOR)?
According to the ATO, generally, a dwelling is considered to be your main residence if:
- you and your family live in it
- your personal belongings are in it
- it is the address your mail is delivered to
- it is your address on the electoral roll
- services such as gas and power are connected.
To be your main residence, your property must have a dwelling on it and you must have lived in it. You are not entitled to the exemption for a vacant block. The length of time you stay in the dwelling and whether you intend to occupy it as your home may also be relevant when assessing CGT liability or eligibility for a CGT exemption.
While there is currently no set period defined in the legislation, case law indicates that the ATO will generally accept a period of 3 months or more as the length of time that you need to live in a dwelling before that dwelling is considered to be your place of principal residence. Further, in the circumstance that you have built the property at issue, you also need to be able to show that you moved into the dwelling as soon as practicable after its construction was completed in order to be entitled to the CGT principal residence exemption.
You can only have one place of principal residence at any given time, the one exception is in the instance where you buy a new home before the sale of your old. In this case, you are entitled to a 6 month overlap period provided you lived in the old property for a continuous three month period in the last 12 months; the old property was not used to produce an assessable income (e.g. rent) in the last 12 months; and your new property will be your place of principal residence.
Satisfying the “move-in as soon as practicable” CGT exemption for PPOR requirement
In the event that you purchase land for the purpose of building a dwelling, you need to be able to show that the dwelling became your main residence as soon as practicable after its completion. In order to satisfy this requirement, we advise that you keep copies and records of the following;
- the Certificate of Occupancy
- the date the final building inspection was granted;
- any “handover” documents provided to you by the builder
- the connection of services, such as gas and electricity, to the property at issue.
As these documents will establish a date relevant to proving that you moved into your dwelling as soon as practicable, it is essential that you hang on to them.
Even if it is not a newly built property, in order to be eligible for the CGT exemption you must still satisfy the requirement to “move in as soon as practicable” from the “time you acquire it”, which would usually be the settlement date of the contract. There are circumstances whereby there is a delay in moving in but you may still be eligible for a full exemption. For example if illness, or other unforeseen circumstances such as an overseas assignment for work, delayed you moving in to your new property, you would still be exempt from CGT liability for that property so long as you could substantiate that you “moved in as soon as practicable”.
Satisfying the 3 month CGT exemption for PPOR requirement
In order to show that a dwelling has continued to be your main residence for three months, we advise that you do the following;
- live in the dwelling for no less than three months;
- re-direct all mail to your new address;
- change the address on your drivers licence to that of your new address;
- change your address on the electoral roll to that of your new address;
- keep copies of rate notices relevant to your new address;
- if you purchase furniture and white goods for your new address, keep the invoices and delivery notices;
- move your personal belonging to your new address and keep copies of any invoices provided to you by the removalist;
- have services, such as gas, electricity, phone, internet, connected to your house and keep the records which show that you have had such utilities connected;
- ensure that the property at issue is the one listed on your income tax return;
- send letter to relevant businesses and government agencies, such as your local sporting club, your doctor, your physiotherapist, your dentist, your bank, the Roads and Maritime Services, Medicare and Centrelink informing them of your change of address; and
- if you’re having a house warming party, keep a copy of the invites that you send out to your friends and family
Essentially, it is good idea to hold on to all correspondence, invoices, receipts and other records that show that the dwelling at issue is being used as your main residence. You need to be able to clearly show that you lived in, and had a clear intention to occupy the dwelling for at least three months in order to claim the benefits of the CGT main residence exemption.
Here at The Quinn Group our team of tax accountants and tax lawyers can assist with assessing, providing individual advice, and where possible attempting to minimise, your Capital Gains Tax liability. Contact us on (02) 9223 9166 or complete an online enquiry to schedule an appointment.