Capital Gains Tax and PPOR

[julieo]

Hi all you passionate PI's out there. I have a question. A friend of mine (and yes it really is the friend, not me!!) Thinks he can avoid CGT using the following scenario.

He purchased a house in sydney about 6 years ago (house 1) . He lived in it for 3 years and he then moved to canberra and rented the sydney house out for 3 years (until recently).

When he first moved to Canberra he purchased a house and lived in it for about 18 months (house 2) and then purchased another house in Canberra which is now is PPOR (house 3). He is renting out house 2.

So the state of play at the moment is that house 1 is just about to be sold. He thinks that as he lived in it for a length of time and it is within the 6 year time from from when he rented it out to when it is being sold, he can claim this house as his PPOR and not paid any CGT.

He also thinks that when he decides to sell house 2 within the 6 year time frame he also won't have to pay any CGT on that one as he lived in it before renting it.

Is this possible? I would not have thought so, otherwise all PI's (who don't want to hold on to their propertys for the long long term) would be doing it and I can't see Mr Taxman letting it happen.

[quiggles]

Mr Taxman has a fairly ironclad rule - you can have one PPOR at any time. That, after all, is what PRINCIPAL means. Your friend is trying to say that for three years both the Sydney property and the Canberra property were his PPOR (a rather different proposition to say moving out and renting).

I think that he's got buckleys and he's going to have to choose (after running the numbers) which is his PPOR - it'll largely center around his current growth and expectations of future growth.

Otherwise, I'm going out and buying properties, moving in for a month and selling the properties after 6 years, tax free. At 12 properties per year and no tax, that will do nicely as a retirement plan. And after all, I'll only have 72 PPORs at any one time... :D

(I'm only kidding, I know that would make me a trader).

Perhaps the professional accountants can comment further.

[BV]

He needs Professional advise on this one.

There are guidelines to the 6 year rule
but even if there were none, the ATO has the ability to dissalow
claims on the basis that the guy is doing this to avoid paying
his share of tax.

cheers

[julieo]

Yes I have advised him to check it all out. The thing is this is a person who likes to do everything by the book, but it is just that he thinks this is how the rule works. I have told him that I don't think he would be able to do something like this. Anyway when he seeks advice he will soon find out!!

[DaleGG]

Hi Julie

I am afraid that Quiggles is correct on this one. Your friend is in trouble if he/she proceeds with their ideas.

Sorry

Dale

[Mry]

I second Dale.

I tell clients that a PPOR exemption is like having a single umbrella, it can only cover one property at a time. I had a similar experience recently with 2 clients who moved all over Australia and tried something similar to this.

[Savanna100]

What I want to know is...if a person pays tax as an individual taxpayer, why cant they have a PPOR each??? why, if you are a couple, can you only have one PPOR between you???

this has always baffled me...

[Mry]

What I want to know is...if a person pays tax as an individual taxpayer, why cant they have a PPOR each??? why, if you are a couple, can you only have one PPOR between you???

this has always baffled me...

Because you actually have to be living there. And the government likes money.

[BV]

What I want to know is...if a person pays tax as an individual taxpayer, why cant they have a PPOR each??? why, if you are a couple, can you only have one PPOR between you???
this has always baffled me...

It makes sense if you think about it.
if you are a couple you can only have 1 PPOR because you actually live together.
What sort of couple would you be if you were living in 2 separate properties?

cheers

[Kiwi Investor]

My understanding is that if you live in a ppor and then rent out, the CGT is calculated on a pro rata basis, eg
5 yrs ownership of ppty
2.5 years as IP
2.5 years as ppor
50% CGT

After all if you take all the deductions etc for the 2.5 yrs I think the ATO would expect you to pay any CGT that was due.

I would suggest your friend may have some issues with this strategy.

:)

[Savanna100]

"What sort of couple would you be if you were living in 2 properties"...

well, actually, you'd be like the federal MP Helen Coonan and her hubby who tried this on the ATO last year !!!

[Tikki]

Hi Julie,

The ATO's 'main residence and temporary absence' states that If you leave your main residence temporarily, you may want that residence to be regarded, for capital gains tax purposes, as your main residence while you are away. This may be the case, for example, if you move because of a temporary job transfer, to study overseas or to take an extended overseas holiday.

Under the capital gains tax rules, if you use your vacated home to produce income, you can choose to treat that home as your main residence for a period of up to six years. If you do not use the home to produce income, you can choose to treat it as your main residence for an unlimited period after you cease living in it.

If you choose to do this, under the capital gains tax rules you cannot nominate any other dwelling as your main residence during your period of absence, even if you actually lived in that other dwelling.

You must make the choice by the day you lodge your tax return for the income year in which a CGT event occurs for the disposal of the main residence. The way you prepare your tax return is sufficient evidence of your choice.

Therefore your friend will have to make a choice as to what date he ceased living in Sydney and started living in Canberra as far as a ppor goes as you can not have two at the same time.

[julieo]

Thanks Tikki and other contributers. I will tell my pal (or better still print out these forum notes) and let him decide what the best course of action is.

Cheers
Julie

[julia]

Savanna,
Couples are only allowed one PPOR between them despite the fact in 50% of marriages they will one day need a house each. If you are having trouble with this concept you misunderstand a fundimental basis of our law. Our law is based on a factor that is the most difficult issue to prove. Our law is based on who you have sex with. Try this quick quiz:
Do you have Sex? No Get all taxation and Centrelink benefits.
Yes Read further
Do you have Sex Frequently? No Get all taxation and Cenrelink benefits
Yes Read further
Do you have Sex Frequently with the same person? No Get all taxation &
Centrelink benefits
Yes Read further
Is the person with whom you have sex frequently with the same sex as you:
Yes Get all taxation and Centrelink benefits
No Gotch ya Now you know what our government means re family values.

Julia Hartman
julia@bantacs.com.au
www.bantacs.com.au

[Francesco]

Julia

You are funny! :p

There is a silver lining in the gloomy clouds over family in Oz. As couples bear the most tax burden and also gets the lesser welfare benefit rate (couple rate compares with 2xsingle rate), couples deserve more tax relief through the Family Tax Benefits. So, electorally the govt still manage to get on the good side of families.

Cheers :D

[julia]

Franseco,
The government has worked out that it does not need to get on the good side of families or workers. It can tax them to the hilt because of the aging population. A couple of years ago it granted concessions to people over 65 that singles on $20,000 a year and couples on 32,612 do not have to pay tax or medicare. These are approximates and I am pretty sure they have been indexed since. Yet families with mortgages and children do. Why? I can only assume it is because there is enough votes in the aged to ignore the needs of the younger generation that has yet to establish itself.

Julia Hartman
julia@bantacs.com.au
www.bantacs.com.au

[quiggles]

I don't believe you're right Julia, but only because you demonstrate such starry-eyed innocence.

With the baby bonus and a couple of other sops, the government actually believes that cash in hand (a trivial amount) will be enough to persuade the younger voters (along with the fact that Mum and dad now have a few extra bucks so don't have to sponge off them).

I think they think that younger Australians can't add up. And judging by the election result, they're right.

[Francesco]

Julia, sorry for the delay in responding.

I value your viewpoints. I read your tax articles at your website and they offer real substance. :p However, I respectfully differ with some of your views on govt policies.

Do govt value votes from families. Yes, it does. There was even an article with a cartoon of JH smootched with kisses from grateful mothers! I forgot in which newspaper it was. For that, the article asserts that JH is a conservative and would prefer to see women at home! People can draw different conclusions with the same statistics! (Notice RBA's recent interest decision against a significant body of informed opinions. Same statistics ,different conclusions.) :)

The govt can afford to provide enhanced Family Tax Benefits because it has an auto-pilot of cashflow via taxing of the normally indexed PAYG income against the unindexed tax thresholds.

Govt offers benefits to seniors, such as higher tax thresholds for 65+ to break the previously entrenched strategy of many of spending all just prior to retirement and relying on the Age Pension (and health benefits) thereafter until the hereafter. That entrenched strategy plus an aging population would be unsustainable. It is better to dangle carrots of tax-free thresholds to seniors if they finance their own retirement. Incentives have to be significant to effect behavioral changes. Of course, govt strategies also have to align with electoral reality. So much the better when you have the votes of the aged in the process! :D

[quiggles]

JH is only concerned about one house - the House of Reps. And as long as he runs it, he doesn't care how many women are there.

[Lplate]

JH is too busy smooching up to Bush.

His egotistical need for a place in history as a world leader is his Achilles heel.

IMHO the government is complacent. The overconfidence, smugness and arrogance demonstrated by JH and his Ministers, especially in not answering questions in the House and in media interviews, will in time be their own undoing.

[Aceyducey]

Julie,

House 1 (Sydney) PPOR for 3 years no CGT, 3 years rental pays CGT
House 2 (Canberra) PPOR for 18 months no CGT, 18 months rental pays CGT
House 3 (Canberra) PPOR for last 18 months no CGT

Thus only one PPOR at a time during the last 6 years.

Cheers,

Aceyducey