CGT Question

[MTR]

Hi All

I had a phone call from a friend this morning and I don't know the answer, perhaps someone here does?

In 2001 she purchased a property for $145K, sold it last year for $375K. During this period she rented this out and as her income was below xxx she did not lodge tax returns. She then moved to her friend's house (rent free) as he is overseas 11 months of the year, comes back for 1 month holiday. Has been in this house for over 20 years.

She does not work, currently she is a student.

When she sold her property she was under the impression that as she only owns 1 property, this is considered her primary residence even if she did not reside in this property she would be CGT exempt.??

ATO have explained that she currently owes approximately $30K, and that she must provide proof that she lived in the property.

She is now going on a tangent, and thinks that if you can prove she lived her property (sold property) for the 1 month, she may be able to get out of paying CGT.

I would be interested in what her tax rate would be if she is a student/unemployed?
Personally I can not see her getting out of this, and she does not have the funds to pay this tax bill?

Can anyone enlighten me on this, as I have no clue.

Thanks for help

Cheers
MTR

 

[sanj]

Im no tax expert but the idea that she can claim an IP was a PPOR simply because she didnt own anything else is pretty silly imo, i certainly dont expect the ATO to agree with her.

why is she unable to pay the tax bill? what happened to the proceeds?

 

[mrdobalina]

I would be interested in what her tax rate would be if she is a student/unemployed?
Personally I can not see her getting out of this, and she does not have the funds to pay this tax bill?

My understanding is that you must have lived in the property when you first purchased in, for at least 6 months. (My understanding is probably wrong)

If she is liable for tax, then the gain (with the applicable discounts) is added to the rest of her income. The tax bands are then applied to the total taxable income.

What happened to the gain in the property after she sold it and paid of outstanding debts?

 

[Paul@PFI]

Not 100% exempt. That is incorrect. And not just incorrect but reckless to consider she could sell a property that has earned rent and pay no tax. Its possibly likely to be considered reckless or evasion by ATO when its detected. That means penalties, interest and possibly a criminal conviction.

If she lived in the property first then rented it out then a MAXIMUM 6 year exemption may be available as she owned no other main residence since. That would mean 6/10th x profit would be exempt. The 1 month a year doesnt seem to me like its a decision to reside. Its just a issue of convenience and her intention is to reside permanently with a friend. ie Did she relocate ALL her possessions and change her D/License, insurances, car rego ect each year. I bet answer is no. ATO will check the same and wont belive her either. A scheme to bypass CGT even ??? Proof she LIVED there will be what ATO insist on. It doesnt smell right. ..."The dog ate my homework"

If she didnt live in it first then rent it out then 100% of profit is taxable. Her moving back in from time to time doesnt seem like a "residence".

Of course 50% CGT discount will apply to any calculated cap gain.

The taxable gain will be at her marginal tax rate for 2013 which if she has low income may mean it's taxed at a progressive rate starting at 0% and working higher.

Love how she rented a property and didnt lodge returns. Its an obligation not a choice. So ATO can issue a Notice demanding returns for every one of those years. Thats a potential jail term if she doesnt comply. Let me put this right...So her rents and "income" were less than a total or $6K a year every year for 10 years AND her deductions less than $6k so she didnt have a loss either. ATO will ask for her to prove that view if she is asked. Very convenient. Sure she is being honest ??

Its possible if she had done the right thing she may even had losses each year and could offset that against the cap gain too. Maybe.

Assume she racked up a HECS debt too... Time to start repayments I suspect.

Robbing taxpayers is just as much a crime as holding a weapon in a bank. I'm all for taxpayers paying no more tax then legally required but this isnt an example.

 

[MTR]

Im no tax expert but the idea that she can claim an IP was a PPOR simply because she didnt own anything else is pretty silly imo, i certainly dont expect the ATO to agree with her.

why is she unable to pay the tax bill? what happened to the proceeds?

Thanks Sanj and Mrd
I agree totally silly
What happened to the proceeds, she purchased another property and borrowed I think $120K, she was lucky to get because she had no income so I guess she got the loan because of the rental income.

 

[MTR]

Not 100% exempt. That is incorrect. And not just incorrect but reckless to consider she could sell a property that has earned rent and pay no tax. Its possibly likely to be considered reckless or evasion by ATO when its detected. That means penalties, interest and possibly a criminal conviction.

If she lived in the property first then rented it out then a MAXIMUM 6 year exemption may be available as she owned no other main residence since. That would mean 6/10th x profit would be exempt. The 1 month a year doesnt seem to me like its a decision to reside. Its just a issue of convenience and her intention is to reside permanently with a friend. ie Did she relocate ALL her possessions and change her D/License, insurances, car rego ect each year. I bet answer is no. ATO will check the same and wont belive her either. A scheme to bypass CGT even ??? Proof she LIVED there will be what ATO insist on. It doesnt smell right. ..."The dog ate my homework"

If she didnt live in it first then rent it out then 100% of profit is taxable. Her moving back in from time to time doesnt seem like a "residence".

Of course 50% CGT discount will apply to any calculated cap gain.

The taxable gain will be at her marginal tax rate for 2013 which if she has low income may mean it's taxed at a progressive rate starting at 0% and working higher.

Love how she rented a property and didnt lodge returns. Its an obligation not a choice. So ATO can issue a Notice demanding returns for every one of those years. Thats a potential jail term if she doesnt comply. Let me put this right...So her rents and "income" were less than a total or $6K a year every year for 10 years AND her deductions less than $6k so she didnt have a loss either. ATO will ask for her to prove that view if she is asked. Very convenient. Sure she is being honest ??

Its possible if she had done the right thing she may even had losses each year and could offset that against the cap gain too. Maybe.

Assume she racked up a HECS debt too... Time to start repayments I suspect.

Robbing taxpayers is just as much a crime as holding a weapon in a bank. I'm all for taxpayers paying no more tax then legally required but this isnt an example.

Thanks for this information I will pass it on.

Could not agree with you more.
She has been taking freebees for years now and I think it has finally caught up with her.

Paying HECS, she will not be paying a cent, just finished a course $12K, one of many, she knows what she can do to get away with this.

I have no sympathy whatsoever, in fact I have advised her many times to do the right thing.

BTW, the property was a gift from her mother, she never paid/worked for it, her mother did, no bank alone against this now.

This is a person who always lands on their feet, that has been the story of her life and freebees are always there, people always offering to pay for meals etc. In fact I would not be surprised if she ends up paying nothing, it is just the way it is, known her for 20 years now and this is just the story of her life.

Thanks
MTR

 

[Aaron_C]

That means penalties, interest and possibly a criminal conviction.

Geez who said anything about tax evasion? If someone like that is up for tax evasion prosecution then I think this country will run out of room for all the convicts put there by the DPP.

 

[perthguy]

ATO have explained that she currently owes approximately $30K, and that she must provide proof that she lived in the property.

For $30k, I would pay a professional to see what can be done.

To give some idea of establishing a PPoR, I have done this. First (and most imporatantly) I moved in the day after settlement. I had the water, gas and electricity accounts set up in my name for that address. I changed my drivers licence and updated the electoral roll with that address. I had my mobile billing address changed to that address. I changed all my bank accounts to that address and got a membership at the local library with that address. Also, I actually lived there most of the time for about 2 years before I had to move for work. Only then did I rent out my unit.

I have records of most of the above in case the ATO ever asks. It is a myth that there is a time limit to establish a PPoR. My friend was upset the other day because his accountant could not tell him the time limit to establish a PPoR. It is about intention and action not time. Take it from the ATO:

"the length of time you live there ? there is no minimum time a person has to live in a home before it is considered to be their main residence"

http://www.ato.gov.au/General/Capit...-estate/Is-the-dwelling-your-main-residence-/