Section 118-192, what is 'income time'?

[james.patre]

Hi SSers

I have a specific question that is hopefully easy to answer.

I have post-1996 PPR that I'm vacating to move to a new PPR. The old property will be rented out.

I would like to ensure that the CGT cost base is reset on the old property as per section 118.192 (reproduced below for reference). I have full PPR exemption up to now so that should not be an issue.

My question is that, do I have to do anything special if I want to ensure that my new property will be eligible for CGT cost base reset under the same rule, should I decide to rent it out in the future?

My concern is around what counts as 'income time', and how it relates to 'moving in time'.

Say:
1. I start advertising rental for property 1 on 10 Jan.
2. I vacate property 1 and move to property 2 on 15 Jan.
3. I find a tenant on 20 Jan.

When is 'income time?' Is it 15 Jan? Am I voiding the cost base reset because the rule says 'covered by PPR exemption up to income time' and in this case it is not covered between 15-20 Jan?

I can probably nominate property 1 to be my PPR up to 20 Jan, but wouldn't that then render property 2 uneligible for this cost base reset in the future, because between 15-20 Jan it is not my PPR? (The rule seems to require that you are fully covered by PPR up until income time).

Or - and this is my hope - I can nominate 'income time' to be 15 Jan, since it is when the property is available for rental?

Bonus complication: What if I want to do some reno to make the property fit for rental?


INCOME TAX ASSESSMENT ACT 1997 - SECT 118.192

Special rule for first use to produce income

(1) There is a special rule if:
(a) you would get only a partial exemption under this Subdivision for a * CGT event happening in relation to a * dwelling or your * ownership interest in it because the dwelling was used for the * purpose of producing assessable income during your * ownership period; and
(aa) that use occurred for the first time after 7.30 pm, by legal time in the Australian Capital Territory, on 20 August 1996; and
(b) you would have got a full exemption under this Subdivision if the CGT event had happened just before the first time (the income time ) it was used for that purpose during your ownership period.

(2) You are taken to have * acquired the * dwelling or your * ownership interest at the income time for its * market value at that time.

(3) If your * ownership interest in the * dwelling * passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate and the * CGT event did not happen within 2 years of the deceased's death, you apply this Subdivision as if:
(a) you had * acquired the interest as an individual and not as a beneficiary or trustee of a deceased estate; and
(b) for applying the formula in section 118-185, your non-main residence days were the number of days in your * ownership period when the dwelling was not the main residence of an individual referred to in item 2, column 3 of the table in section 118-195.

 

[GaryT]

The cost base is reset to market value when first rented out i.e. when it first produced rental income.

You can utilise the 6 year rule to extend the exemption if needed.

Once you move into your new residence you can choose either one to be your PPOR residence for CGT exemption however you can only have one PPOR at a time.

 

[james.patre]

What is counted as 'produce rental income'?

• The day that the first rent is due/paid?
• The day that it is advertised for rent?
• Something else?

 

[GaryT]

First produced rental income would seem to be the date that the rental income is first derived i.e. the date the tenant is paying rent from as per the rental contract

 

[Rob G.]

"Purpose of producing assessable income" is defined in s.995-1(1) ITAA97 in a similar manner to s.8-1.

Under s.8-1 second limb (business), interest expense was allowed by the High Court from the first day of a prolonged development that eventually failed (Steele's case).

The AAT has subsequently applied this principle to an owner/builder investor (Ormiston) and the ATO has issued public documents to this effect.

Therefore, it would be a reasonable argument that from the day you vacated to prepare the house for rent then your purpose has begun.

If the Commissioner disagreed, you still have a six month overlap on the two dwellings where you get the full main residence exemption.

You might consider asking for a pbr and disclosing more detail (or asking your tax agent to apply for a pbr on your behalf).

Cheers,

Rob

 

[GaryT]

If the Commissioner disagreed, you still have a six month overlap on the two dwellings where you get the full main residence exemption.
Rob

Rob - The six month overlap does not apply in this case as the property is not being sold and also because it is being used to produce income.

I am not sure a few weeks would make a great difference to the market value. However the legislation and associated IDs (i.e. 2003/1113) seems to be clear that the relevant "income time" is the day it was first used for income producing purposes. Again this would seem to be the day the lease starts and rent is due but certainly a PBR would be useful for a definitive answer if you really think the date is critical.

 

[Rob G.]

One day, you or your executor/beneficiary will sell it and get to apply pro-rata the 6 months.

Ormiston took 4 years to renovate his IP (Ormiston and FCT [2005] AATA 978).

Cheers,

Rob

 

[GaryT]

One day, you or your executor/beneficiary will sell it and get to apply pro-rata the 6 months.

Ormiston took 4 years to renovate his IP (Ormiston and FCT [2005] AATA 978).

Cheers,

Rob

Yes this is a common misconception but unfortunately only in very limited circumstances. S118-140 only applies if:

(1) If you acquire an ownership interest in a dwelling that is to become your main residence and you still have your ownership interest in your existing main residence, both dwellings are treated as your main residence for the shorter of: (a) 6 months ending when your ownership interest in your existing main residence ends; or
(b) the period between the acquisition of the new ownership interest and the time when the ownership interest referred to in paragraph (a) ends.
(2) Subsection (1) only applies if:
(a) your existing main residence was your main residence for a continuous period of at least 3 months in the 12 months ending when your ownership interest in it ends; and
(b) your existing main residence was not used for the purpose of producing assessable income in any part of that 12 month period when it was not your main residence.

So you would have to have to go back and live in the old property and re-establish it as your main residence for at least 3 months in the 12 months before selling and also not rent it out at any time in that 12 months. Both of these options are generally not feasible or a worth while exercise.

 

[Rob G.]

Its a common estate planning strategy to reoccupy an IP when quite elderly to effectively access two main residence exemptions.

Usually done in anticipation of croaking or having to move into a home.

Cheers,

Rob

 

[james.patre]

Hi - I'm resurrecting my own thread since upon reflection my question is not yet answered - the last convo about what happen upon death is really not relevant to my situation.

I'm aware that I can extend the PPR exemption to whatever time is deemed 'income time', even if by then I'm already in house 2. That's not my issue. My issue is that when I do so, I cannot claim PPR on house 2 during that time (since you can only claim PPR exemption on 1 house at any time), and therefore I would not be able to benefit from section 118-192 cost base reset.

So I'm trying to time the events so that I can benefit from section 118-192 on both properties. And that's why I'm trying to determine exactly what 'income time' means.

Any help/thoughts appreciated

 

[Rob G.]

s.995-1(1) ITAA97 defines "Purpose of producing assessable income" in s.118-192 as "for the purpose of gaining or producing assessable income".

The key word is "purpose".

This does not have to be when the rent comes in according to jurisprudence for "purpose of gaining or producing your assessable income" in s.8-1 ITAA97.

I find this a reasonable interpretation to apply to s.118-192.

However, if when you move out you do not immediately start preparations for renting then you must use the absence rule to elect the old dwelling to be your exempt main residence.

Otherwise, s.118-192 will not be triggered since the dwelling will not be 100% exempt immediately prior to renting.

See ATO ID 2003/1113 where the election is made.

See ATO ID 2003/1112 where a detailed analysis is made of the trigger condition for s.118-192.

Of course, you need to run it past your Accountant with full disclosure since a small detail can make a big difference sometimes.

Cheers,

Rob

 

[GaryT]

As previously stated, I would consider the "income time" to be on the day it was first used for income producing purposes i.e. the day they first paid rent from.

i.e. I have a different opinion to the very knowledgeable and respected Rob. This is not uncommon as there does not appear to be any cases that specifically defines this term other than a reference in ATO ID 2003/1113 which seems to support my contention.

To be confident in your approach you should consider a PBR.

But also take note of Rob's point about triggering s.118-192. i.e. if the property would not have got a full exemption IF the property was sold immediately before the income time, then s.118-192 would not apply.

 

[james.patre]

Ok I think I understand the responses now. Thank you for sharing your thoughts, Rob and Gary, and I appreciate that there are 2 opinions.