Tax Q&A: Situations when you can claim a CGT exemption

6/7/2018

Q: My question is regarding circumstances that prohibited my living in my residence due to having a child with significant disabilities. As such, I was not able to work full-time over an extended period of 15 years and ongoing, so I could not pay the mortgage myself. So I rented in a more affordable location that was closer to my parttime workplace. 

As such, I did not have any other property considered a main residence. The property was purchased in November 1998. I moved in a couple of months later and then moved out after becoming pregnant in March 2000. Could this be a viable situation to claim an exemption for CGT? 

Thank you for your kind assistance, Olivia

A: The capital gains tax main residence exemption is most often calculated based on the number of eligible exempt days as a proportion of total days held. I understand that you moved into the home a couple of months after acquiring it. 

"You might consider transferring the investment property to an SDT. However, please be aware that an SDT cannot borrow from any source"

If you wish to start the exempt day count from purchase date, you must establish the property as your main residence as soon as practicable after acquiring it. If you delayed your move-in because of illness or other unforeseen circumstances, and you moved into the home immediately after the matter was resolved (e.g. after you recover from an illness), you won’t be adversely affected. If you did not move into the dwelling as soon as practicable after acquiring it, you will not be entitled to count the days prior to your move-in as eligible exempt days. 

However, you may be entitled to partial main residence CGT exemption from the period you established the home as your main residence. Section 118-145 Income Tax Assessment Act (ITAA) 1997 allows you to elect to continue to treat the property as your main residence for up to six years if it is used to produce assessable income like rent, and indefinitely if no income is generated. However, the days beyond this six-year limit will not count as eligible exempt days. 

You also might consider setting up a Special Disability Trust for the benefit of your disabled child. Special rules apply to the income from these trusts, and these rules assist with Centrelink means test rules. The disabled person (or beneficiary) must meet the definition of ‘severe disability’. Special Centrelink gifting concessions also apply. Gifts of up to $500,000 by a family member to an SDT are disregarded from Centrelink gifting rules. 

This might assist family members to qualify for carers’ income support. Assets up to $626,000 (at 1 July 2014, indexed annually) that continue to be held in the trust are generally not assessable under the Centrelink assets test. Assets voluntarily gifted to a Special Disability Trust by a family member may qualify for a capital gains tax exemption under section 118-85 of the ITAA 1997. You might consider transferring the investment property to an SDT. However, please be aware that an SDT cannot borrow from any source.

A special tax return may be required for the SDT, and tax is payable on unexpended income of the trust. The beneficiaries’ marginal rate of tax is applied.

Need to know:

- Consider setting up an SDT for a disabled family

member.

- CGT exemption is typically calculated based on eligible exempt days.

- Assets voluntarily gifted to an SDT by a family member may qualify

Janelle Bartlett

Partner at Chan & Naylor

Redlands