Case Studies

1. Capital Gain Implications of Selling a Principal Place of Residence

Client Background: Our firm recently assisted a client in navigating the complex capital gain tax (CGT) implications associated with the sale of her Principal Place of Residence (PPR). The client had purchased the property on June 20, 2017, with pre-existing tenants under a lease agreement that extended until December 1, 2017. Subsequently, the client moved into the property and resided there until May 2023 when she decided to sell the property. Seeking clarity on the CGT implications of this transaction, the client engaged our team of Tax Specialists.

The Challenge: The primary challenge in this case revolved around understanding the CGT treatment of the property given the period during which it was initially rented out and when the client could establish it as her main residence. Specifically, the question was whether the client would be eligible for the full CGT exemption typically granted to a Principal Place of Residence.

The Analysis: According to Section 118-135 of the Income Tax Assessment Act 1997 (ITAA 1997), the full main residence exemption can only apply if the property is established as the taxpayer’s main residence as soon as practicable after acquisition. ATO ID 2001/744 confirms the ATO’s position that the full exemption is not available when the property is initially rented out, and the taxpayer cannot immediately occupy it as their main residence. In such cases, the exemption commences when the client moves into the property and establishes it as their primary residence.

In our client’s case, unfortunately, they will not be eligible for the full capital gain exemption since they couldn’t move in immediately. They are required to report a capital gain for the period from June 20, 2017, until December 2017.

Outcome and Recommendations: Given the CGT implications of the rental period, our Tax Specialists provided the following recommendations to the client:

CGT Calculation: We advised the client on how to calculate the capital gain for the period in which the property was rented out (from June 20, 2017, to December 1, 2017) in compliance with tax regulations.
CGT Discount: We explored potential opportunities to apply any CGT discounts or concessions that may be available under the tax laws, thereby minimising the client’s overall tax liability.
Record Keeping: We emphasised the importance of maintaining comprehensive records related to the acquisition, rental, and subsequent use of the property as a PPR. These records would be critical for substantiating CGT calculations and exemptions in the future.
Future Tax Planning: Our team also discussed the implications of this CGT event on the client’s overall tax planning and advised her on strategies to optimise her tax position in the future.

Conclusion: In this case study, our client faced CGT implications associated with the sale of her Principal Place of Residence. While she was unable to immediately occupy the property upon acquisition, our Tax Specialists provided her with a clear understanding of the relevant tax legislation and offered strategic advice to ensure compliance with tax obligations while minimising her tax liability.

This case underscores the importance of seeking professional tax advice when dealing with complex tax matters, as it can lead to more informed decisions and potential tax savings. Our firm remains committed to providing tailored solutions to our clients’ unique tax challenges, ensuring they navigate the ever-changing tax landscape with confidence.

ember 1, 2017.

2. Case Study: CGT Implications on Sale of a Subdivided Block with Primary Residence

Client Background: Our firm recently had the opportunity to assist a client who had undertaken a subdivision of their 100-square-meter block into two separate blocks. The client’s decision to subdivide the land included constructing a new dwelling on one of the newly created blocks while retaining their existing property as their primary residence. The client approached us with a dual query: Firstly, they sought clarification on the potential Capital Gains Tax (CGT) implications of selling the newly constructed dwelling, primarily due to rising interest rates and financial constraints. Secondly, they wanted to understand the tax consequences if they decided to sell their current residence.

The Challenge: The primary challenge in this case revolved around determining the CGT treatment of the sale of the newly constructed dwelling, which had been created through a subdivision and construction process. Additionally, the client wanted to explore the tax implications of selling their existing primary residence. The goal was to provide our client with a comprehensive understanding of their tax obligations and opportunities to optimise their financial position.

The Analysis: Our team of Tax Specialists at Investax conducted a detailed analysis based on the specific circumstances of the client’s case. They provided the following advice:

Sale of Newly Constructed Dwelling:

Generally, when individuals undertake a basic subdivision on land held for private purposes, and the subdivision work is primarily for council approval, any subsequent sale of the subdivided blocks remains on a capital account.
However, if the subdivision involves the construction of a new dwelling on the vacant block with the intention to sell it for a profit, it suggests a profit-making activity beyond a mere realisation. In such cases, any profit generated from the sale is treated as ordinary income rather than a capital gain.
In this specific case, where the client went beyond a simple subdivision by constructing dwellings on the property, the sale is more likely to be treated as revenue for tax purposes. This implies that Goods and Services Tax (GST) may also apply if the client decides to sell the property immediately after completing construction.

Sale of Existing Primary Residence:

If the client chooses to sell their existing dwelling, which serves as their primary place of residence, they would not be subject to any Capital Gains Tax (CGT) liability. This is due to the CGT main residence exemption, which exempts the primary residence from CGT.

Outcome and Recommendations: Given the advice provided by our Tax Specialists, the client was presented with several options:

Sale of Newly Constructed Dwelling: If they proceed with selling the newly constructed dwelling, they need to be aware that it may be treated as ordinary income, potentially subject to income tax and GST.
Sale of Existing Primary Residence: Selling their current primary residence would not attract CGT, thanks to the main residence exemption.
Exploring Alternatives: Our team recommended further discussions to explore alternative financial strategies and solutions, which could include refinancing or other financial arrangements to address the client’s financial constraints.

Conclusion: This case study highlights the complex tax implications associated with the sale of a subdivided block with a primary residence. Our client was provided with clear guidance on the potential tax treatment of their property transactions, enabling them to make informed decisions regarding their financial future.

It is essential for individuals considering property transactions involving subdivision, construction, or the sale of primary residences to seek professional tax advice to ensure compliance with tax laws and to optimize their financial outcomes. Our firm remains committed to providing tailored solutions to our clients’ unique tax challenges, ensuring they navigate the intricacies of tax regulations with confidence.

3. Case Study: Managing Multiple Principal Place of Residence for Capital Gains Tax Purposes

Background: Our client purchased their first residence, immediately making it their primary place of residence. Subsequently, they moved out and rented this property for a period exceeding six years. During this time, the client acquired a second residence, in which they continued to reside. This case study explores whether the client can continue to consider the first property as their principal place of residence during the six years after vacating it, and if so, what the cost base for Capital Gains Tax (CGT) purposes should be for the first residence.

Client’s Inquiry: The client was uncertain about the CGT implications of their situation and sought clarity on two specific questions:

Can they continue to treat their first residence as their principal place of residence for up to six years after moving out, despite having acquired and lived in their second residence during this time?
In the event they can continue to treat the first residence as their main residence, should the cost base for CGT purposes be determined based on the market value at the time they ceased living in the property or at the end of the six-year period?

Investax Tax Specialists’ Response: Investax’s Tax Specialists provided the following guidance:

Continuing Principal Place of Residence: According to Section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997), the client can choose to maintain their first property as their principal place of residence for CGT purposes, even after moving out and residing in their second property. They have a window of up to six years to make this choice.
Cost Base Determination: As per the ‘home first used to produce income’ rule outlined in Section 118-192 of the ITAA 1997, the cost base for CGT purposes for the first property is established as the market value at the time it became available for rent. This means that the market value of the property at the point when the client decided to rent it out is the reference point for CGT calculations.

Conclusion: In this case, our client can elect to maintain their first property as their principal place of residence for CGT purposes, even while residing in their second property, for a period of up to six years after moving out. Additionally, the cost base for CGT calculations for the first property is determined based on its market value at the time it was made available for rent, as per the ‘home first used to produce income’ rule. It is crucial for taxpayers to understand the CGT implications of their property decisions and seek professional advice to make informed choices in managing their assets.

4 Case Study: Travel Deduction for an Investment Property

Client Background: Our firm recently onboarded a new client who possesses a diverse portfolio of both residential and commercial properties located in different states across the country. The client had become disheartened by the fact that the rules regarding claiming travel expenses had changed a few years ago, and their previous accountant had not claimed any travel expenses for them in recent years.

Given our expertise in investment property taxation, the client turned to us seeking clarification on the possibility of claiming travel expenses for their interstate property visits. They wanted to ascertain whether the information about the ineligibility for such deductions was indeed accurate or if there were avenues for claiming travel expenses related to their property inspections.

The Challenge: The primary challenge in this case was to determine the client’s eligibility for claiming travel expenses in light of the recent changes in tax regulations. It was crucial to understand the specific rules governing travel deductions and whether they applied to both residential and commercial properties or were limited to particular types of properties.

The Analysis: Our team of Tax Experts conducted a thorough analysis of the client’s situation and provided the following insights:

We confirmed that the changes in travel expense claims primarily pertained to expenses related to residential rental properties. These changes were not intended to apply to situations involving travel expenses for commercial rental properties.
The key reference point for these regulations is Section 26-31 of the tax code, which contains rules restricting travel deductions. However, it was crucial to note that these rules apply exclusively to expenses incurred in gaining or producing assessable income from the use of residential premises as residential accommodation.
In our client’s case, where they owned both commercial and residential properties, the travel deductions were still applicable for their commercial properties.

Outcome and Recommendations: Upon understanding the nuances of the tax regulations, we provided the following recommendations to our client:

Maximize Commercial Property Deductions: We advised our client to continue claiming travel expenses for their commercial properties located in different states, as they remained eligible for such deductions.
Review Previous Tax Returns: We suggested reviewing their previous tax returns to identify any missed opportunities for claiming travel expenses on eligible properties.

Conclusion: This case study illustrates the importance of staying informed about changes in tax regulations, particularly when it comes to claiming deductions for expenses related to property ownership. Our client, who owns a mix of residential and commercial properties across different states, gained clarity on their eligibility for travel deductions, ultimately ensuring they make the most of available tax benefits while complying with the law.

As investment property tax experts, our commitment to providing accurate and up-to-date advice empowers our clients to navigate complex tax matters with confidence, helping them achieve their financial goals while staying compliant with taxation regulations.

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5- Case Study: Excluding a Related Party Loan from Division 7A Rules.

Client Background: Our firm recently welcomed a new client who had utilised company funds amounting to $500,000 to repay a bank loan associated with a commercial investment property. This property was owned by a related family trust. Following this transaction, the client had established an internal loan agreement, separate from a division 7A agreement, with the family trust. The client was keen to understand if this internal loan arrangement could be excluded from the rules outlined in Division 7A.

Our Advice: Our team of tax experts assessed the client’s situation and provided the following guidance:

Scope of Division 7A:
- We explained that Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) typically applies when a private company makes a loan to a related trust. Division 7A is triggered if either:
  - The trust holds any shares in the company, or
  - Anyone who could potentially receive a benefit from the trust, directly or indirectly, holds any shares in the company.
- Given that the client had utilised company funds to repay a loan associated with a family trust and he was the primary beneficiary of the Trust, it was likely that the transaction fell within the scope of Division 7A, particularly since the parties involved were related.
Deemed Unfranked Dividend:
- We highlighted that, under Division 7A, a deemed unfranked dividend would ordinarily arise unless the loan is fully repaid or is placed under a complying Division 7A loan agreement by the earlier of the due date and actual lodgement date of the company’s tax return for the year the loan was made.
Complying Division 7A Loan Agreement:
- Section 109N of the ITAA 1936 sets out the stringent requirements for a loan agreement to qualify as a complying Division 7A loan agreement. Key conditions include:
  - The agreement must be in writing.
  - The loan term must not exceed 7 years.
  - The interest rate must be at least as much as the Division 7A benchmark rate for each year of the loan, which is updated annually by the Australian Taxation Office (ATO).
- The latest Division 7A benchmark interest rates can be found in the ATO website, which was forwarded to the client.
Exception:
- We informed the client that, in general, the loan term cannot exceed seven years. However, section 109N ITAA 1936 allows for an extension of the maximum loan term to 25 years if specific conditions are met, including:
  - 100% of the loan value is secured by a registered mortgage over real property.
  - The market value of the real property (excluding other secured liabilities) is at least 110% of the loan amount when the loan is initially made.

Conclusion: In this case, the client sought guidance on excluding an internal loan agreement between a company and a related family trust from the Division 7A rules. Our comprehensive advice outlined the conditions and requirements for complying with Division 7A regulations.

Navigating Division 7A can be complex, and it is crucial for individuals and businesses to seek professional guidance to ensure compliance with tax laws and optimise their financial arrangements. Our firm is committed to providing tailored solutions for our client’s unique tax challenges, enabling them to make informed decisions while meeting their tax obligations.

6 Case Study: Tax Treatment of Cryptocurrency Trading

Client Background: Our firm has recently observed a significant surge in our clientele’s interest in cryptocurrency investments, particularly in assets like Bitcoin. One notable case involves an individual who has taken the initiative to actively trade cryptocurrencies, engaging in frequent transactions almost on a daily basis. The client has reached out to us seeking guidance on the potential Capital Gains Tax (CGT) implications and other rules and regulations surrounding cryptocurrency trading.

Our Advice: Navigating cryptocurrency taxation is an evolving landscape, and the Australian Taxation Office (ATO) has regularly updated its guidance in response to this emerging area. Our guidance to the client revolves around assessing the tax implications based on how they are holding and using cryptocurrencies:

Determining Capital vs. Revenue Account:
- The primary consideration is whether the client holds cryptocurrency on a capital or revenue account, which often depends on their purpose for acquiring the cryptocurrency and how it is utilised.
- The tax treatment generally depends on whether the cryptocurrency is held as trading stock (part of a business activity), as part of a profit-making undertaking (taxed on revenue account but exempt from non-commercial loss rules or trading stock provisions), on capital account as a personal use asset (capital losses disregarded), or on capital account as a long-term investment.
- The ATO provides guidance on distinguishing between a trader and an investor in shares, and a similar analysis can be applied to cryptocurrency trading.
GST Treatment for Cryptocurrency Sales:
- Sales of digital currency are treated as input-taxed supplies, which means that the sales should not trigger Goods and Services Tax (GST).
- Consequently, the client would generally not be eligible to claim GST credits on expenses related to cryptocurrency trading under Sections 11-5 and 11-15 of the GST Act, which restricts GST credits for expenses linked to input-taxed supplies.

Conclusion: The taxation of cryptocurrency trading presents a dynamic and evolving challenge, with implications that depend on various factors, including the client’s intention, frequency of transactions, and the nature of expenses incurred. In this case study, our client, actively engaged in cryptocurrency trading, sought our guidance on understanding the tax implications.

At Investax, we remain committed to staying abreast of the latest regulatory updates and providing expert advice to help our clients navigate this emerging and complex area of taxation. By assessing each client’s unique circumstances, we aim to ensure compliance with tax laws while optimising their financial positions within the evolving cryptocurrency landscape.