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.

Capital gain

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:

Capital Gain Tax(CGT) recommendations to the client

  1. 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.
  2. 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.
  3. 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.
  4. 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.