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In Australia, the treatment of Capital Gains Tax (CGT) on a property can vary depending on how the property is used and whether it's considered the owner's principal place of residence. Hills Accounting is the tax accountant Hobart trusts to get the best results on this important issue.

So What Is CGT?

Capital Gains Tax (CGT) in Australia is a form of taxation on the gain made from the sale of certain types of assets, typically property or investments, which was introduced in September 1985. The tax is not a separate levy but forms part of the income tax system and applies to the capital gain made on the disposal of any asset, except for specific exemptions (like the family home under certain conditions). CGT is calculated by subtracting the cost base (the purchase price plus any associated costs) from the asset's selling price. The resulting profit or gain is then added to the taxpayer's income in the financial year in which the asset was sold and taxed at their marginal tax rate (after being pro-rated and/or changed depending on various circumstances).

The concept of CGT is rooted in principles of equity in the tax system, aiming to tax the financial gains made from the increasing value of assets. Over the years, the rules surrounding CGT have evolved, including the introduction of concessions and exemptions to address various economic and social considerations. One significant aspect of these rules in the Australian context is the treatment of a taxpayer's principal place of residence. Special rules apply to properties that have been used both as a primary residence and for income-generating purposes, such as renting out a room or the entire property. Understanding these rules is crucial for homeowners and investors in Australia to navigate the tax implications associated with selling their property.

Main Residence Exemption

Generally, your main residence is exempt from CGT. This exemption applies if the dwelling has been your home for the entire period you've owned it, hasn't been used to produce income (e.g., renting it out, running a business from it), and is on land of 2 hectares or less​.

Renting Out Part of the Home

If you rent out part of your home, you do not get the full main residence exemption from CGT. When you sell your home, the part you use for rental or to run a business is subject to CGT. The capital gain or loss is typically calculated based on the market value at the time it first began generating income.

The Six-Year Rule

This rule allows you to treat a property as your main residence for up to six years while it's being rented out, provided it was your main residence before you rented it out. If you reoccupy the property as your main residence after this period, the six-year rule can be reset for another absence. However, during the six-year absence, you cannot treat another property as your main residence for CGT purposes. If you decide to sell the property within this six-year period without renting it out again, the main residence exemption still applies.

CGT Discount

If you hold the property in your name for more than one year, you're entitled to a 50% discount on your capital gains tax payable when you sell the property​.

Market Value Rule

If you don't sell the property within the six-year period and continue renting it out, the 'market value rule' comes into play. This rule states that the market value of the home at the time you first rent it out will be considered when calculating the capital gains. This can potentially reduce the CGT if you qualify for a partial exemption​. However, it is essential that you get a proper market valuation at the time to get this partial exemption

It's essential that property owners understand these rules and plan accordingly, especially if they are considering renting out their principal residence or are moving back into it after a period of renting it out. Sometimes, for Capital Gains Tax implications, it might be better to rent out the entire home than just one room!

Consult with us at Hills Accounting!

We can provide tailored advice based on your specific circumstances.

For more information on our services, email us today at admin@hillsaccounting.com.au or call us on 03 62737800