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Why the family home is
Australia’s favourite tax haven
Two thirds of Australians don’t need to travel to Bermuda or
Switzerland to stay in a tax haven. That’s because they live
in one – it’s called the family home.
In this article we explore the reasons why the
owner-occupied family home is tax free, and how to keep it
that way. All of the comments made are generalisations. Tax
law is technical, and you need specific advice if you plan
to act upon a suggestion made in this article.
What taxes might apply to the
family home?
Three main taxes apply to the family home –
- Capital Gains Tax (CGT) – is paid on the
profit made when a property is sold. Normally, the
family home is exempt. If you don’t keep the family
home exempt, then the capital gain – the sale price
less the purchase price less capital expenses - will be
added to your normal income. The tax payable will depend
on what other income is received in the year you sell.
Illustration: if your property is sold and the
capital gain is $100,000, assuming that your other
income is $85,000, your income will increase to become
$185,000 and the extra tax will be $39,309.99.
- Income Tax – is paid on rent. Owner occupiers
who rent out a room or a granny flat need to add the
rent to their income, and pay tax on it.
Illustration: if a granny flat is rented for $300
per week, then $15,600 (less expenses) is added.
- Land Tax - is paid on the land value.
Normally, the family home is exempt. If you don’t
keep the family home exempt, then land tax is
payable annually calculated upon the land value. It is
just the land value, not the market value of the land
plus the home, which is liable for land tax.
Illustration: if the land value exceeds the land
tax value threshold ($549,000 in NSW this year) then
land tax of either 1.6% or 2% is payable annually on the
excess value. Each State levies land tax in a similar
way.
The Capital Gains Tax
exemption for the Main Residence
The Australian Taxation Office calls the family home the
‘main residence’. Any capital gain / profit received on its
sale will be tax free provided these requirements are mostly
satisfied:
- you and your family live in it
- your personal belongings are in it
- it's the address your mail is delivered to
- it's your address on the electoral roll, and
- services such as gas and power are connected
The following rules apply to the main residence
exemption:
Rules for moving in and moving out
- You must move in as soon practicable after
purchasing your family home. If you are building a new
home or renovating, you must move in as soon as
practicable after it is ready to occupy.
A common mistake is to buy, rent out the home for a
while, and move in later on. When this happens the
increase in value until you move in is subject to
capital gains tax.
- You may move out and rent the family home
for up to six years without losing the capital gains
tax exemption, so long as you do not purchase another
family home in the meantime. Before the six year period
ends, you have the choice of either selling (if so, the
sale proceeds will be tax free) or moving back into the
family home (which will re-start the six year period).
- You may move out and leave the main residence
vacant or allow a family member to live in it rent free,
and it will remain capital gains tax exempt
indefinitely.
- You have a crossover period of six months if
you purchase a new home first and then sell your old
home. During that period you can call both homes your
main residence.
Rules for ownership
- If your name is recorded as an owner on the
property title, and if you occupy the home as your main
residence, then the capital gains tax exemption
applies to you. The exemption applies only if the
home is in a personal name. If the family home is in the
name of a company or a trust, you may have asset
protection, but do not have capital gains tax exemption.
- If you own a family home and a holiday home
jointly with your spouse, you cannot claim to live
in both homes for capital gains tax purposes. The
capital gains tax exemption applies only to the home you
live in.
- If you inherit a family home there is a time
limit of two years from the date of death to sell it.
Otherwise, capital gains tax will be payable on the
increase in value from the date of death.
The two year time limit does not apply if the
inherited home was purchased on or before 20 September
1985. These homes are ‘grandfathered’ and will remain
tax free whenever they are sold by the beneficiary who
inherits the home.
Rules for renovation and subdivision
- If you buy a house to renovate or build a house
for a profit, when you sell, the whole of the profit
may be treated either as ordinary income or as a capital
gain. That is, the main residence exemption from capital
gains tax might not be available even if you live in the
house.
- If you subdivide land with a family home
built upon it, the profit on sale of the family home
will be capital gains tax exempt while the profit on
sale of the subdivided land will be treated either as
ordinary income (if you bought to subdivide) or as a
capital gain (if not).
General Rules for capital gains
- If you own a property for more than 12 months,
then only one half of the capital gain is added to your
income (this is known as the 50% capital gains tax
discount) in the year you sell.
- If you purchased the property before 5 February
1999, you can choose to apply CPI to the base value
for CGT instead of the 50% capital gains tax discount
method, when you sell.
- If you purchased on or before 20 September 1985
– whether lived in or rented, the capital gain is tax
free! Why that date? Capital gains tax was introduced on
that date.
- If you sell a property, the date a contract
for the sale of the property becomes unconditional is
the date the capital gain is made, not the date that the
sale proceeds are received.
Where the Family Home is used
to produce income
A home office, a granny flat and a room or whole home rented
short-term produces taxable income. But short-term rentals
result in a partial loss of the capital gains tax exemption.
- A home office use means part of the home is
used exclusively as a place of business and is not
readily adapted for private use. Examples are a doctor’s
surgery, a consultancy practice, a photographic studio,
which members of the public can visit.
The positive is that interest paid on the home loan may
be deducted from the business income for tax purposes,
in the proportion that the floor area of the home office
bears to the floor area of the home. The negative is
that the capital gains tax exemption is partially lost
in the same proportion for the period in which that part
of the home is used as a home office.
- Permanently renting a granny flat, separate flat
or rooms in a house which is owner-occupied is
similar to having a home office in terms of rent being
taxable income and a proportion of interest and
utilities such as electricity and rates and insurance
being tax deductions. Again, the capital gain is
calculated on the proportion of the house rented, for
the period of time it was rented. On its website, the
ATO notes that payments received from a family member
for board or lodging are considered to be domestic
arrangements and are not rental income.
- The ATO treats renting a family home or rooms
short-term through a sharing economy website or app,
like Airbnb, Stayz or a rental agent, as being the same
as permanent renting both for income tax purposes and
for capital gains tax purposes. The ATO requires you to
keep records of all income earned and declare it in your
income tax return, and to keep records of expenses you
claim as deductions. The capital gains tax exemption is
partially lost proportionally based on the floor area
rented out, and the length of time it was rented (or was
available for rent).
The Land Tax exemption for
the Principal Place of Residence
Like the capital gains tax exemption, the land tax exemption
applies to the family home, which is called the ‘principal
place of residence’. These are some of the rules:
- There can only be one principal place of residence,
within or outside of Australia. The residence must have
a kitchen, bathroom and toilet facilities.
- The exemption applies only if an owner uses and
occupies the residence during the land tax year.
- If not all of the owners occupy the residence, so
long as one owner does, then their occupation will
exempt the whole property from land tax.
- The exemption applies although part is used as a
home office, or a garden apartment or separate flat or
rooms (no more than two) are rented. The exemption also
applies to short-term lettings such as bed and breakfast
accommodation where an owner lives on site.
- A crossover period of 6 months applies when moving
houses, during which two residences can be treated as
principal places of residence.
- A principal place of residence will retain its
exemption for up to 6 years after the owner occupier has
moved out, provided they do not own another principal
place of residence.
Be careful of the Centrelink
assets test
The sale of the family home can drastically affect the
entitlement to the aged care pension and the viability
supplement for aged care. These are some of the rules:
- The family home is exempt from inclusion in the
assets test for age pensions, no matter what its value.
A single home owner can hold up to $552,000 in assets
(apart from the home) before the aged pension cuts out,
and a home-owning couple can hold up to $830,000 in
assets (apart from the home). If your assets exceed
these amounts, you do not have pension entitlements.
- For non-home owners, the assets test limit is
$230,000 higher. It is $755,000 for a single person and
$1,033,000 for a couple. This means that if the family
home is worth more than $203,000, it is better to keep
owning it, not selling it to free up cash.
- If the family home is sold and the proceeds of sale
are not used to buy a new family home or aged care
accommodation within 12 months, then the proceeds of
sale are added to the assets. Aged care accommodation
units and bonds are treated as a family home and are not
counted in the assets test.
- If the family home is sold to downsize and free up
cash, the surplus proceeds of sale is added to the
assets for the pension assets test.
- It is not possible to give away the surplus to
relatives so as to the aged pension. Centrelink will
allow only up to $10,000 per year (and a total of up to
$30,000 over 5 years) to count as a reduction in assets.
But Centrelink does not prohibit proceeds of sale
to be used to repay personal debt, for home
improvements, or to pay for personal holidays such as
retirement cruises.
Reverse mortgages can be attractive as an alternative to
sale, where small amounts of money are needed, because
it enables retirees to raise funds against the equity in
their home without selling it.
Conclusion
Its tax exempt status makes the family home in Australia
very valuable. Coupled with the fact that there are no
inheritance taxes in Australia, it makes perfect sense for
Australians to buy a family home to live in and remain
living in it as long as possible
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