I bought a house in Woollongong three and a half months ago. I've been living there all this time, and it's the only property I own. I bought it to live in.

Due to personal circumstances I've now sold it for a profit. Settlement date is in 2 weeks.

Someone has just mentioned to me that I will have to pay capital gains tax on the profit, even though it was my only place of residence. They said I must have lived there for at least one year in order to avoid capital gains tax. I've searched the internet and I can't find any mention of this "one year" rule. I think it may have been an old rule from days gone by, but I'm not absolutely sure about that.

Does anyone know for sure whether or not this "one year" rule applies to my circumstances? Thank you.

My suggestion.. ask your tax agent.

I am not an expert in CGT but if you were living in it and presumably were not claiming any tax deductibility for any mortgage interest you might have paid or the costs of purchse (stamp duty, legal fees etc), your house should qualify as a "principle residence" and thus be exempt from CGT.

However, I repeat, I am not an expert in CGT and your question should be addressed to your tax agent.

If your tax agent tells you that you do have a CGT liability, at least you cshould be able to claim the costs of buying and selling as cost offsets against the gain.

You are supposed to live there for a year, as the intention is to prevent the tax exemption being abused for profit.

However, someone I know had sold their house due to their partner dying after a few months, and were given exemption. I can't quote the law, it has flexibility.

If this is the third house in 2 years you might get less sympathy.

Shadow M, I've looked on the internet and also all over the ATO website, and I can find no reference anywhere about having to live in the house for at least one year. This makes me think that maybe this was an old law that's since been changed. Does anyone know for sure? Thank you for the replies.

As Cj says, a tax agent is your best bet. Alternatively, you can call the tax office themselves and they would give you an answer.

Having said this I do think there are exceptions to the '1 year rule', although I thought it was in fact 6 months (QLD that is) but it would depend on your circumstances and whether or not you have done this before.

contimued
the date is from when the contract is signed, not the date the property settles. (again, QLD)

So if this 1 year rule (or 6 months rule) actually exists, how come there's no reference to it anywhere on the ATO site? Also, I've spent several hours now going over all the info I can get from other internet resources and I can't find any official reference to a "one year rule" (meaning you must live in the house for a minimum of one year). I've already made an appointment to get legal advice, but that's in 2 weeks time.

Someone else told me an hour ago that yes, I need to be there for one year.

Is this "one year rule" just urban folklore?

Can someone please direct me to an internet site that clearly sets out and explains this "one year rule"? Thank you.

Dear Smithy456,

I'm not a tax agant, just a very knowledgable person ;) .

You should still see a tax agent even though you can take it from me you will not be up for Captial Gains Tax.

As you said it was your principal place of residence, I'm assuming under 2 hectares, it is the only house you own, and you haven't made a habit of turning houses over in the last few years, your laughing.

Those giving you contrary advice are getting confused with the 50% CGT exemption rule which states you must hold an asset for over a year to apply for the halving of the due CGT rate (something brought in by the Howard government which I personally consider a scam for the high end of town) be it shares or property.

The tax office has access to stamp duty records and uses those to filter for suspicious buying and selling. The important thing is your intent. As long as you are able, if you are asked, to show your intent was to live in the house as a principal residence then it doesn't matter how long you have held it before selling it, even if it was a few weeks.

If however the tax office deems that your intent when buying was to reap profit through a quick sale you could well be in strife. They are a lot more likely to ask if you have held several properties for short periods of time and sold them for profit.

I hope this assuages any stress you might be feeling.

The bill is in the mail.

*for the halving of the due CGT rate (something brought in by the Howard government which I personally consider a scam for the high end of town) be it shares or property.*

Err no scam there Csteele. When Keating brought in the CGT, he
indexed values for inflation, which is of course only fair. For
a dollar invested 10 years ago, would have lost about 40% of its
real value.

Some people had trouble with the calculations, so Costello simplified
the system, by halving the CGT rate, but removing the indexation
rule. So if you work it out over a number of assets, it kind
of balances out and is no scam at all.

Dear Yabby,

Sorry but no dice.

I could have been specific, and said it was a scan for the speculating high end of town (note I think one of the reasons indexing should be reinstated is the current system favours short term investments over the long term).

But there is also the issue of executive pay being partially in shares. We are told it is to give greater incentive to work to raise share prices but really it is a tax advoidance measure sometimes saving departing executives a third of their tax bill.

If I was to pull a $5,000 bonus for a years work I will pay tax on that, as I should, at my top rate. If I were to earn the same from the sale of shares that I had held for just over 12 months it would be half that.

In my opinion it erodes our system of progressive taxation, drives short term speculation and is a rort for the most highly paid in our economy.

It should be remembered that the top one percent of taxpayers receive nearly 40% share of capitial gains revenue in this country and the top 10% receive nearly 70%.

Also someone on the top marginal rate of 46.5% gains a 23% tax rebate while a person on the bottom recives nothing.

The 50% rule is one of the primary inequities in our current tax system and is in urgent need of reform.

Bring back indexation

Yabby "Some people had trouble with the calculations, so Costello simplified
the system, by halving the CGT rate, but removing the indexation
rule. So if you work it out over a number of assets, it kind
of balances out and is no scam at all."

I agree with you Yabby, that is exactly what happened.

When the prevailing rate of CGT was levied on only half the gain, instead of all the gain, it was because the indexation to CPI (which is what Keating operated with) was removed.

Thus as you say, the net differemce was about zero, in terms of ATO GCT receipts.

scteele "The 50% rule is one of the primary inequities in our current tax system and is in urgent need of reform."

barely.....

By their very nature, "capital gains" differ from "income gains". Treatment of the two does not need to be "uniform" in their levying or rate.

If you wanted to address "inequities" I suggest you look at not how tax is generated but how it is spent... bribes for pregnant women, extra subsistence for special groups....

those are the real "inequities"

but I would agree with you, the whole Tax system is a mess whic needs cleaning up... by eliminating special exemptions and special interests and maybe getting rid of stupid taxes like FBT and the state taxes which were supposed to be revoked when GST was introduced.

*It should be remembered that the top one percent of taxpayers receive nearly 40% share of capitial gains revenue in this country and the top 10% receive nearly 70%.*

I guess this ignores the tax free capital gains that most people
make on their houses, which would not be included in the figures,
nor the capital gains on super fund investments, which are credited
to the super funds.

The thing is, I explained to you why Costello introduced it, for
good logical reasons, as at the time there was much outcry that
filling out a tax form was too complicated.

If CEOs have now developed a scam to take advantage of that law,
that is quite possible, but that happened long after the event.

To me it makes little difference as to which system is used, as
long as inflation is allowed for. My big complaint is that with
retail deposits, savers are effectively being screwed by inflation
and taxation, so our savings rate remains very low in this
country and banks need to go offshore for their money, to a large
degree.

Funnily enough some commentators are against any change, saying
it would be too hard to calculate. I can hardly see the logic
in that, for the alternative is that they just keep screwing us.

Dear Col Rouge,

"Thus as you say, the net differemce was about zero, in terms of ATO GCT receipts."

Dream on.

Within four years the proportion of total tax revenue represtented by Capital Gains Tax receipts went from nearly 4% to 2%. Or in real terms $5.3 billion in 1999-2000 to $3.2 billion in 2002-03.

Next you will be telling me it is right that people can negatively gear expenses at 47.5% but only pay tax at half that rate on the profits.

Dear Yabby,

From my reading it was Howard who asked his mate Ralph to investigate CGT and whether reducing it to 30% would help in the efficiency of its application. Ralph went with a submission from the Stock Exchange that had hired Reaganite Alan Reynolds who claimed for every 1% drop in tax rate the return would be 1.7% increase in transactions.

Howard goes 'Yipee' so goes even better than the initially mooted 30% and drops the rate to 24.5% for the high income earners.

The result, drops in both transactions and revenue.

But he was warned by many eg,
“Clearly the new CGT regime is inequitable and unjust and is an invitation to the kind of rorting that the Ralph Review was designed to stamp out.” Ivor Ries, financial journalist, Australian Financial Review 1999

So I'm still sticking with a scam.

Csteele “Next you will be telling me it is right that people can negatively gear expenses at 47.5% but only pay tax at half that rate on the profits.”

Yes

I would remind you, the rules for determining “profit” are exactly the same for housing investment as it is for any other form of investment, be it a share investment or small business, that the costs of borrowing (setup and interest) are allowed for (deducted) before the assessable income is determined.

What you claim as the “anomaly” of negative gearing is not an anomaly at all but is the standard accounting principle as applied to all and every investment and has been “adopted” for use by the tax office.

I would also refer you to Yabby’s comment regarding the millions of houses which are exempt from CGT because they are owner-occupied. I suppose your sensitivity to that “scam” too and think all should pay.

Of course, under the Howard government, tax revenues increased beyond expenditure and surpluses prevailed.

However, today we are heading back into negative government budgeting, in the name of a myth, the socialist government vomiting billions of dollars onto an overheated building sector in the name of the God “dimulous”.

Yes, building school halls from where future generations can pray to the great “Dimulous” and talk the mantra of Krudd and the sacred swill humpers. Forgetting that school halls have zero value to productivity or any future benefit (since they are seriously underutilized at the best of times).

Finally, regarding your comments people on the top rate gaining a benefit whilst those at the bottom get nothing….

when you pay no tax, there is no benefit but when you pay heaps of tax you benefit by paying less but still pay a lot more than those who pay nothing.

I blame them at the bottom, for not earning more taxable income.

“So I'm still sticking with a scam.”

If you think the standard accounting practice, as adopted and ratified by accountants across nations is a “scam” then you are clearly either misinformed or misguided.

Dear Col Rouge,

Still dreaming it would appear.

Standard accounting practice?

Standard business practice dictates that if an arm of your (the ATO) business is costing you double what your making from it then it is time to make some changes.

Lets just focus on real estate.

Deductions from individual property investors was $11.7 billion in 07-08 which was over twice the $5.2 billion in taxable capital gains reported by them.

Lets assume most of them are in the top income bracket then 48% of $11.7 billion foregone in revenue to make 24% of $5.2 billion.

Scam.

I think the Henry tax review will recommend CGT be payable on properties over $2 million, Rudd specifically asked him to look at this.

Gets no objections from me.