When a house has to be a home: a guide to claiming the CGT main residence exemption
MELBOURNE Thursday, 7 September 2023: Record numbers of Australians have started a business or side hustle as the cost of living rises, but they should pay close attention to their taxes, advised Neil Brydges, CTA, a tax lawyer at Sladen Legal. Speaking at The Tax Summit 2023, hosted by The Tax Institute, he cautioned tax professionals about the implications of taxpayers claiming the CGT main residence exemption while running a business from home.
Many run their business or side hustle from home, especially as close to one million Australians now hold multiple jobs, a figure that has steadily risen since COVID-19. The main residence exemption allows homeowners to not pay capital gains tax (CGT) when they sell a property if it has been their main residence. However, running a business from home can impact the ability to claim the full exemption and add complexity when it comes time to sell.
Running a business from home differs from simply working from home, Brydges advised. “It typically means having an area within the home that is clearly identifiable as a place of business, that is exclusively or almost exclusively used for carrying on a business or regularly used for visits by clients and customers.” A home office doesn’t always meet this criteria, he said, if it’s a matter of convenience to carry out work from home rather than at the regular place of business or employment.
Beyond the impact on claiming the full exemption, however, Brydges highlighted its implications. “If you started using the property for producing assessable income after 1996, and would otherwise be entitled to a full exemption, the cost base for the partial exemption is lifted to the market value at the time you first started using the property to produce assessable income. That time also becomes the date of acquisition for the CGT discount – so if you sell it within a year, you won’t be eligible for the CGT discount.”
Brydges addressed the ‘deceptively complex’ concession during the session on the first day of The Tax Summit 2023. “The main residence exemption is probably the biggest concession in the Tax Act. You can buy a property in 1986, sell it in 2023, and if you satisfy certain requirements the entire gain isn’t subject to tax. In many cases it’s easy to satisfy these requirements – a person lives in the dwelling and doesn’t rent it, demolish it or subdivide it – but life’s not that simple, because people do these things and it makes the exemption incredibly complex.”
There’s not a choice about applying the exemption, Brydges advised. “If you satisfy the requirements, it applies. This might be relevant in a post-COVID world, where someone may have bought a property at the peak of the COVID boom and sells it today. Once you factor in stamp duty, movement in the market, real estate fees etc the person might make a capital loss. They can’t choose not to apply the main residence exemption and use the capital loss to offset against capital gains, for example on shares sold – it doesn’t work like that.”
Tax professionals should consider a number of factors when applying the CGT main residence exemption, Brydges outlined:
Meeting the criteria of a residence: A residence is a dwelling – such as a house, apartment, retirement village unit and even houseboat or caravan – where someone “eats, sleeps and has a usual settled abode.” There are a number of indicators a dwelling may be a main residence, said Brydges, including the length of time they’ve lived there, whether their family lives in the same house, where their personal belongings are stored and where they have their mail delivered.
There’s a limit for big properties: The exemption applies to the land underneath the dwelling and adjacent land up to 2 hectares, but not beyond that. But the catch here is the adjacent land needs to be used for private or domestic purposes in association with the dwelling. For example, a person could buy the property next door, bulldoze it and build a tennis court – the main residence exemption could apply provided both properties are sold at the same time. When it comes to vacant land, there must be proof it is used for private or domestic purposes, for example walking the dog or housing a pony. Remember though, that up to 2 hectares can be claimed – not always all of it.
Take note of multiple dwellings and structures: The adjacent land can include other structures which can be claimed for the exemption in some situations. For example, beyond the tennis court mentioned earlier, a garage or granny flat (provided it doesn’t generate assessable income). If these are sold together the exemption can be applied to everything provided it meets the other requirements.
Be careful with demolition and construction: This is an area where some people come unstuck because they have a dwelling and land, then they bulldoze the house, subdivide, and sell the lots then ask ‘Why didn’t I get the CGT exemption?’. It’s because they didn’t have a dwelling on the land. If a new dwelling is built after demolishing, the exemption can be claimed if there is no more than 4 years from the date of last occupation of the demolished dwelling and the time the new dwelling becomes the new main residence and you live in the new dwelling at least 3 months.
Neil Brydges joined a compelling speaker lineup of the nation's most forward-thinking minds, including Chris Jordan AO, Commissioner of Tax; David Thodey AO, Xero Chair; Karen Payne, CTA, Inspector-General of Taxation and Taxation Ombudsman; Victoria Lanyon, Senior Associate at King & Wood Mallesons; Australian Sporting Legend Kevin Sheedy; and many more.
The Tax Summit 2023 brings together taxation specialists, lawyers, accountants, newcomer tax professionals and business leaders as well as anyone with an interest in the latest issues impacting businesses on a local and global scale. For more information on The Tax Summit and its line-up of more than 70 expert speakers, covering topics including economics, property, business, global tax developments and technology, please see the full program.
Neil Brydges, CTA is a Principal Lawyer in Sladen Legal’s Tax group. He is an Accredited Specialist in Taxation Law with the Law Institute of Victoria and a Chartered Tax Adviser with The Tax Institute.