Section 118-192 of ITAA97 provides a special rule under which a main residence (if acquired after 20/8/96) is deemed to have been acquired at market value when it is first used to produce assessable income.
Too many taxpayers don't get the valuation at the time (eg. because they thought they were going overseas for max 6 years so could use the absence choice, but ended up staying for 10 years) and there is no guidance on how do they then calculate their gain on disposal without that valuation. The ATO website (QC 17185) avoids the issue by giving an example of a property purchased prior to 21/8/96. Another page (QC 17193) gives great examples of taxpayers getting valuations on the assumption that they knew of this rule when first moving out and states that use of the special rule is compulsory.
Why not make this special rule an alternative rule to the normal CGT calculation (proceeds less actual cost base, apportioned for the income producing period)? I cannot imagine that this would be a cost to the revenue. Rather it would be an aid to taxpayer compliance.
The Board agrees this idea has support within the tax community. The Board will raise this at an appropriate stage but ultimately policy is a matter for Government.
The Board of Taxation has undertaken some preliminary investigations into this issue. Further detailed comments are attached. The Board would be interested in getting the views from the community on these questions.
Moderator - Board of Taxation Secretariat attached: 180219-BoT-Comment---Main-residence-CGT-special-market-value-rule-should-be-a-choice-idea-c90286.docx 18/Feb/18 5:01 PM
Board of Taxation Comment
The Board has undertaken some preliminary investigation into this issue.
The Technical Issue
The default position for partial capital gains appears to be 118-185 where you calculate based on number of days. The special rule in 118-192 is concessional – that is, you can instead use market value, where you would have got full exemption if just before it first became income producing you could claim main residence exemption.
- Would stakeholders prefer to remove the concessional treatment – so that all calculations are made based on number of days?
The Valuation Issues
The following ATO guidance was located on the ATO website:
- Using your home to produce income (see section titled ‘value of home when first used to produce income) - https://www.ato.gov.au/general/capital-gains-tax/your-home-and-other-real-estate/your-main-residence/using-your-home-to-produce-income/
- Valuation methods – property - https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Market-valuations/Market-valuation-for-tax-purposes/?page=10#Valuation_methods___property
In summary – there is no need to engage or instruct a formal valuer in these circumstances. The taxpayer can demonstrate market valuation using an appropriate valuation method.
The Board is interested in the views of the Sounding Board community to understand if the valuation issue is clear? Would more accessible guidance on this topic be useful? Is the current guidance useful? Is the current guidance easy to understand and easy find the information you are after?