An investor purchases a rental property for $800,000 and sells it 18 months later for $900,000. They are eligible for the CGT main residence exemption. What is their assessable capital gain?
Correct Answer
C) $0
If the investor is eligible for the CGT main residence exemption, the entire capital gain is exempt from capital gains tax. The main residence exemption provides full exemption from CGT when applicable, regardless of the gain amount.
Why This Is the Correct Answer
Option C ($0) is correct because the CGT main residence exemption provides complete exemption from capital gains tax when applicable. Under Division 118 of the Income Tax Assessment Act 1997 (Cth), if a property qualifies for the main residence exemption, the entire capital gain is exempt from CGT assessment. The exemption is binary - either the property qualifies and receives full exemption, or it doesn't qualify at all. There is no partial exemption or reduction based on the gain amount or holding period when the main residence exemption applies.
Why the Other Options Are Wrong
Option A: $100,000
Option A ($100,000) represents the total capital gain before any exemptions are applied. This would be the assessable amount if no CGT exemptions applied, but since the investor is eligible for the main residence exemption, the entire gain is exempt from assessment.
Option B: $50,000
Option B ($50,000) appears to apply a 50% CGT discount, which is available for assets held longer than 12 months. However, this discount is irrelevant when the main residence exemption applies, as the exemption provides complete relief from CGT assessment.
Option D: $75,000
Option D ($75,000) seems to apply an arbitrary 25% reduction to the capital gain. This doesn't correspond to any valid CGT calculation method under Australian tax law, and ignores the fact that the main residence exemption provides complete exemption.
Deep Analysis of This Finance Taxation Question
This question tests understanding of the Capital Gains Tax (CGT) main residence exemption under Australian tax law. The key principle is that when a property qualifies for the main residence exemption, the entire capital gain is exempt from CGT, regardless of the gain amount or holding period. The question presents a scenario where an investor purchased a rental property for $800,000 and sold it for $900,000 after 18 months, creating a $100,000 capital gain. However, the critical factor is that they are eligible for the CGT main residence exemption. This exemption is one of the most significant tax benefits in Australian property law, designed to protect homeowners from CGT on their primary residence. Understanding this exemption is crucial for real estate professionals as it affects investment decisions, property valuations, and client advice regarding residential property transactions.
Background Knowledge for Finance Taxation
The CGT main residence exemption is found in Division 118 of the Income Tax Assessment Act 1997 (Cth). This exemption applies to a taxpayer's main residence, providing complete exemption from capital gains tax on the sale. Key requirements include that the property must be the taxpayer's main residence, though temporary rental periods may still qualify under certain conditions. The exemption covers the dwelling and up to 2 hectares of adjacent land. Unlike the 50% CGT discount for assets held over 12 months, the main residence exemption provides 100% exemption when applicable. Real estate professionals must understand this exemption as it significantly impacts property investment strategies and client advice.
Memory Technique
HOME = Hundred percent Off Main residence Exemption. When a property qualifies for the main residence exemption, remember that it's not a discount or reduction - it's a complete 100% exemption from CGT. Think of 'HOME' as your safe haven where you pay zero CGT.
When you see any CGT question mentioning 'main residence exemption' or 'eligible for main residence exemption', immediately think HOME = 100% off. Don't get distracted by calculating percentages or discounts - the exemption means zero assessable capital gain.
Exam Tip for Finance Taxation
When a question states a taxpayer is 'eligible for the CGT main residence exemption', the assessable capital gain is always $0. Don't calculate discounts or partial exemptions - the main residence exemption provides complete CGT relief.
Real World Application in Finance Taxation
A couple owns a house they've lived in for 5 years as their main residence. Due to job relocation, they rent it out for 2 years before selling. Despite the rental period, they may still qualify for the main residence exemption under the 'temporary rental' provisions. If eligible, their entire capital gain would be exempt from CGT. As their real estate agent, you'd advise them to consult a tax professional to confirm eligibility, as this exemption could save them tens of thousands in tax on a substantial capital gain.
Common Mistakes to Avoid on Finance Taxation Questions
- •Calculating a 50% CGT discount when main residence exemption applies
- •Assuming partial exemption based on rental periods
- •Confusing main residence exemption with investment property CGT rules
Related Topics & Key Terms
Key Terms:
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