An additional 10% capital gains tax (CGT) discount may be available when you sell an Australian residential rental property that you used to provide affordable housing.
This move will increase the maximum capital gains discount percentage on your sale from 50% up to 60%.
For the affordable housing CGT discount purposes, affordable housing is any dwelling (house, unit or apartment) where the following conditions are satisfied:
- The dwelling is both a taxable Australian real property (TARP) and residential premises that you rent out or genuinely make available for rent. Caravans, mobile homes and houseboats are not residential premises.
- The dwelling is not a commercial residential premises.
- Management of the tenancy or its occupancy is done exclusively by a registered community housing provider (CHP).
- Each entity that holds an ownership interest in the dwelling has a certificate from the provider showing that the dwelling was used to provide affordable housing.
- No entity that has an ownership interest in the dwelling is in receipt of an incentive from the National Rental Affordability Scheme (NRAS) for the NRAS year.
- If a managed investment trust (MIT) has an ownership interest in the dwelling, the tenant does not have an interest in the MIT that passes the non-portfolio test.
ELIGIBLITY FOR AFFORDABLE HOUSING CGT DISCOUNT
When you sell a rental property used to provide affordable housing, you may make a capital gain on the profit. This may qualify you for an additional (up to 10%) affordable housing capital gain discount if you meet the following eligibility criteria:
- The capital gain must have been either
◦ made by you as an Australian resident individual, or
◦ distributed or attributed to you either - directly from a trust or managed investment trust (MIT)
- indirectly from a trust through an interposed partnership, MIT or other trusts (this does not include public unit trusts or super funds).
- You must have also provided
◦ new or existing affordable housing
◦ rental rates below market rent
◦ affordable housing to eligible tenants on low to moderate incomes (based on household income thresholds and household consumption)
◦ affordable housing for a minimum period of three years (1,095 days) from 1 January 2018. This can be continuous or an aggregation of three years over a longer period.
The additional discount will be pro-rated for periods where you don’t use the property for affordable housing purposes.
Example – Working Out The Aggregate Period For Affordable Housing
Lisa purchased a dwelling (that is a residential premise) on 15 August 2018.
When she owned the dwelling, Lisa:
- left it vacant and made repairs from when she acquired it on 15 August 2018 (her acquisition date for CGT purposes) until 1 December 2018 (109 days)
- rented it out through a CHP as affordable housing from 2 December 2018 until 20 August 2020 (628 days)
- rented it out through a real estate property manager at market rates (that is not providing affordable housing) from 21 August 2020 until 31 August 2021 (376 days)
- rented it out through a CHP as affordable housing from 1 September 2021 until 15 January 2023 (502 days)
- vacated the property and prepared it for sale on and after 16 January 2023 (57 days).
On 13 March 2023, Lisa signs a contract to sell the dwelling, with the settlement occurring on 11 April 2023. Lisa makes a capital gain of $100,000.
Lisa has held the dwelling for a total of 1,672 days. She used the dwelling to provide affordable housing for 1,130 of the 1,672 days. As Lisa uses the dwelling to provide affordable housing for more than 1,095 days, she may be eligible for the additional affordable housing capital gains discount. She must also meet all of the other conditions to ensure her eligibility for the discount.
Making the decision to provide affordable housing can be morals-based, or it could be a financial decision. While this example doesn’t show whether or not Lisa decided to provide affordable housing on either a moral basis or financial reasons, it does provide an example of how you could potentially use a residential premises to make a capital gain, and potentially be eligible to apply the additional affordable housing capital gains discount.
If you wish to provide affordable housing based on financial reasons, we can support you with the necessary modelling to determine if offering cheaper rent would be more than offset by a future capital gains tax saving.
