The Line in the Sand: Your Property and the 1 July 2027 Reset

Mia: Welcome to the podcast, our newsletter made easy. Please note, this podcast features AI-generated voices for your hosts, Mia Taylor... Leo: and Leo Baker, bringing you expert insights from the team at Aevum Accounting. Each week, we're here to help you confidently navigate the ins and outs of Australian tax, whether it's for your individual finances or the complexities of your business. Mia: We'll cut through the jargon to give you strategies for compliance, smart planning, and that ultimate peace of mind. Leo: So, if you're looking to understand your obligations, maximise your financial position, or simply gain clarity on your money matters, you're in the right place. Let's get started with our review of the week! Mia: This one comes from Ashlee. She says they had a more complex return this year with shares from an equity loan, that the attention to detail was great, and that the team also helped them work out how to maximise their returns in future years. Leo: Thank you, Ashlee. And that last part is today, because this episode is entirely about a year that hasn't happened yet. Mia: The first of July, twenty twenty-seven. Leo: The first of July, twenty twenty-seven. If you own an investment property, something happens to it that day whether you do anything or not. Harvey, welcome back. Harvey: Thanks. And can I start by correcting myself, because I owe the audience that. Leo: That's a strong opening. Harvey: On budget night, back in episode forty-one, I explained the market value reset coming in twenty twenty-seven, and I introduced it as a pre-capital-gains-tax measure. My example was a farm bought in nineteen eighty-two. Everything I said was true, and it left most of you with the wrong impression. Mia: What impression was that? Harvey: That the reset is about very old assets, and that if you bought your rental in two thousand and eight it has nothing to do with you. It has everything to do with you. It catches almost every asset an individual or a trust holds on the thirtieth of June, twenty twenty-seven, and still owns when it's later sold. There are exceptions, and one matters a lot in Perth. If you've been a foreign or temporary resident for tax at any time since May 2012 while you owned it, the reset as passed doesn't apply to you. Genuine new builds and affordable housing sit outside it too, because they keep their discount. Leo: So let's do it properly this time. Harvey: Let's. And the good news is that the reset is the part that protects you. Most people have heard the bad half of this and not the good half. Mia: Start with the bad half. Harvey: From the first of July, twenty twenty-seven, the 50% capital gains discount goes to zero for individuals and trusts, except on genuine new builds and affordable housing. In its place you get two things. Your cost base gets indexed for inflation, and if you're an Australian resident you pay at least 30% tax on the new growth, unless that year you're on something like the Age Pension or JobSeeker. Leo: And that is law, not a proposal. Harvey: It passed in June and it's on the books. It is no longer a draft. Mia: So what's the good half? Harvey: That the law does not apply the new rules to the growth you've already had. On the thirtieth of June, twenty twenty-seven, you are treated as having sold almost every asset you own. On the first of July you are treated as having bought it all back, at what it was worth just before the first of July. Leo: A sale that never happens. Harvey: A sale that never happens. Nothing changes hands, nothing settles, and you don't pay a cent at the time. It draws a line in the sand and says everything below that line belongs to the old world. Mia: And the old world is the 50% discount. Harvey: Exactly that. Growth up to the reset keeps the 50% discount under the old rules. Growth after it goes through indexation and the 30% minimum. Two slices, two sets of rules, one property. Leo: When do you pay the tax on the first slice? Harvey: When you actually sell or otherwise dispose of it, and not before. There's nothing to report in your twenty twenty-six, twenty-seven return. No notification, no election, nothing. Which is exactly why it's so easy to miss. Leo: What about the twelve month rule? If the law pretends I bought the place again in twenty twenty-seven, have I reset my clock? Harvey: No, and they thought of that. The legislation says to disregard the deemed sale when you're applying the twelve month rule. Your actual holding period is untouched. Mia: Here's the question everyone will have. What number goes in the box? Harvey: That is the question, and it's the whole reason people are ringing valuers. There are two possible answers and only one of them currently exists. Leo: Give us the one that exists. Harvey: A market value. What the property was worth just before the first of July, twenty twenty-seven. That's the default in the legislation and right now it is the only route available. Mia: And the one that doesn't exist yet? Harvey: A formula. The Act lets the government set one by legislative instrument, and Treasury put out a draft in August. Consultation closed on the twenty-first of August. As of today that formula has not been registered, so it is not law, and nobody can use it yet. Leo: What would it do? Harvey: It estimates the reset value from what you paid, what you eventually sell for, and how long you held it. It works out a daily growth rate and compounds it forward to twenty twenty-seven. Mia: So it's a straight line through the middle. Harvey: Not quite, and this is worth getting right because a lot of people are describing it that way. It's a compounding curve. For a property that climbed steadily it'll be close to reality. For one that sat flat for a decade then doubled, or one you renovated, it won't be, and it can miss in either direction. The formula doesn't know your kitchen exists. Mia: So when do you have to choose? Harvey: In the tax return for the year you actually sell. Not in twenty twenty-seven, not the year after. The law is explicit about it. You make that choice in the return for the year the sale happens, and it has to be settled by the time you lodge it. Leo: Which could be fifteen years away. Harvey: Which could be fifteen years away. And that is the single most useful thing in this episode, because it means nobody has to make a decision right now. Mia: Then why is everyone panicking about getting a valuation done? Harvey: Because "reset date" sounds like a deadline, and it isn't one. The legislation doesn't set one. The explanatory memorandum never once uses the word valuation. Leo: But the date is fixed. Harvey: The date is fixed. What gets valued is the property as at just before the first of July, twenty twenty-seven. The report itself can be written later, off evidence from around that time. Mia: So a valuer can do it after the fact. Harvey: Retrospective valuations are completely ordinary. The tax office's own valuation guidance uses one as its example, as at the first of July, two thousand. The catch is hindsight. That same guidance says prudence is assessed by referring to the state of the market at the valuation date, not with the benefit of hindsight at some later date. Leo: So what does waiting actually cost you? Harvey: Evidence, not eligibility. You keep the right to do it. What you lose is the quality of what the valuer has to work with. Comparable sales go cold, and the condition of the place on the day has to be reconstructed from memory. Mia: So what should people actually do? Harvey: Don't book a valuer for the first of July. Do think about whether yours is a property where the formula would be wrong, and if it is, capture the evidence while it's fresh. Photographs, the renovation invoices, what was happening in your street that winter. Leo: Now, the question everyone's actually shouting at the radio. What about my own home? Harvey: Treasury's budget material says it plainly. The main residence will continue to be exempt for capital gains tax purposes. Mia: That sounds settled. Harvey: That's Treasury describing the policy, and I'd rather be straight with you about where that sits. The main residence exemption itself hasn't been touched by this Act. What the Act doesn't do is carve your home out of the deemed sale, though it clearly assumes the exemption keeps working on both sides of the line. What nobody has published yet, not Treasury and not the tax office, is exactly how a partly exempt home is split across the reset. Leo: Should people worry about that? Harvey: No. If your home is fully exempt it stays fully exempt. The deemed sale runs over every home, but if part of your ownership period wasn't exempt, and for a lot of people it isn't, the days it was your home still come out of the taxable part. How that divides between the two slices just hasn't been spelled out. Mia: Which brings us to the rule everyone thinks they understand. Leo: The six year rule. Harvey: The six year rule. And I want to spend real time here, because we've mentioned it twice on this show and never properly explained it, and the way most people describe it is wrong in a way that costs money. Mia: How do most people describe it? Harvey: As six years of free rental. The belief is that you can rent a property out for up to six years, move in at the end of it, and sell it later with no capital gains tax. That is not the rule. Leo: What is the rule? Harvey: It only works on a home you lived in first. The section opens with the words, if a dwelling that was your main residence ceases to be your main residence. You have to have something to cease. Mia: So live in it, move out, rent it. Harvey: Live in it, move out, rent it, and you can keep treating it as your main residence for up to six years, as long as you don't treat another home as your main residence over the same period, apart from up to six months of overlap when you're moving. Leave it empty instead and there's no time limit at all. And a fresh six years runs each time you move back in and out again. One catch if you move overseas: if you're a foreign resident for tax when you sign the sale contract, you generally lose the main residence exemption altogether, six year rule included. Leo: And if you never lived in it? Harvey: Then the rule never switches on. Not for a shorter period, not partially. It isn't available. The tax office says it in one sentence on their own site. The property must have been your main residence first. You can't apply the main residence exemption to a period before it first becomes your main residence. Mia: What happens when you sell? Harvey: The gain gets apportioned. You take the whole gain and multiply it by the days it wasn't your main residence, over the days you owned it. Leo: Say that one again, because there's a trap in it. Harvey: The days it wasn't your main residence. Not the days it was rented. If it sat empty for a year before you moved in, that year usually counts against you too. The exceptions are narrow: a delay from illness or something unforeseen, where you move in as soon as you can, or time spent building or renovating, up to four years. Mia: And moving in later doesn't fix it. Harvey: Moving in later doesn't fix it. The tax office has a worked example of someone who bought a place and rented it out for just over two years, then moved in, lived there for more than four years, and sold. Those seven hundred and fifty-seven rental days were still in the fraction. About $173,000 of her gain was taxable, and even after the 50% discount she added about $86,500 to her taxable income. Leo: Is there anything that softens it? Harvey: There's a rule that resets your cost base to market value when a home first starts producing income, and it's often valuable. But it only runs one way. It has to have been your home from the start, right up to the day you first rent it out. Rent it from the day you bought it and you don't get it, so you're stuck with your original cost base. And it isn't optional. You need a valuation as at the day it was first rented, and if you sell within twelve months of that day you lose the CGT discount. Mia: So the person who did it in the right order has two rules on their side. Harvey: Two rules, and most people have never heard of the second one. Rent it out for six years or less and the first one can make the whole gain exempt. Rent it for longer and the gain is worked out from what it was worth when first rented, and only the days past six years are taxed. Which is why the order you do things in matters more than almost anything else in property tax. Leo: So if you're planning to move into a rental one day. Harvey: Get the dates in front of an accountant before you make the plan, not after. Whether you ever lived in it is the first question, and the answer changes everything after it. Mia: Next week, the business side of the same reset. Leo: A company's own assets mostly don't get reset at all. But the shares in it do, and so does the goodwill of a sole trader or a trust. And there's a trap for families who've held shares in a company, or an interest in a family trust, since before nineteen eighty-five. Harvey: That last one is the biggest number in this whole topic. Mia: If you'd like someone to look at your property and tell you whether the formula will do you justice, head to aevumaccounting.com.au and book a session. Leo: Or head to aevumaccounting.com.au. And if you're already a client with a rental, bring it to your next catch-up and we'll go through the dates. Mia: Before we go, a quick but important reminder. The information shared today is for general informational purposes only, and does not constitute specific tax or financial advice. Leo: Everyone's situation is unique, and tax laws are complex. For personalised advice tailored to your situation, we always recommend consulting with a qualified professional. Mia: Until next time, stay savvy, stay proactive... Harvey: And whatever you do, don't book a valuer for the first of July!