Capital Gain Tax and Mortgage

A valuable Sydney residential property is under my name, and my wife uses this property as her principal place of residence. T property is going to be substantially renovated, the cost will only be paid by my wife. The cost of renovations will represent about 23% of the current value of the house. If possible, we would like to avoid the NSW stamp duty when I transfer 23% of the ownership of the property to my wife. Another arrangement might be my wife lending me the money on a mortgage. Repayment of that Mortgage requires me to pay 23% of the valuation of the property determined at the time of repayment or 23% of the sale proceeds if the property is sold. We expect that the value of the property would go up in the future, which would result in a higher repayment amount. If my wife became a part-owner of the property, her share upon disposal would be CGT exempt if it continued to be her principal place of residence. However, what would the CGT treatment be if the transaction was structured in a way of mortgage?

Is a mortgage a CGT asset? If so, would the excess between the amount loaned and the amount ultimately repaid be a capital gain?

Would the general discount apply if the mortgage was held for more than 12 months before discharge?

 

The difference between the amount provided under the secured loan and the amount ultimately repaid may be partly on capital and partly on revenue account. Usually, the excess to a loan is considered interest and thus ordinary income. If the amount is in the nature of a return on capital, the GST provisions could apply instead. The general discount from CGT will only apply if the excess is on the capital account and the secured loan is for a period in excess of 12 months (ITAA 1997 S 115-5, 115-10(a), 115-25(1) and 115-100(a)(i)). However, there is a risk that some or even all of the excess could be on revenue account and the general discount will be inapplicable (ITAA 1997 S 6-5).