Tax Tip 177: Stretching the 6 year absence rule indefinitely

Discussion in 'Accounting & Tax' started by Terry_w, 2nd Jul, 2018.

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  1. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    Stretching the 6 year absence rule indefinitely

    Most readers will be familiar with the ‘6 year rule’. This rule basically states that a person can be absent from their main residence for up to 6 years yet still treat the residence as the main residence for CGT purposes even if that residence is rented out. See

    Tax Tip 23: The 6 year Absent from Main Residence Rule Tax Tip 23: The 6 year Absent from Main Residence Rule


    The 6 year rule is covered by section 118-145 of ITAA97.


    What is less commonly known is that where the taxpayer is absent from their main residence and that residence is not rented out, or otherwise income producing, then there is no time limit. The property could be counted as the main residence indefinitely. The relevant legislation for this is subsection (3) of section 118-145 ITAA97 – i.e. section 118-145(3) ITAA97.

    Check it out yourself at:
    INCOME TAX ASSESSMENT ACT 1997 - SECT 118.145 Absences


    This handy little rule can be used in tax planning to save tax.


    The 6 year absence limit also starts again if the property becomes and the main residence once again and then the taxpayer becomes absent again. This is confirmed by the legislation which contains the following example:

    Example: You live in a house for 3 years. You are posted overseas for 5 years and you rent it out during your absence. On your return you move back into it for 2 years. You are then posted overseas again for 4 years (again renting it out), at the end of which you sell the house.

    You have not treated any other dwelling as your main residence during your absences.

    You may choose to continue to treat the house as your main residence during both absences because each absence is less than 6 years.

    You can make this choice when preparing your income tax return for the income year in which you sold the house.




    So with careful planning the 6 year rule can be stretched out to be more than 6 years and possibly indefinitely.
     
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  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    The catch to the indefinite issue is the ALP and Coalition plan to both end the main residence exemption for people who depart Australia to reside offshore temporarily. Its in limbo at present (after being passed by both houses !!) but in some form will get up at some point.
     
  3. Redwing

    Redwing Well-Known Member

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    @Terry_w

    What happens where the original PPOR is rented out for more than six years (owners move overseas, or commence renting elsewhere themselves) then look to sell 10 years + down the track?
     
  4. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    I have a tip on this already. Out so can't check what number
     
  5. Mike A

    Mike A Well-Known Member Business Member

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    Would be subject to partial cgt
     
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  6. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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  7. craigc

    craigc Well-Known Member

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    Hi Terry,
    Another query - if using the 6 year rule above but you return to main residence status in <6 years.

    Does the cost base remain market value at time when first used to produce income (ie rented out) which is as I understand it,
    or,
    does the cost base reset again if move in after <6 years and property is returned to PPOR status before then moving out and returning to rental property again? Ie the second time it’s turned into a rental property after MR.

    Thanks
     
  8. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    Craig I have another tip on this cost base would be value at first used to produce income.
     
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  9. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    It depends.

    If the home had always been used as a 100% exempt main residence and was never a place of business (whether or not any deductions were claimed) then s118-192 ALWAYS applies to the ONLY the first instance when the home is first used to produce income.

    There are also other instances when s118-192 isnt eligible and a quite common example occurs with a new spouse/partner/defacto and you both have different past or current main residences at anytime after the test for spouse applies BUT this can also affect property either own at the date they become spouses.

    The other common example is when a taxpayer seeks to use s118-192 but has earlier already elected to use ANOTHER property as exempt for even one day within the ownership period for the subject property (excepting the 6 month main residence "overlap"exemption. (The earlier election means the present property isnt eligible for s118-192)

    A taxpayer who has been a non-resident for tax purposes after 10 May 2012 who cannot use the 6 year absence exemption (due to its loss) may also be affected and unable to use s118-192 as special rules require them to calculate their gain or loss differently to residents.

    A taxpayer with a pre-CGT asset is also not required to use s118-192.

    Otherwise s118-192 only applies ONCE. The first time. Thereafter pro-rata may occur unless your return and recommence the main residence again. This raises a interesting issue - Some taxpayers return and quickly live in the property but this can be fatal. The key words are MAIN residence. A brief occupancy with intention to immediately move out again wont likely comply.
     
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  10. craigc

    craigc Well-Known Member

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    Thanks gents, as I thought but still lots of opportunities around this if taxpayers think it through.