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

Thanks for the prompt reply @Terryw. Your dedication to this forum is prolific and impressive!

 

Take care you dont misinterpret Terrys reply and views as being some type of advice specific to your tax position. Personal tax advice may still be needed. Terry hasnt evaluated all your issues

 

Is it correct after the recent budget changes that you need to be a resident for tax purposes at the time of selling in order to get the CGT main residence exemption unless grandfathered (purchased prior to changes and sold before 30 June 2019)? If you were overseas and not a resident for tax purposes then you would not receive the exception and then need to pay 100% capital gains tax?

Capital gains tax changes for foreign investors

 

The proposed law changes have not been drafted as final. The draft position said as much but did include a grandfathering proposal

At present Clause 1.28 of the EM at https://static.treasury.gov.au/uplo...2017-t204155-EM-ForeignResidentCGTChanges.pdf does confirm a total loss of the former main residence exemption if Terry the Taxpayer lives in a property and puts it up from sale then departs to take up a foreign job and the property sells while he is non-resident (ie 2 days later).

One strategy available to Terry would be to ensure he has no intention to stay beyond the first 6 months in the USA until he is satisfied the role and country are worth the effort. Then after 6 months he agrees to a longer contract and finalises more permanent residency arrangements in the USA. He would not be a non-resident taxpayer for that period. It could even be a month.... In some ways easily avoided and still complex. Lawyers and accountants will just charge the smart ones and tax revenue goes nowhere.

The proposed law seems to allow a person to return within 6 years and then occupy the property and sell it and no CGT applies. Very inconsistent and unfair is what many have said. The final Bill could modify some of these issues

 

When is the final bill expected to be released?

This 6 year ppor change seems to have been proposed for a while, why is it not implemented in full yet?

 

Winter break. High Court issues re 7 MPs who are kiwis and sheer flood of issues being given priority. Bills get packaged...Some good laws get attached to ones which get opposition.

 

it has to get passed the senate. Don't think the high court has any role in approving legislation.

 

The Govt has a present agreement that the citizenship affected senators and MPs cant vote on laws while the HC issue is undetermined. This avoid repeal later !! So Turnbull has no real majority at present even with independents. The HC wont hand down its view on citizenship for another month I believe. In meantime parliament is just dealing with basic laws without objections or where unilateral agreement exists (not much of that!!). ie their own salaries perhaps.

 

What a waste of money this citizenship thing is costing us. Time, money and resources.
But there is no alternative I guess.

 

I hope they adopt a more modern view on allegiance.

 

Hi Terry,
What happens if you live in PPOR, leave for work purposes (reosting) and receive discounted rental accommodation in the other locations. As there are no other PPOR owned, can you claim full PPOR after the 6 years? That is in the scenario of selling prior to finding another property in a new location or moving back in to the original property.

 

the reason for the absence is of no relevance. The legislation says if you are absent you can continue to treat the main residence as your main residence....

 

We have moved out our PPOR 1 of 8 years and now living in the in PPOR 2. PPOR 1 is now worth almost double than original purchase price.

We are considering converting PPOR1 to IP. Is my interpretation correct that when we eventually sell the IP say after 4 years, can we apply the 6 year rule and avoid CGT?

What if we wanted keep our oprions open as to which property to claim CGT exemption on? If PPOR 2 has appreciated better than IP when the IP is sold, perhaps it better to retain CGT exemption entitlement for the future sale of PPOR 2.

If this is the case, is it better to have PPOR 1 valuated before converting it to IP to reduce CGT liability?

 

just wait until you sell either and reasses then?

 

No idea. A valuation may only have relevance to s118-192 which is the Home First Used to produce income "special rule". Only a property that has been a 100% CGT exempt home since day one can use this method. In all other cases a pro-rata based on number of days applies and market values are irrelevant - Excepting some property used in a development

With a choice of home 1 or Home 2 you need to determine if that affects s118-192.

You can choose which periods of time are exempt provided no two days are claimed and you can choose NOT to use the exemption also. Typically a choice is demonstrated in how you prepared and lodge a tax return...No form to fill out as such. The first property sold often acts as a trigger for that decision.

 

I'm surprised the rule hasn't been in the sight of either party looking to raise taxes.

 

It already harms some taxpayers. s118-192 is not optional and it presently harms anyone who buys a home that falls in value. Common strategy is to rent it out...triggers a reduced costbase and higher CGT v's a neighbour who sells at a loss

A example could be former homes in mining towns. People have lost job and moved with the work but kept the property which may be worth far less than it cost.

The only reason the rule hasnt been changed is there has been a long history of prolonged price growth / stability. If property values were to adjust across the country there could be problems

 

The 6 year rule won't be around forever I think. Too generous.

 

I agree. However in the recent non-resident CGT changes it was obviously a consideration they ignored. I suspect a government with majority may address it but mere mention of it could trigger a scare campaign. If Shorten gets a two house majority of 1 seat it could be easily passed.

I once was asked - why 6 years. It came in with the 1985+ Keating introduction of CGT and had a trivial purpose back then explained in the EM. Many people went o/seas for 5 years and 6 years was considered a safe period. How things have changed...Back then banks didnt do investment loans like now, no equity release like now and property was seen as your home and often only wealthy with cash bought a second property. Given the level of interest rates at that time (15%+) and the "regulated home rate" of 12.5% for owner occupied property neg gearing was a minor issue at a time when property stimulus was needed.

Keating and then Costello in many respects made a mess of the negative gearing principles - PJK tied neg gearing to other income, included a 6 year rule and a 6month exemption concession and made it all highly complex using indexation rates and averaging over 5 years (for some taxpayers). Costello's reforms simplified parts of it (50% CGT discount after 12 mths) but retained many of the tax impacts - All because economic prosperity at that time had very large surpluses. All banked into the future fund. But the tax liabilities on the budget remain !!

If a CGT main residence exemption is retained then it needs reform to limit abuse.

 

Hi Terry, Paul and Everyone,

Thank for the insightful post, this really open my eyes to plan my tax carefully.

I have just sold my ABC property (used to be my PPOR for 2010-2014 and rented out 2015-2018) say for example if I decide to treat this ABC property as PPOR for CGT purpose then I would have to pay CGT for my DEF property (currently PPOR bought in 2015) for the overlap period I.E 2015-2018 should I sell this in the future

and let say if I will sell property DEF in 2019 , could you please confirm the following questions

1. Can I claim stamp duty cost from DEF property for the CGT calc?
2. I read earlier that I can claim interest expenses for DEF property although this is my PPOR Is this right?
3. Do I need o get property valuation in 2018 for my DEF property for CGT purpose or can I just do the prorata based on number of year IP VS PPOR for CGT purpose ?


thank you