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

So you occupied both duplexes yourself in the period 2004 - 2012 ??
NOBODY at all occupied either duplex between Nov 12 and July 13 ?
Not used rent free by parents etc ?

That could be a important factor too

 

Hi, and thanks for your replies.

A friend and I bought the duplex pair in common in August 2004 and moved in straight away.
We bought in common, not jointly; my stake is 61%, and hers was 39%.

I occupied one duplex from 2004 to Nov 2012.
She occupied the other duplex from 2004 until she passed away in June 2010.
I have life tenancy over the lot, granted by her will sitting at the public trustee of Queensland.

I moved out in November 2012 when trying to sell the house, and it was empty until July 2013 when I give up trying to sell it because the agent said it was worth less than we had paid for it in 2004.

I then got tenants in one unit, and there still are tenants there now.
Without rent coming in, I will run out of money because I’m an age pensioner and council and water rates on the Gold Coast are $3500 per year before you open the tap.

 

can't be CGT free

 

That may complicate it a bit more and the impact of TR 2006/14 should be understood for the estate portion/s of each of the two CGT real property assets (39% of each). Perhaps all of it is subject to some CGT ? At best a 6 year absence rule commenced Nov 12 will end Nov 18 even if any was exempt prior to that date. After Nov 18 I suspect all of the property would have some CGT impact as the exempt period will have ceased if it ever applied to 100%. (I suspect that 100% exemption is not apparent)

Certainly one for personal tax advice before contemplating any sale. If values are depressed v's cost (or market value at the date of death) there may be less concern for the amount of tax.

 

1/9/10 Purchase contract signed. moved in and paid rent to renovate the house
1/10/10 Settlement date and Available for rent
1/7/11 Moved in but rented out 70%
1/7/13 Moved out to a new house bought with partner
1/9/17 Sell contract signed
1/10/17 Sell settlement
Do I need to pay any tax on Capital gain tax or 70% of CG or full CG amount?
Thanks

 

none of the above.

 

May be more than 70%, maybe less. The partners property will also come into play and BOTH of you need to both consider the CGT choices or they will apply in a way you dont intend.

CGT affects non-ownership partners as well

 

Thankyou

 

Thankyou

 

Scott Morrison & Turnbull screwed my Main Residence CGT exemption strategy - self funded retiree with permanent disability who had hopes of spending my retirement overseas in cheaper countries and just come back to Australia from time to time and live in my property every six years to re-activate the Main Residence CGT exemption.

Now if I keep my property past June 2019 I am going to lose that exemption if I become a non-resident - just one non-resident event overseas can trigger it.

So I am now effectively being forced to put my property on the market - in a downturn market too, worst time for me to try and sell. I relied on the rental income to live off. Equivalent income I get is same as a pension.

I will be left with money from the sale and unable to invest back into property without falling into the same trap. This will force expats into riskier investment classes IMO. It looks like shares are the only thing I can invest in now to get enough money from dividends to live off. And hope that I don't lose it all in a share crash.
So many sharks out there giving financial advice wanting to fleece your money with bold promises that don't eventuate (been burnt several times). But Liberal is forcing people like me into that corner.
There is going to be a lot of heartache and pain as a result. I expect suicides will increase. I can relate to that.

The Grandfathering period for selling our properties is just not enough time. Speaking with a real estate agent I was told there is a huge increase in expats now selling their properties so as to still get the Main Residence CGT exemption.

The government wants to purge all expats from owning investment properties. But as a result we are being discarded to be left with less options and higher risks.

The question is "Why were non-resident Australian citizens targeted in the first place?"
Australian non-residents/expats are such a small minority and in no way impact on the housing bubble crisis. But Morrison then Treasurer claimed it was all part of the housing affordability measures.
So, in other words "rob Peter to pay Paul", because all this measure is doing is to try to transfer the apparent 'wealth' from one section of the community to another to appease them and give them the apparent advantage.

 

Generally it would be preferable for a society to encourage ownership of property rather than money flowing to absent landlords, especially overseas based landlords. The recent influx of Chinese resident investors helped push up prices with more money flowing offshore with many taking advantage of the law to avoid paying tax.

Thats my theory of why.

 

There is NO reason why a property must be sold if the person expects to return as a tax resident. Only a non-resident not expecting to return will face the tax issue/s.

This law change reflects that many people who were tax residents at some point were landbanking and holding property which preserved its tax free or partially exempt position. The 2012 changes partially addressed this but didnt go far enough it was felt. Treasury conducted a review that found the links between past exemption and change of residency exposed a weakness in our tax laws that was being exploited. eg : People who were temporary residents were also eligible to exemptions of 6 and more years. However based on pro-rata calcs the 6 years arent actually exempt but a far more prolonged period. And the modelling suggested that without arbitrary slashing of the concession that the abuse would go unchecked. And as Terry suggested many resident persons were bypassing the FIRB limits on foreign ownership by receiving offshore funds from family so that gap had to also be closed as there was no likely revenue on sale but prices were rising and exposing credit market risks.

In short Treasury wants the main residence exemption for people who physically reside so that the tax savings given to those offshore for whatever reason is reduced. eg

Scott Morrison & Turnbull screwed my Main Residence CGT exemption strategy - self funded retiree with permanent disability who had hopes of spending my retirement overseas in cheaper countries and just come back to Australia from time to time and live in my property every six years to re-activate the Main Residence CGT exemption.

Bingo. Perhaps Treasury got this one right ? Tax laws doesnt always have to be fair. In the post CGT period loads of people moaned for years about CGT and given its now almost 35 years later the noise has quietly disappeared. Families who inherit the property now just accept the good old days ended long ago.

 

Yes, but unfortunately expats are being caught by this. For most expats, including myself, the money from the investment property stays in Australia and at the same time income earned abroad gets sent to Australia - buying Australian shares is a good deal as there is no CGT until you return, interest rates are higher in AUD than EUR, superannuation gets topped up each year etc.

 

But unexpected things can happen, events that force a non-resident who plans to return to sell before they can come back and re-establish tax residency. All those years where the property has been your PPOR suddenly no longer count. That is unfair. Australia was the place of the "fair go". Treasury got this wrong. Very wrong. Imagine if your spouse died while abroad - you and your children could return to the PPOR, but when the PPOR is sold then there is a huge new CGT liability.

 

Totally agree with you - I have the same issue. Sure I plan to return but what if something unexpected happens that forces a sale while abroad? Seriously considering selling just because of this - the risks are too great. But what is the alternative? Invest in shares while abroad? In your case would this work:
1. Sell property, move abroad, buy AX shares, focusing on growth
2. return to Australia,sell AX shares, CGT free, buy AX shares, focus on yield
3. sell AX shares, move abroad, buy AX shares, focus on growth
4. repeat steps 2 and 3
the idea is to use the CGT free status of shares while abroad, then lock this in and get dividends+franking credits while resident...

 

Yes they do. And sometimes people find their residency changes with short notice due to work issues. And some depart Australia and then change residency etc.

Citizenship itself is not the answer since that not how our tax laws work and it too could have unintended consequences for someone who may have lived a long time and never adopted citizenship. And citizenship and residency can be at complete opposition. eg : Would you consider a citizenship who has never lived here much should enjoy tax free status from their home they used back in 1990-1996 (extended to 2004) v's someone who migrated here from NZ 25 years ago and has been a resident that entire time. The question of citizenship is truly limited to the USA's and Eritrea's tax laws.

Its important to remember that only some countries exempt the family home from CGT. Many nations give concessions but not 100% exemption. Some give nothing. The UK is a good example - Death taxes can cripple a family. Even fewer give even more generous extension to the exemptions based on absence especially while overseas !! ( Australia is truly exceptional to be honest). There has been a general withdrawal of tax laws that do give extended exemption in countries across the world. Australia is just one. And the same tax treaty that gives Australia right to tax real Australian property hasnt changed.

I have a solid belief that the 6 year absence rule will face tight modification or even repeal soon. Not in this Govt. Maybe the next ? And I question if s118-192 will be accessable to all taxpayers too. It has also been used to advantage taxpayers who depart Australia. And to disadvantage some taxpayers (when values fall). This could really screw taxpayers who had already relied on these laws in the past but not actually incurred a CGT event. ie all past use of the absence concession or s118-192 could be removed as a past option !! Imagine the outcry. But the argument will be - Its been used to avoid tax. Treasury numbers will show it a massive revenue drain. If the ALP win an election its a solid bet for a review if not an announced budget tax measure. And I dont think Treasury will oppose the change. Just a minority opposition.

 

the incoming labor government will have a field day removing many of those concessions

accounting firms will easily double practice revenue with restructuring and providing advice re the myriad of changes that will eventually occur.

 

Is that Mike on a bike ?

 

yes a VERY VERY long time ago.

 

What about the NSW land tax surcharge? That is specifically linked to Australian citizenship:
Land tax surcharge | Revenue NSW