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

TaxBanter recently had a good discussion regarding this matter

CGT main residence exemption amendments hit Parliament | TaxBanter

 

Confusing state land tax, stamp duties surcharges and Commonwealth income tax ? Land tax is not a tax on citizenship OR residency but a wealth tax based on ownership. Land tax surcharge exemption is not confined to citizenship either. eg
- Trusts which dont exclude non-resident beneficiaries (despite none being known) may be caught. This has the opposing position v's that of citizenship in many cases.
- The modified definition of 'Foreign Person' excludes an Australian citizen and New Zealand citizen holding a special category visa from liability to the surcharges no matter where they reside. A non-Australian citizen will be ‘ordinarily resident’ in Australia at a particular time where the individual has actually been in Australia during 200 or more days in the last 12 months and is not (or was not from most recent departure) subject to any legal limitation as to time for continued presence in Australia. A person who falls outside of the exclusion or is not 'ordinarily' in Australia will be regarded a 'foreign person'.

Many states have adopted the FIRB measures for consistency. However if you read those laws it is NOT solely limited to citizenship either. And uses a expression of "ordinarily resident" as well. Sorta aligns with residency but it isnt and has a different test

 

Thanks for that! Very good summary of the issue. The last line really hits this nail on the head:
What is not in question is that this proposed measure is draconian, retrospective and unfair.

 

Agreed. A grab for cash.

 

Did you ever enquire about english teaching. My friend says they are looking for someone to train. Pm me. Ill send their details then up to you.

If you complain after that then i have zero sympathy. A potential employment opportunity awaits. Stop complaining about the new laws and start earning an income.

 

Yes that summary, like much of the material they generate, is concise as possible and clear. However it also merely supports the views I have had that the new laws will create harm particularly for those who were tax residents / citizens before their departure.

The Committee recommendations are really poor in my opinion. Taxpayers even contemplating departure from Australia for prolonged periods of 2+ years should all be aware of the serious tax concerns that could occur if they dont seek tax advice WELL BEFORE moving. In its simplest form if a couple own a home they may seek to sell it before departure rather than face the serious tax concerns that result later. Selling after they fly out could be a major error in some cases.

I imagine large employers with in/outbound expat advice will address these issues but many smaller employers or those who have small local offices may not. A 5 year working holiday absence could become a nightmare situation if the people seek to sell after they depart.

 

So what is the best advice basd on an example where a family have already moved over seas and not sure when coming back...

Just sell up now before March next year???

Of course, if we sell then we face trouble if we want to come back later but the market has moved again. Its a tough one with so much uncertainty about govt. policies! Especially when your not one of those expats leaving Oz for a big increase to you income but one doing it for family reasons and already sacrificing big chunk of earnings.

Must be a better way of trying to have a go and not having to worry that 50% of your capitol will go in tax??

 

Depends.
If it is your main resident at death it could pass to beneficiaries without a tax liability imbeded.

 

Im only in early forties, moved OS for wife's family reasons and we may return in 5 to 10 years.
There are so many other factors in the decision that would come before MR at death but i do take your point.
It just seems that this "never sell" mantra that is drumbed in from the very start of reading the forums and books may be best left behind now.

 

When selling the property under the 6 year rule, presumably you can't make any deductions on the legal and comission fees associated with the sale right?

 

These are capital expenses and there is no capital gain that is taxable.

 

Thanks Terry for this tip thread on the 6 Year Rule. Just seeking further clarification.

To what extent is it important to move in to a property straight away?

If for example, one originally planned to move in to a property/unit first, then rent it out down the track, but in the meantime circumstances changed?

If the plan changed to renting it out first then moving in later, say within 11 months or so, how is the 6 year rule calculated? Is it from the time an owner moves in? How important is it to establish it as main residence from the beginning? Is it then calculated from the time the person moves in?
Is one disadvantaged down the track? Would it actually be better to move in first, establish it as a main residence, then rent it out later? Also, how long does one have to live in it for it to be counted for this rule?

Many thanks in advance
all the best
MLH

 

6 year rule can still be used after moved out, but not before moved in
so CGT would still need to be apportioned based on time the property was a main residence.

 

6 year rule can still be used after moved out, but not before moved in
so CGT would still need to be apportioned based on time the property was a main residence.

 

I let tenants continue to stay in our place when we bought it 20 years ago. They stayed for about 10 months and looking back, don't think I should have done that but at the time we were "stretched" a bit to buy the place.

10 out of the 240 months (apportioned as Terry mentioned) will have to pay CGT but understand I can claim some costs including buying it.

I didn't get a valuation at the end of those 10 months and hope that won't be a problem but guess can just work it out from 10/240. Otherwise I think I can still get a valuation from back then.

I've kept the details during those 10 months plus the buying costs and hopefully the CGT will be nil when taking into account any claims. It has at least tripled in price in 20 years.

 

A valuation couldn"t be used Alex as you moved into an investment property, s 118-185

20 years or rates and interest etc will probably mean little gain and then 4% of that would be taxed.

 

I would always move in.

But if you did not and it is a flat or declining market, I would not sweat it....

 

It doesn't really matter if the market is flat or declining at the point you buy, it is during the whole life of the ownership that counts.

example
$100,000 purchase price, move in 1 year after purchase when it is still worth $100,000.
It then soon jumps to $200,000 when you sell in year 2.
That is a $100,000 gain of which 50% is exempt as you have lived there for 12 months. 50% discount on top

compare to:

$100,000 at purchase and move in when it is worth $200,000 a year later.
Sell for $200,000 in year 2.
You have still made the same gain and tax outcome $100,000 gain of which 50% is exempt as you have lived there for 12 months. 50% discount on top

 

Yes...

I meant if bought and rented for 12mth and market say dropped for next 2 years.....

You move back in after 12 month and val shows it is worth less....or same.

I know someone doing this....but they are oblivious too all tax matters.....it wont be going up in val though.

 

Dabbler - You can end up paying CGT on an apparently tax free property too.

Fred buys a property in Port Hedland for $550K (+20K of acquisition costs) in 2015 and lived + worked there for six months then rented it out. At that time it was worth $350K as the mining industry and local property values tanked. Now he looks to sell. Its worth $450K but may get a little more if he fixes it up. It sells for $485K in late 2018. When Fred moved from Port Hedland he bought a Sydney property that he will claim as his main residence.

Fred has technically sold the property for a loss. BUT. CGT laws will impact his choice
s118-192 applies and is not optional. The historical costbase is $570K. But s118-192 imposes a lesser costbase of $350K and the sale was $485K. Fred pays tax on 50% of the $135K gain. He does not have a $85K capital loss.

If Fred wanted to he could treat Port Hedland as exempt for the period he lived there and up to 6 years after hence nil tax is payable. But it means for any duplicated time the Sydney property will lose its exemption. But given most Sydney property if off its highs this could be a sound position to adopt. But until Sydney eventually sells and a pro-rata CGT calc is made nobody will know if the Port Hedland exemption actually saved less or more vs Sydney

Often a full exemption today is always better than a possible part exemption later.