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

Discussion in 'Accounting & Tax' started by Terry_w, 20th Aug, 2015.

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  1. Rob G

    Rob G Well-Known Member

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    I am not aware of any Commissioner's established position on this.

    If both dwellings were leased to the one tenant who uses the entire property as private residential premises then there would be a good argument.

    However, on a narrow view the legislation only refers to "a dwelling" and its ancillary land and buidlings used in conjuction with that dwelling as a main residence.

    If the two dwellings are separately leased to different persons then the ancillary land and GF is not technically being used as a single residence. Then the argument could even descend to legal technicalities such as the act of leasing the first "dwelling" has technically annexed the other "dwelling" and its land. This means that there was only a partial exemption entitlement upon leasing the second dwelling. Messy.

    Better get advice on whether to proceed with or without a pbr.
     
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  2. Nicho32

    Nicho32 Member

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    If you purchase a PPOR and live in it for 12 months then rent it out for 6 years before moving back in for a further 12 months and then rent it out again does the CGT cost base remain the purchase price if you do not claim the main residence exemption or is it reset to the market value at the time of renting it out?
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Depends
    On the circumstances.
    It would like be the valuation at the date it first became income producing
     
  4. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    s118-192 imposes (its not optional) a change of costbase from the historical costs incurred on acquisition etc so that the costbase is the market value at the date income was FIRST earned (ie at end of the 12 months).

    Thereafter the CGT gain is apportioned between exempt and taxable days (ie when rented after the first occurrence)

    On that basis I question how (or why) you would not claim the exemption if it was your main residence. Paying tax on something not taxable may be unwise. s118-100 does allow a taxpayer the choice of ignoring the main residence exemption however. That choice really covers the issues surrounding a non-exempt use or election by a taxpayer. For example, where a partner and taxpayer each have a PPOR they cannot both fully claim the exemption but must determine how to use their respective exemptions limited to one home in total.
     
  5. S0805

    S0805 Well-Known Member

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    Terry, couldn't find the example....how will it work on below please

    PPOR1 bought and moved in @ 2008 lived there till 2015. In 2015 PPOR1 become IP. Agent valuation done on PPOR1. Same time PPOR2 bought and family moved in straight away....


    1) PPOR1 sold in 2025 (10 yrs after it becomes IP). Assume owners want to claim main residence exemption...So 6 yr rule doesn't apply or it applies but apportion by number of days rented vs lived?

    2) PPOR1 sold in 2018 (3 yrs after it becomes IP). Assume owners want to claim main residence exemption.....so 6 yr rule applies but no apportion given its within 6 yrs...??

    3) Given 1) happens and PPOR2 sold in 2030 (15 yrs after it was bought) how does CGT apply on this will it er apportioned and how??

    4) Gicen 2) happens and PPOR2 sold in 2030 (15 yrs after it was bought) how does CGT apply on this????

    cheers...
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  7. S0805

    S0805 Well-Known Member

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    Terry, clarification on above point I've read the link however PPOR2 here was never IP. By reading rest of the other tips the way i understand PPOR2 will loose the CGT exemption for the years which it intersects with PPOR1. is that right??
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    If PPOR2 was lived in the whole time, but not counted as the main residence at all for the first 5 years, and it was later sold say 2 years later then 2/7th of it should be exempt from CGT.
     
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  9. Vicianpark

    Vicianpark Active Member

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    hi there,

    If I purchased property 1, and i lived there for 12 months, moved out and rented it out because I bought another property 2.

    Now i am living in property 2 paying interest only, and still claim property 1 as my PPR. will property be exempt for CGT if i sold it within 6 years?

    when i am living in property 2 while I rent out property 1, how do i claim property 2 is not my PPR?

    thanks a lot
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It could me depeding on the circumstances.

    You just claim it the tax return when you sell either.
     
  11. Alla

    Alla New Member

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    Tried to research on it with not much success. How will the CGT be treated in this case:
    I have only one property that I intended to be my main place of residence but I rented it out straight away as I bought it due to personal reasons.
    So now the following will likely to happen:
    Rent the place for a year, move in and live myself for a year, move out and rent for a 2-3 more years. If it's the only property that I have - can I use the 6 year exemption? So say if i hold it for 6 years in total like this:
    1 year rent
    1 year live
    4 year rent
    Will the CGT be calculated as 1 year over 6 or will it be 5 over 6? Basically, foes it even make sense to move in to this property for one year to stop the CGT closk and make it my main place of residence or it just doesn't work this way?
     
  12. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The 6 years is a max single period from the time you CEASE to occupy a property as your main residence. You can repeat the process but on each occasion you must have occupied as your home and then move out.

    Also where you move - You cannot own it and your partner cannot own it either !! So moving into rental or parents etc is OK.

    You dont have to move in for a year. It could be a few months, 6 months or a year too. Moving in turns off the clock for the time you are there AND for a further period of up to 6 years.

    In the above example exempt period after 6 years is 5 years. 1 year as you occupied and 4 as the absence rule applies. So taxable period is 1 / 6 th. But with CGT discount its 1/12th of the "profit". And until you sell its deferred anyway
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    If I have understood you properly you would be owning the property for 6 years in total. Of these you could claim 5 years as the main residence so 1/6th of any gain would be taxable (less 50% discount etc)
     
  14. Brady

    Brady Well-Known Member

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    Haven't run this by an accountant yet, but looks like a good thread to ask the question that might also help others in similar situation.

    Property A purchased - rented out for 12 month whilst plans were being drawn up for development
    Property A was subdivided in 3 parcels - Property X, Y & Z

    Property X will be my PPOR and Property Y & Z will be rented out

    During the whole period I didn't have a place of residence that I owned (living at home with family)
    My thought is that I potentially should have resided in the property for a period of time.
    My intention from the start was that I would live in one of the new properties once constructed.

    If I was to sell Property X in the future would I be liable to CGT - If so would the CGT be based on the increased (if any) value of the property during the 12months prior to demolition. As once constructed it will be my PPOR - noted I've claimed FHOG for the property.

    For Property Y & Z will be looking to hold for 5+ years, at that point my understanding is wont have an income tax or GST issues and would be looking at CGT.
     
  15. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Probably a capital gain of $0 on X Y and Z properties !! (Dont get excited)
    But marginal tax rate on the profit otherwise. Read TD 92/135
    Why 5 years? Thats only a GST rule. Living in a property doesnt always mean its a CGT exempt property. If CGT doesnt apply then a exemption cant operate. And you havent resided in it anyway ?

    Paul wonders aloud how quickly Simon replies to a s264 notice.
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Assuming you hold these on capital account:

    X could be the main residence if certain requirements are met - lived in before, build within 3 years on knocking down and stay there for at least 3 months.

    But being a development could mean there was a CGT event at the point you decided to subdivide. The property may be trading stock and no CGT payable, but just income tax with no main residence exemption after that happens. CGT woul be triggered even though there was no sale.

    It could also be that some of the units are on capital account and some on revenue.

    Are you ordinarily a developer?
    Did you acquire the property with the purpose of making a profit by sale?
     
  17. Brady

    Brady Well-Known Member

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    Had a read of TD 92/135

    A builder constructs a spec home in which he and his family reside while construction proceeds on another spec home. Any profit on sale which gives rise to income is fully assessable to the builder even if a main residence exemption is available for CGT purposes.

    I'm not a builder - I haven't done any developments prior.

    5years+ wasn't just around the GST - property is in a nice area there isn't much comparable properties around, should be able to rent out easily, will have good depreciation. I believe in 5years there will be more similar properties coming up and would be around the time I personally might look at selling Property X and maybe Y and/or Z to fund purchase of new PPOR.

    I would be residing in Property X - but not Y or Z

    No first development.

    No acquired the property with the purpose to construct a PPOR and build properties for investment/hold/rental.
    At this point have no intention of selling, finance was obtained based on proposed rental income.
    Will be keeping all 3 properties for the foreseeable future 2 of them will be rented out.
    As per above wouldn't be looking to sell for 5years at this stage.
     
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  18. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    First dev or not its the same issue. Many taxpayers misread the example in TD 92/135 which just happens to be a builder to demonstrate the business income principle of ordinary income. An isolated profit intention is also ordinary income and the simplicity of the TD example hides its sting.

    Good that the proposed rental income is a factor however I had someone come to me with a ATO concern he gave a projection to lender which demonstrated intent to hold for 5 years and sell. ATO considered that as ordinary income.

    The ATO can see the "5" years as merely a GST avoidance issue to enhance profits by as much as 4-9% and that seems ancilliary to an enterprise and a outcome of an enterprise and its tax planning. So they consider ordinary income can arise. Personally I would be wary of anyone planning around the 5 year mark to avoid that association.

    Rob G ?? Your thoughts ?
     
  19. craigc

    craigc Well-Known Member

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    Query assistance please from the gurus on CGT. IP1 purchased 97. Valued before renovation as part of family settlement. Recently renovated & sold for great result late 2015. Receipts for capital & repairs etc all ok. Expect CGT 50% disc from holding >12 months.
    IP 2 purchased 2007 & rented out for 2 years. Separate PPOR claimed elsewhere. Then lived in IP2 for 9 months say 2010 while new PPOR being built. Costs & receipts ok. 2011-2014 other claim for PPOR then sold PPOR. Rented with no PPOR for 15 months 2014 - 2015. Current PPOR claim from Late 2015 onwards. IP2 about to hit market.
    Q- Given there was no PPOR being claimed from mid 2014 - late 2015 can I use PPOR on either of the IP's during this period? IP1 would be best tax result as CG before reno was low (say $180k) and Reno was conducted during renting elsewhere. Have never lived in IP1. Ie can you pay CG on 97 - 2015 pre-Reno gain (180k) less 50% disc then claim PPOR for Reno & sale period? Best possible result. Reno cost 40k with staging etc added 120k to sale price. (Then less agents fees etc). Otherwise portion of days option?
    IP2 however did have the 9 month period as PPOR but has seen more steady climb but was lived in for a period. Helpful if can claim PPOR for period but probably not as much as CG total approx 120k (before selling costs etc) for 07 - 15 period. IP2 will not need significant Reno before sale - maybe paint/carpet that's it.
    Rents & Depreciation schedules all ok & have been claimed on tax returns.
    TerryW or Paul?
    Thanks for all the assistance and a great forum! Being doing lots of reading and may have more queries to come. Hopefully can contribute a bit back too. Thanks
     
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Your post is confusing and too densely packed.

    If you have lived in one of these property and have been absent less that 6 years you could possibly claim part of a main residence exemption.
     

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