Tax Tip 259: Timing of the 6 year Rule – when does it start

When does the 6 year rule start?

- When you leave the property?

- When it is first available for rent?

- When the tenant moves in?


The legislation is not so clear about the timing of the 6 year rule. Subsection1 of section 118-145 ITAA97 says:

“(1) If a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence.”


Therefore, the timing starts when it ‘ceases’ to be the main residence. This would generally be the date that you move out and not the date it is available for rent.


Example

Bart moves out on 1 July, and spends the next month cleaning up and renovating the property before advertising it for rent on 1 August. He then finds a tenant on 1 Sept.


My opinion is that in this situation the 6 year commences on 1 July as it is no longer being used as Bart’s main residence.


But what if Bart took one month to move. Moving things slowly? Living some nights in the new property and some in the old property. Perhaps his wife and kids remained in the old property with the kids attending school nearby. The property would still be Bart’s main residence until he is out completely.


What if Bart advertises the property and only moves out once he has a tenant. In this case it would only start once he is out and not while advertising.


Example

Bart is moving back with family and starts advertising for a tenant on 1 July when he commences moving stuff. He finds a tenant on 14 July, but they are not moving in until 21 July, and Bart stays there until the 20th


I think in this case the relevant date for the property ceasing to be the main residence would be 21 July.



In any event it is probably not necessary to be too worried as going over the 6 year rule by a few days or even months won’t matter too much as the majority of the time it will still be a main residence.

See my other posts on the 6 year rule:


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

Tax Tip 27: Borrowing to knock down PPOR and build duplex and Rent one Tax Tip 27: Borrowing to knock down PPOR and build duplex and Rent one

Tax Tip 105: Don’t Claim the 6 year rule where there is a capital loss Tax Tip 105: Don’t Claim the 6 year rule where there is a capital loss

Tax Tip 109: CGT and Being absent from the main residence for more than 6 years Tax Tip 109: CGT and Being absent from the main residence for more than 6 years

Tax Tip 129: Deductibility of Loans when later renting out your main residence. Tax Tip 129: Deductibility of Loans when later renting out your main residence.

Tax Tip 132: Terminal Illness – tax aspects to Consider Tax Tips 132: Terminal Illness – tax aspects to Consider

Tax Tip 135: The 6 year rule and renting part of your property out Tax Tip 135: The 6 year rule and renting part of your property out

Tax Tip 177: Stretching the 6 year rule indefinitely Tax Tip 177: Stretching the 6 year absence rule indefinitely

Tax Tip 190: CGT Strategy Wait 5.5 Years Before Selling the Old Main Residence Tax Tip 190: CGT Strategy Wait 5.5 Years Before Selling the Old Main Residence

Tax Tip 207: Tax Trap when renting out a New Property Tax Tip 207: Tax Trap when renting out a New Property

Tax Tip 218: Renting out Part of the Main Residence and CGT Tax Tip 218: Renting out Part of the Main Residence and CGT

Tax Tip 233: The 6 year rule when moving into an IP and then out again Tax Tip 233: The 6 year rule when moving into an IP and then out again

Tax Tip 245: Can you use the 6 year rule with a short rental on Airbnb? Tax Tip 245: Can you use the 6 year rule with a short rental on Airbnb?

Tax Tip 248: CGT when Renting out a Room in your Main Residence Tax Tip 248: CGT when Renting out a Room in your Main Residence

Tax Tip 254: Main Residence CGT Exemption Where one owner resides in the property and the other Tax Tip 254: Main Residence CGT Exemption Where one owner resides in the property and the other

 

The issue can also be impacted by where the owner moves to.

1. Two owners. One moves out. Other stays. The date they depart is more likely to be relevant as they were no longer residing from that date.
2. Two owners move to a new residence and rent the former home. They cant have any two days where both are the main residence. But for the purposes of choosing the 6 year rule IF it applies the date on their last night may be when one ceases and the following day is when the new starts. Deferral of the former home date would impact the new home.
3. Two owners move to a new residence and seek to sell the former home. The impact of s118-140(1) may impact this date. as well as the issue in 2 above.
4. Owners move to non-owned property. ie parents, friends, hotel, leased etc. They may wish to defer the date based on their final use of the property. eg The date may be deferred until they finally move all their belongings out rather than just sleeping there and make the home available for rent (and use s118-192)

One complicating factor I'm often asked about....Taxpayer in 2 constructs a new residence. They move in as soon as practicable. Can they backdate the main residence exemption on the new dwelling as s118-150 allows eg up to 4 years ?? so that they can treat the land and new building as exempt ? Yes. However for those same days they must not claim exemption on their actual former home. This can open up the idea of third element CGT costs which may be a good strategy for some. .This will likely result in an apportioned CGT issue. Most taxpayers will seek to consider the change of value in that period. That isnt permitted.

 

Important to remember that the MAIN RESIDENCE test considers which is the taxpayers main residence. It can be both because of the 6 year absence which avoid consideration of the fact of residence. The issue is whether the taxpayer wants a uncertain tax liability on the new home.

The other "hidden" issue with the absence rule is the spouse/ family/ partner CGT rule. eg Darth Vader is absent from the death star which he owns 100%. He now resides on the battleship 100% owned by his spouse The Emperor. From that date they must work out if both are 50% exempt or the battleship is 100% exempt and the deathstar is 0% exempt.

 

Bart is single and has a PPOR. Bart decides to he wants to live by the sea.
Bart finds a seaside rental and signs a lease, then over 2 months he moves his contents and prepare the PPOR ready for rental as an investment.
The PPOR is then advertised for rent and after 1 month on the market, a tenant signs a lease and the property commences generating income.

In this hypothetical situation, please indicate the point when the 6year rule starts.

 

What about gaps in tenancy? For example Bart moves out, and the tenants occupy on a 12 month lease. When the tenants depart after 12 months, Bart returns to and lives in the home for a few weeks and does some painting and other maintenance tasks before again offering the home for rent.

Such a short occupation for a few weeks with the intention of renting the home out again would not trigger a reset of the 6 year rule, but would it pause the 6 year clock?

Example:
Bart moves out and tenants occupy on 31st January 2016.
Tenants move out on 31st January 2017.
Bart returns and stays in the house from 1st February to 28th February 2017.
New tenants move in on 1st March 2017.
Does the 6 years expire on 31st January 2024, or 28th February 2024?

What if there was a gap of say 3 months, where the tenants left and it took 3 months to find new ones, and Bart didn't return during these 3 months? Does this also pause the 6 year clock?

Thanks!

 

When does Bart become absent? Not enough info

BTW It is known as the main residence under tax law now, not PPOR - since about 1997

 

Returning to live for a few weeks would probably not establish the property as his main residence.

If the property is not income producing there is no time limit, but I am not sure how it would be treated in a situation like this
Bart establishes the place as his main residence.
Moves out, rents it for 2 years.
Then keeps it empty for 2 years.
Then rents it out for 4 years.
It is 8 years in total but only income producing for 6 years. It might still be totally exempt if sold just before the 4 year mark on the second tenancy.

 

His MAIN residence would not be affected and the absence provision would be unaffected and not reset to restart later as a consequence. T But he may also lose Div 40 by reoccupation even if its not as a main residence. Depreciation of plant items (div 40) cannot continue if he uses the premises for more than a mere incidental use (eg a weekend was an example in the law change).

In the above example the 2 year may still be exempt but s118-192 may also apply. And 3rd element CGT costs can be used for the period it was vacant.

Treating a dwelling as your main residence after you move out

 

I think this is clarified by example 8 in the following link:
Treating a dwelling as your main residence after you move out

In the example they calculate the number of days exceeding 6 years like this:

Income-producing period exceeding six years after Rami stopped living in it:

2,556 − 2,191 = 365 days

The six years has been calculated with a gap of two months between the two periods of tenancy:

1 January 1995 to 31 December 1999 = 1,826 days

1 March 2000 to 28 February 2001 = 365 days

Total = 2,191 days

So in your example I would think that the property would be totally exempt if sold just before the 4 year mark on the second tenancy.

 

Great, well spotted Fredbear. Thanks

 

What constitutes ABSENT?

 

Not being present. Moving out, with your beloingings.

Airbnb won't cut it if you leave your stuff there for example.
Tax Tip 245: Can you use the 6 year rule with a short rental on Airbnb? Tax Tip 245: Can you use the 6 year rule with a short rental on Airbnb?

 

Absent - as the main residence or for land tax - As a principal place of residence.

The terms of s118-192 are a bit further challenging and refer to resetting the costbase when the premises are FIRST USED to produce income. That use applies the test to a tenancy rather than a vacancy. However in practice I cant imagine a issue where the value may substantially vary in a period of a few days, weeks or even two months etc That date however is of more critical importance.

In many situations people ask me I explain it this way:

Darth vacates the Death Star on December the 21st. He moves to occupy with the Emperor. The Death Star is rented by a tenant on 28th March who moves in and commences to rent on 1st April.

21st December - 31st March : The home is exempt as a former main residence. The absence provision applies and allows an indefinite period if the property does not produce rent. This occurs until;
1st April onwards. s118-192 applies on that date (if applicable) and / or the 6 year absence provision commences.

If Darth partially uses the Death Star s118-192 may not be triggered and he may not be absent either if he leaves any possessions behind or plans to return from (say) a brief stay with the Emperor. He hasnt ceased to maintain a main residence. Partial CGT may apply based on the % each party uses the DeathStar. ​

 

... so I rang the ATO and asked when 6-yr rule commences, in these 3 scenarios:
- the day I moved from main residence into a rental property;
- the day the main residence was made available for rent;
- the day the main residence first produced income.

I was told it is up to me as to when the 6-year rule commences counting. Seriously.

So I shall use the date it first started producing income.

 

Hopefully they didn't actually say say. They might have said the law is not clear and you should seek tax advice.

 

Thats correct. The person you spoke to probably knows little about tax law and even less about your specific circumstances. The mostly likely lack any tax qualification. The Commissioner can only issue private advice in the form of a ruling, determination etc

This is the sort of matter a personal tax adviser would be able to address as part of their support for you.

Generally the date income is first produces is safest however the date may be earlier and be the date after you vacated if you actually moved to a new residence and commenced to make the former home available for rent. Making it available for rent is not relevant to the absence rule

 

but the 6 years only applies to income producing property so I think it will count from the date that the property is rented as prior to that there would be no income.
ss(2) of 118-145 ITAA97:
(2) If you use the part of the * dwelling that was your main residence for the * purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.

 

Timing can produce some wierd tax outcomes

1. The 6 year rule issue above.
2. When a new property is acquired. Steele's decision may allow deductionsbefore a propert is available for rent based on a intention. BUT the vacant land holding period rules may disallow the interest and holding costs on the land but still allow it for the build IF you intended to rent it all.
3. Ownership periods. Contract ve settlement dates. may differe for occupancy dates as these are based on FACTUAL actual occupancy based on the äs soon as parcticable" rule
4. The renovation / new build rule. Its says up to 4 years. BUT... It can be limited to dates for any other actual residency/ Cant overlap
5. Costs incurred v paid. eg land tax and rates. Yet try doing that with repairs that are underway and contracted but are unpaid !!
6. CGT earnout arrangements. eg You sell a asset based on certain agreed future issues. 4 years later the sale price is increased or reduced. You need to amend but amending a out of time return is rejected. This is allowed but you have to argue the point.
7. CGT contract v settlement dates. But a builder is based on settlement. But isolated profit making is not.
8. A CGT event based on a sale contract dated 20 June is allowed to include selling costs incurred aftre 30 June...But no inverse rule applies to other tax deductions.
9. The CGT absence rule if a property doesnt produce income. Its not 6 years but can be unlimited. Sometimes. If the person is non-resident it doesnt work
10. The s118.192 "gap" Eg a former home is left as a new home is moved into. Then some reno s etc. Its a year before the property is available to rent. Does steels decison cover this ? But s118.192 for the costbase reset may leave a gap. The costbase may be higher due to reno's and thats what tax laws dictates. The cost of the reno doesnt add to the costbase then. So a reno that costs $100K adds $20K to value may be a poor tax outcome.

Tax law can be confusing. This is helped by ATO public guidance eg Rental property guide etc but sometimes tax rulings are hard to find or understand and sometimes tax advice is needed.

 

What about this one

Example
Bart moves out on 1 July and tries to find a tenant, but there are no takers because of the state of the house so he does some renovations which take a month and it takes about another month before a tenant moves in on 1 Sept.

Bart is able to claim interest since 1 July but the property is not income producing till 1 Sept.

I think the 6 years would start on 1 Sept.

It is unlikely to be an issue though by getting it wrong by a few days or even months. e.g. if Bart sold on 1 Oct, 6 years later, any CGT would be minuscule. But it would be the pain in working it out that is the problem

 

Yes, Bart can claim interest and holding costs. The principle in Steele's decision appear relevant as Bart has a intention to produce rental income and the renovations are element of that intention. The "matching principle" that many taxpayers assume doesnt require income to allow deductions in all cases. But may be imposed for a new build or extensive reno on the LAND interest element and a portion of holding costs. Ironically the interest on the construction loan is deductible if Bart intends to rent when complete.

Whether Bart has ceased to reside will also play a role. If he remains resident then the exemption continues and he cannot claim any deductions. If he doesnt reside then the above should be OK. The costbase reset priciples and Div 40 "used assets" will also be a factor. eg Bart cant claim Div 40 later if he uses the new kitchen while he lives there. But if has departed and resides elsewhere the Div 40 may be enhanced as the assets he installs are unused. The costbase reset issue is 1 September. and would include the renovation costs so they are not added. Wise Bart gets a val based on the completed works and ignores the earlier val. That is a defined outcome and not variable. "The date first used to produce income" is what it says.

Of course if any CGT is minisclue consider adding 3rd elemnet costs IF they apply. Unlikely Bart will have these if the former home is rented thereafter. One costs may ignore is selling costs. eg Bart gets a val that says $500k. He is absent 6 years and one day and it sells for $700K. People panic..Hell I have a $200K profit. Slow down.... ... But no. He should reduce the gain by the selling legals and agent etc. Lets say its $22K of costs. So now its 1/2191 x $178K. $40 is taxable.