Tax Tip 303: 6 Year Rule Trap on Spousal Transfers

There are many traps involving the 6 year rule, one of which is when part ownership is transferred to a spouse and that spouse never lives in the property. The issue is that the owner must establish the property as their main residence before they can become absent to use the 6 year rule

(the 6 year rule refers to being absent from your main residence, renting it out, yet to still claim the main residence CGT exemption under s118-145 ITAA97).


Example

Homer lives in Sydney and has paid off his $1mil main residence. Homer is married to Marge, but the property is in Homer’s name only as he bought it just before he met her.

Now they wish to move out and keep the home.

Homer sells 50% of the property to Marge who borrows to pay Homer for it. Homer ends up with a cash deposit of $500,000 for the new main residence and the interest on this loan is deductible because Marge borrowed to buy the property from him and it is an income producing property.

They moved out on the day of settlement into a new house in the countryside. 5.8 years later they decide to sell the Sydney home and to claim the main residence exemption on it as it is now worth $1mil and their home in Whoop Whoop is still the same value.

They are shocked to discover they fell into a trap.

Marge bought 50% of the house from Homer, but she never lived in the house after this so it is unlikely they will be able to use the main residence CGT exemption on 50% of the property.

There was no contract for the sale so the relevant date for CGT purposes is the settlement date – the day they moved out. Perhaps Marge could argue the property was the main residence for a few hours. But it would have been preferable for the settlement to have happened a month or two before they moved out.

 

Hi Terry, would the result have been different if there was a contract with a 90 day settlement period to the same moving out date?

I.e. Could the contract date be used and then living there for 90 days before moving out work to establish the main residence?

 

Yes that might help. You just want to make sure the new owner spouse is living in the property long enough to make it their main residence. Ideally you want it to settle well before moving out - months rather than days.

 

A main residence for a few hours ? That would be highly unusual and rare. Best when its not something planned but may more typically be safeguarded when the matter is externally influenced. Part IVA could even apply. This is where an intention test does apply to the main residence exemption. The key matter for the main residence exemption is that it was intended to be the taxpayer's main residence. Only after that commences can an absence then occur. The duration of time between these events can pose a concern and needs some supporting basis. Something that could be subject to ATO review years later after the property is finally sold.

Likely exempt : David and Sue own a property at Mt Majura ACT. Dave is a soldier who teaches at RMC Duntroon. He sells 50% of the property to his spouse who now owns 100%. He does this so that he can access a new ADF scheme to assist staff to buy property with concessional loans. And there is no contract - Just a transfer for nil consideration handled by their solicitor. That evening he is ordered to immediately deploy to new barracks at Townsville the next day. Sue is worried she only resided there for 1 night before flying to Townsville. David and Sue wisely seek advice and their tax adviser suggests that copies of his deployment orders be retained on file.