Tax Tip 317: The 6 Year Rule for Non-Residents

Changes to the tax legislation a few years ago now generally mean that non-residents can no longer use the ‘6 year rule’ to count a former main residence as still being the main residence while absent – s 118-145 ITAA97.

Example

Bart is living in Sydney and buys a home before moving overseas and renting the home out. Bart sells the home after 5 years and wants to use the 6 year rule to claim the main residence exemption, but because he is a non-resident for tax purposes he can no longer do this.

The property will be subject to CGT and Bart will not get the benefit of the 50% CGT discount either, he will pay non-resident rates, and the cost base might also not reset to market value when he first rented the property out.


But it is still possible to use the ‘6 year rule’ when a non-resident in a few situations.

The first one is moving back to Australia and becoming a tax resident before selling.

The other ones are available while remaining a non-resident but are only available for those experiencing a ‘life event’ under the ‘life events test’ as defined under s118-110(5).

This involves the taxpayer, or their spouse or their minor child dying or getting a terminal illness or a separation – I will write about these separately.

 

If Bart was to retain the property and return to Australia and recommence his tax residency for 6 month then sell the former absence and his period of actual residence prior to the absence are all reinstated. I am seeing many people who dont get this. They think the exemptions are lost. This is the case for someone who departs Australia not intending to return who then sells a property while absent. It may be wise to sell prior to departure or to at least ensure your tax residency doesnt trigger until sometime later.(eg defer applying for perm US residency and arrive on a Visa)

eg Bart keep the property. he returns 6 years later. Moves back in. Then aftre 8 months he sells. The fact he was non-resident is totally disregarded. However the issue of him having another main residence at Springfield Oregon while he was absent will be a tax issue to seek advice on. he cant claim the absence for Australian property and also treat the Oregon property as his home despite it being US property.

Unfortunately the life events rule doesnt cover the landowner dying. It covers their spouse or child. Its a fundamental problem that limits the exemption. If Bart dies while non-resident its fatal (pun intended) to his former main residence exemption. But if Bart gets a terminal medical condition he may have a limited period to act to use the life events rule before he dies. eg transfer to his spouse. A will isnt of assistance. A CGT rule basically adopts the ownership immediately preceeding death. Barts transfer of ownership prior to death will likely be dutiable. And even subject to surcharge if his wife isnt a citizen of Australia. This transfer cost and must be weighed up vs the CGT saving.

You satisfy the life events test if, at the time of the disposal of your residential property in Australia:

• you were a foreign resident for tax purposes for a continuous period of six years or less and, during that time, one of the following must have also occurred:
  • you, your spouse, or your child under 18, had a terminal medical condition
  • your spouse, or your child under 18, died

 

One key issue that is worth noting...

If Bart develops a terminal medical issue he must dispose of the property interest prior to death. That means a contract to sell. Easier said than done if he remains non-resident. Where a resident could consider spouse transfers and a entity as owner this isnt practical for non-residents for a variety of legal reasons. (in addition to costs) But if he had a terminal medical issue with XX months to live it may be a very practical solution as part of his estate planning to sell the property asap.

One strategy that is definately available to some is a pre-CGT asset. These bypass this CGT main residence rule altogether BUT...It can defer a different problem. I have a number of clients who are Australians who reside offshore who have retained local property and its wise they dont sell. However, they do need to be aware of the CGT trigger to their share if they die. The CGT clock may start after they die and leave their spouse or beneficiaries exposed to CGT commencing. And no CGT discounts. And non-resident tax rates if and when the property is ultimately disposed of. And for non-residents use of a testamentary trust may be quite problematic and needs complex legal advice.

 

Do you know when these (bolded) changes occurred Terry? I'm trying to figure out if the 6-year rule can still apply to a non-resident from circa 2005-2009.

 

The 6 years rule CAN be recovered if a life events test is met within the 6 years

A taxpayer in 2005-2009 will have reported and lodged and be out of time to amend so such discussion is irrelevant now. The test is if a sale occurs NOW and a few outcomes can occur. Its impossible to speculate a true answer. That is why personal roperty tax advice is needed. . Old law no longer applies just because they were once a resident. The 2017 (and 2008) law changes impose changes on all non-resident persons at the time of sale OTHER than when a life event occurs within the 6 years aftre ceasing residency OR a property sale is a pre-CGT asset of that taxpayer. There can also be impacts on death

 

They haven't lodged their return/s for that period - so it's very much relevant.

The property was sold in 2009.

 

from memory it was about 2017

 

they should get some tax advice

 

Running a big risk. Undeclare property gains can be imapcted by default assessments - How can you claim a main residence if you didnt lodge ? If the Commissioner default a Nil assessmnet etc it can be fatal. Have been asked this question of someone who we checked and found they had advised the ATO no return was required. Commissioner refused to reopen to amend. Another had lodged 2 decades of resident returns which were all incorrect and they assumed their sale (aftre 2017) was exempt when it wasnt...On checking it was pre-CGT asset which saved the day.

Its unwise to be assisting advise someone else. So many factors may be unknown or mis-described.

The 8th May 2008 CGT changes could also come into play.