Tax Tip 329: The 6 Year Rule and CGT When becoming a Non-Resident

There have been some substantial changes in the law in relation to CGT and non-residents. I have covered some of this here xxx

These changes have affected the 6 year rule for absences from the main residence (s 118-145 ITAA97). But it is still possible to use the 6 year rule in some circumstances.

The basic rule now is that if a property is sold after a person becomes a non-resident of Australia for tax purposes, that property will not be able to be claimed as the main residence. That is the 6 year rule can’t be used.



Example

Homer is a tax resident of Australia and a citizen of Australia. He goes and works in North Korea as a fashion model and he becomes a non-resident of Australia, even though he is still a citizen.

Things are going good over there so 5 years after moving out of his former main residence he decides to sell it. That is the only property he owns and he has been absent from it for less that 6 years so he thinks he can sell it CGT free – which would have been possible prior to the law changes. But now if he sells it while a non-resident it won’t be possible to use the 6 year rule.

Even worse, the cost base is not reset to market value when first rented and he won’t get the 50% CGT discount either!



However, the 6 year rule could potentially be used if the taxpayer were to become a tax resident of Australia again and be so when the property was sold.



Example 2

Homer does seek tax advice, at the local North Korean pub, and decides it will be too costly for him to sell while remaining in North Korea. He immediately leaves and comes back to Australia and moves into the former main residence and becomes a tax resident again.

Homer then sells the property and it could be totally CGT free if he had moved back before the 6 years is up, since it was rented.

But Homer does not necessarily have to move back in. He could rent elsewhere and as long as he sells before the 6 years, and he is a tax resident, then the property could be totally exempt from CGT.

 

Important matters to note : Homer needs to move back AND recommence Australian tax residency AND contract to sell after 6 months to access the past main residence exemption and therefore access the max 6 year absence concession. It is NOT available if Homer sells within 6 months of his return.

Issue :
If Homer proposes to stay here three months then move back to Pyongyan to enjoy its wonderful culture, food and lifestyle he will never correctly access the exemption. He didnt sell after 6 months. Possibly also never re-commenced tax residency here either DOH !

 

given it is very difficult to get residency in North Korea the chance of Homer even being a non resident is dubious. His domicile probably didn't change so might not even be an issue.

 

There are two sides to that coin. If Homer were a Kiwi then a change of country / domicile itself may not in itself satisfy residency tests for Australia. Just flying on a plane isnt the only event to consider. For all the residency issues I reckon AU/NZ is one of the more difficult ones. Many NZers come here without seeking a visa (444 ?), to their detriment. Can even affect stamp duty on property. I have a client in the USA with dual citizenship and he and his family all diligently maintain passports so they have a RIGHT to return. Kiwis without AU citizenship are being deported for minor crimes in Australia eg member of a OMCG wearing colours, drink driving etc

Anyone cross borders for extended periods should consider legal and tax issues before acting.

 

speaking of North Korea, there is a vlogger with a hidden camera running around freely.
Jaka Parker, an Indonesian Muslim speaking broken Korean, which is interesting in itself, see

 

Could you point to legislation that confirms that you have to sell 6 months after returning? This is the first I've heard of this requirement. Someone returning for example to a job in another city might want to sell the former PPOR and buy something closer to the new job, and not have to wait 6 months to do this.

 

Is the CGT exemption "locked in" if the property is not sold and Homer lives in the property after return until sale in the distant future?

For example a rough possibility in my case:

2013 - bought in Australia while non resident, never lived in property
2025 - become resident, move into property for 2 years, value has doubled
2027 - become non resident again for 5 years
2032 - become resident again permanently, live in property, don´t sell

Obviously 2013-2025 would be taxable at non-resident rates, but would the 6 year exemption be useable for the years 2027-2032 (to apply to a sale in the distant future, or to the estate) ?
i.e. is the exemption permanent so in the above example only 2013-2025 would be taxable ?

 

If you were not a resident when bought it you could not use the 6 year rule from that point but it could be used potentially after you move in and out. But cgt would be worked out as a % based on total ownership period

 

Warning : If you die while non-resident then 100% of the gain based on the original costbase + third element costs in 2025-2027 is subject to CGT at non-resident tax rates. No past exemptions, no 50% discount. Its a nasty sting. However if you return in 2032 and remain a tax resident at least 6 months that problem is washed away and the pro-rata basis (based on actual days) occurs.

 

What is this 6 months you speak of Paul?

 

The CGT law changes dont specifically allow you to return for 1 day and sell. Australian tax residency must be established for past main residency exemptiosn to be reestablished and allowed. In many cases this could require 183 continuous days in Australia.

My advice / warning is unless you receive tax advice concerning your tax residency becoming that of Australia (resides / domicile tests) you should take care for the initial 6 months. Returning to Australia for 1 day or a short term primarily to sell a property certainly is not a change of tax residency for many. Of all the advice I have been asked in this area it is the most common question and care should be taken that blindly assuming that flying into Sydney airport and then quickly listing and selling may not be sufficient. I have even had a few propose flying back to sign the contract. In many instances a ATO ruling prior to sale may support the residency change.

The other warning I see is whether the taxpyer is even not a tax resident of Australia. I have had two successful cases of late where the assumption was for foreign residency but issues didnt right. The ATO confirmed the tapayers were Australian tax residents and they didnt have to fear any tax issues due to a change of residency.

Up to June 2020 this issue wasnt as prevalent as the gradfathering rule allowed a disposal.

There is no 6 month "rule" per se. Its a caution to highlight that concern and avoid negligent advice

 

Yes certainly you owuldn't want to come back to sell only to later find out you were not a tax resident. But someone could be here much longer yet still be a non-resident too.

 

@Paul@PFI. the post is quite misleading. In your original post it says Homer WILL NOT receive the concession if they sell within 6 months. This is not correct. If they have proved they are tax residents for Australian tax purposes and have changed their domicile then the concession is available. It is these wild and inaccurate statements that frustrate practitioners like myself as I have had a client refer me to your post and ask why this hadn't been highlighted to them. I would appreciate if you don't make inaccurate statements as it CAN be available which is clear from your second post on this matter.

 

I agree that it CAN be available but it is far from automatic just because of physical presence at the time of the sale. Each taxpayer should ascertain any sale within 183 days after return carefully to ensure that they are a tax resident eg domicile, resides, statutory etc. Fortunately you ascertained their residency status. As I said I am seeing more (DIY) assumptions about residency that frustrate me and I accept your view as well. I can count on two hands the number of people who have asked me if they can fly back to sign the contact. (Less a issue at present).

A practitioner cant just advise that as you are physically present the past exemptions are reinstated. They must ascertian residency is established. Then no problem. I wont say it IS exempt until that is determined or known. (I even had a PWC partner incorrect advise an expat. The taxpayer went back to PWC who corrected their advice. The person had considered selling but then withdrew the property when PWC corrected their advice on residency. They will sell when they get back here. PWC applied for a PBR that was adverse to tax residency at this time)

 

@Paul@PFI not a problem. It was the fact you had said it was NOT available that frustrated me because it can be. We all make mistakes and you have clarified that original post was in error. thanks.

 

Lets be clear. There is no 6 year rule that applies in this situation. If a non-resident comes back to Australia and sells while they are a tax resident the 6 year rule could potentially be used.

 

Correct. If they are a tax resident when they return at the time of the sale contract. Being physically present in Australia isnt a guarantee of tax residency.

 

For those interested in tax residency rules there is a nice country by country summary on the OECD pages here:

Tax residency - Organisation for Economic Co-operation and Development

Where the concept of 6 months comes in for Australian tax residency is when a person does not satisfy the "Common Law Test" and then determination turns to "Statutory Tests". One of the statutory tests is if the person is actually in Australia for more than half the tax year.

The tax office has on-line access to passenger movement data and came back to me in 1/2 hour with all my arrival and departure dates going back 20 years. They counted day of arrival and day of departure to determine the number of days in Australia in each financial year. Some other countries don't count day of arrival and/or departure: only full days count.

 

OECD rules are what the default treaties may apply. If the treaty partner and AU adopt that model but is not.written The treaty terms prevail unless there is no agreement in writing. Im yet to become aware of a treaty that adopts the model treaty and is not written.

The rules substantially differ for in and out bound.

 

Hi @Paul@PFI and @Terry_w
Can I ask, do you become non resident the minute you fly out of Australia or only when you get more permanently set up in another country?
Our PPOR will sell in c April and I will most likely have left Australia by March with my husband staying behind to sell it but I would count myself an Australia tax resident for this financial year still as have no job or lease in new country ( going home for a few months to help out). Dont want to get caught on a CGT. Not sure yet where we will live longer term