Tax Tip 385: Misunderstandings with the 6 Year Rule

There are many misconceptions with the so called ‘6 year rule’ for CGT (s1180145 ITAA97) and accountants get it wrong sometimes.

In this thread someone reported that an accountant told them they can retain the CGT exemption by renting longer than 6 years as long as they claim no other property – which is incorrect. How to reduce CGT bill when selling a high equity IP


Some also think the 6 year rule can apply after knockdown of the house. This is not possible as there needs to be a dwelling on the land. Selling land where the house has been knocked down could be a disaster.


Others think the 6 year rule cannot apply where the person has purchased another property in which they live. It can under many circumstances, but it may not be able to be used if the taxpayer had already claimed a property for an overlapping period.


The 6 year rule can apply where you have moved into a rental property, but it cannot apply for the period prior to the person moving in.


It can apply for non-tax residents too, but not if they sell while they are a non-resident.


The 6 year rule can also apply at death.

 

Common one is a untenanted property. There is no 6 year time limit. The 6 years only counts if use of the property after absence is to produce assessable income. Otherwise if it does not then the period is indefinate. Not using the property to produce income may also avoid s118.192 which may reset the costbase.

Example. Fred & Mary are moving overseas for work for 4 years intending to return to their home after that time. Their adult son Jeremiah will remain in the former home. Doesnt pay rent. This may also (in NSW) be eleigible for a land tax exemptions for a limited period.

Another common one is where a property was formerly party used to produce income and party as a home. Then XX months after they are absent they rent the whole property to the same tenant. When the owner rents it all they seek to use the absence rule for all the property. s118.145 contains a limitation which is underlined. I have seen people sell and tell me their former adviser said it was fully exempt. I always ask for a complete history of any CGT sale to ensure mistakes are noted and any concerns are addressed. The strategy in such cases is to stop renting part of the property just before the owners move out. A new lease for the full property.

s118.145 (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.

 

If one moves out of their PPOR into a new PPOR within the same city just for the reason of upgrading houses, can the six year rule still apply to the original PPOR? i.e. we are thinking of upgrading our PPOR and renting out the original PPOR to hold it for several more years until the the time to sell is more favourable.

 

Main residence is the phrase used in the legislation and yes it could potentially apply even where you move next door.

 

When you change homes both may be eligible as either absent (6 years if rented) or as the actual residence. However BOTH wont be exempt at the same time, at any point of time. Choices may be applied when the first is sold. Except if you cease to be a tax resident in which case the past exemptions may be lost.

So if you move out yes you could use the ACTUAL exemption for the former home and also another 5 years for example under the absence rule. But for those 5 years the new home remains taxable when it is sold.

 

Lets say one has a Property A (PPOR) and 500K loan pending and can be rented at 650 per week ( positive geared ).
Then he wants to upgrade to a new PPOR with 1.5 mil loan and can be rented at 900 per week (negative geared )

So which is beneficial in the long term :
1) Making Property A has PPOR and renting out Property B and claim tax returns on the loss . However, if Property B is sold after 5 years the CG tax may be more than the tax returns claimed over 5 years
2) Move to Property B and make Property A rental. So pay more tax and more out of pocket expense as the loan repayment is higher . And can also sell property A immediately so the CG is tax exempted and sell property B after 5 years and again no tax on CG.

Which option would be better ,considering both are good houses to live and both are in the neighbouring suburbs?

Can the 6 year rule be used for both the properties ?

 

Yes, but the exemption can only be claimed on one for any overlapping period

 

Thanks Terry,

So lets a continue to stay in PPOR A for 2 years and move to PPOR B and stay for 2 year and then if I sell PPOR A ( 4th year ) and not claim CG exemption , Can I claim full CG exemption on Property B even though the first two years were rented ?

 

Not if it was rented before you moved in

 

If I move in straight away , is it possible ?

 

You cannot claim both as the main residence for the same period, but either could be counted

 

AND consider the issues for land tax which are more rigid

 

thanks, need to look into the actual cost . However, think definitely Property will have more land tax as the land is bigger.
Will I be able to deduct tax on land tax as well ?

 

land tax can be deductible, depending on the circumstances.

 

Does this CGT exemption rule apply to an overseas property as well?
If someone moved to overseas about 20 years ago, bought a home to live in while overseas, returned to Australia about 8 years ago, never bought a home here under his own name during the last 8 years, either renting or living in a property under a corporate trustee of a discretionary trust.
If the overseas property sold recently, does the CGT exemption apply? The property in overseas never been rented out since that person moved out and returned to Australia.
Thank you.

 

It could potentially apply in some instances but I don't think it would apply in this instance if you have been absent longer than 6 years.

 

It would be the type of case where a binding private ruling be obtained for your benefit. I suspect CGT exemption based on the absence rule could extend the term indefinately after ceasing residency as noted below. However the gain / loss may still need to be declared ($0 perhaps) and if the ATO enquired they would likely focus on evidence as to how the property costs were met and how you demonstrate it wasnt used to produce income in ANY form. eg even charging relatives a small cost for use could fall foul. A tax treaty country would be higher risk since the ATO may ask them to check their data sources. These days shortstay platforms are often global and pose a risk that the ATO could ask for information about a resident taxpayer and their foreign property dealings that have no tax connection with Australia. eg ATO can ask Booking.com to provide rental details about a croatian property owned by a australian taxpayer.

Former home not used for income
If you do not use your former home to produce income (for example, you leave it vacant or use it as a holiday house) you can treat it as your main residence for an unlimited period after you stop living in it.

 

We are planning to utilise the 6-year rule for our Victorian Property we lived in after purchase from 2008 until 2019 - now rented. We do pay Vic land tax on it.
We now live in QLD and planned for it to be our nominated main residence from the time we sell the Victorian property. Probably within the 6 year limit although that is TBD.

How does this work from a QLD land tax perspective -> can we still nominate the QLD property as our PPOR to be land tax exempt and have the Vic property CGT exempt during the same period of time?
We are currently under the land tax threshold but from June 23 and the QLD land tax changes if we were including our Vic properties we would be well over.
I understand for CGT you dont have to nominate your main residence exemption until you sell it but for QLD land tax perspective it would become a requirement from June 23.

 

Land tax has no relevance to commonwealth cgt law. You can choose which of your properties as exempt for cgt. Provided it is eligible. The other then remains taxable. Either or both could be subject to land tax. You dont nominate. Tax advice may assist to choose how to deal with tax choices.

 

A property could be a PPOR for land tax but not a Main Residence for CGT or vice versa.