Tax Tip 525: 6 year Rule and being absent for more than 6 years and moving in again

It is possible to restart the 6 year absence rule for CGT even after you have been absent for more than 6 years. However, the property could never be fully exempt if the taxpayer is absent for more than 6 years and the property is income producing. But there could still be benefits.




Example

Bart bought a main residence and lived in it for a while. He returned home to his parents as he found it hard to wash his own clothes and cook for himself.



7 years later he learns about the 6 year rule by reading the Propertychat forum.

He moves in again for a period and again finds it hard to take care of himself so he moves home again.


The property can never be exempt from CGT if it was rented out over 6 years which is what happened here.


But it would mostly be exempt.


Bart keeps the property for another 6 years and sells.

Let’s say he has owned it 13 years in total and lived in it for 6 months on settlement and then another 6 months on the 7 year point.



The cost base would first be reset to the market value when it was first rented out which was 6 months after the settlement date. It is likely this will be close to what he paid for it.



Then he has exceed 6 years absence so the CGT will need to be apportioned.

Bart will need to work out the capital gain and then multiple it by the apportionment calculation.



12.5 years he has owned it since it first became income producing.

During this time, he lived in it for 0.5 years.

So, the taxable capital gain would be for 0.5/12.5ths of it or 4%

Ie 4% of the capital gain, after the 50% discount too, will be taxable.


So, it can still be worth moving back into a former main residence even after the first absence has exceeded 6 years.

 

Hi @Terry_w - as mentioned in other thread this would be a good one for Stuart Wemyss to read and improve his understanding of the 6 year rule.


Also with all due respect to your great work - I think the wording on this portion of the post could be improved.

I had to re-read it a couple of times as it seemed to read that he lived in for 0.5 years so 0.5 years was taxable.

However it’s the same periods from the calculations results.


Could I (In the most respectful way) suggest amendment to something like:

12.5 years he has owned it since it first became income producing.

During this time, he lived in it for 0.5 years.

However during that holding period,12 years is exempt due to using the two periods of the 6 year absence rule. That leaves 0.5 years liable for CGT.

So, the taxable capital gain would be for 0.5/12.5ths of it or 4%


Again, please don’t take as criticism from the cheap seats as I appreciate your valuable contribution to the forum, but thought this post could have some improvements for those consuming your content.

 

How would that work if Bart had moved from Oz to Springfield (US) then returned? Would he have lost the exemption & CGT discount?

 

Of course the taxpayers tax residency is a further complicating factor. However its possible a person can reside in home in Australia and depart for the USA and provided they dont live in a property they own AND return and later sell that the main residence exemption can apply in full Others who cease tax residency that exceeds 6 years and sell as a non-resident could have the exemption stripped. In other cases (rarer) the departure to the USA could be 38 years and also be 100% tax exempt as a pre-CGT asset.

I also came across a wierd case last year. Taxpayer was a AU resident but a foreign US person and acquired a property while resident here for work but he didnt have a PR right. They departed Australia and the 6 year rule could not be used. Reason..They had unlawfully been a (work) visa overstayer and bought in that period aftre the visa expired. He was obliged to sell under FIRB rules while non-resident and isnt allowed to come back for X years. ATO sought extra info at time of the withholding process (which he couldnt be exempt for) and confirmed he resided with partner (spouse) in the USA in her property. Therefore this was his main residence in the absence period and they didnt consider he could have made a main residence when he resided here as he had no ability to remain in Australia. So it was a temporary residence and didnt meet the conditions for a main residence to be exempt. No absence was allowed. Sold within 6 years but fully taxed. This appears yet another consequence of the ATO's database of property etc and its role supporting the FIRB etc. I referred him to a specialist legal adviser who agreed on the ATO position and suggested a challenge would be difficult based on being illegally in Australia at the time of property settlemnet (apparently he was OK at the contract date and explains how he bypassed some checks. A issue came up with state taxes also.

 

If he returns to Oz before selling he could use the 6 year rule potentially. But not if sold while a non-resident for tax (except for limited exceptions)

 

Note Stuart Wemyss did apologise and recognise in a follow up podcast that he was incorrect in his understanding after another listener pointed out his error.

 

Indicates the importance of relying on experienced and qualified people when tax is involved. If someone thinks a podcast is personal tax advice they need to understand it is not personal advice.

There is a profilic retired former financial adviser that gives tax advice that is often basically incorrect in a major newspaper and online. The fact he is unpaid shouldnt be grounds for him being asked to stop.

 

Not Noel! Who is not licensed for either