Tax Q&A: CGT on main residence rented out for more than six years

Question: I bought a property in 1991 as a permanent resident of Australia. I have owned the property for 27 years. However, my spouse and I also lived overseas for six years and five months – we bought a house in France in September 2011.

We didn’t have a permanent address for the first four months, and our house was rented out for exactly six years and one month (from June 2011 to May 2017). From May 2017 onwards, it was empty until we moved back to Australia permanently in October 2017.

We wanted to know, how are the capital gains on the house worked out? We are in the process of selling it and understand that we need a clearance certificate. Any help would be appreciated.

Thanks, John

Answer: I am assuming that you and your spouse are the sole owners of the house in Australia. I also assume that you established the Australian house as your main residence as soon as practicable after acquiring it and it was never used to earn assessable income before you moved out of the house, and you did not treat another property (eg the property in France) as your main residence during the ownership period of the house.

As the Australian house was rented out for more than six years, even if you elected to use the absence rule to continue treating it as your main residence for capital gains tax (CGT) purposes after you moved out, the maximum period of exemption would be the first six years of rental. In that case, you would only be entitled to a partial main residence CGT exemption. It cannot apply to the period after the property was rented out for six years until you re-established it as your main residence.

If you elect to use the [six-year] absence rule, you would be deemed to have acquired the house at market value when you fi rst rented it out

Please note that the special rule in section 118-192 ITAA 1997 automatically triggers a deemed re-acquisition of the dwelling at its market value when it first starts being used to generate assessable income, provided that you would have been entitled to the full main residence CGT exemption if the property was sold just before it was first used to produce income.

Therefore, if you elect to use the absence rule, you would be deemed to have acquired the house at market value when you first rented it out in June 2011.

If you have held the Australian house for more than 12 months from the date it was first rented out, the general CGT discount can also apply (the percentage would be subject to your residency status during your ownership period after 8 May 2012).

Please note that the government is planning to change the main residence CGT exemption rules to prevent someone from accessing the exemption if they are a non-resident at the time of the CGT event. A Bill (not yet law) has been introduced to Parliament that contains a transitional rule basically stating that if the property was held prior to 9 May 2017, then the existing rules can apply if the CGT event happens by 30 June 2019. The Australian Parliament website details the relevant Bill and its explanatory memorandum for further guidance.

From 1 July 2017, a purchaser is required to withhold 12.5% under the foreign resident capital gain withholding payment if they purchase Australian property at a price of $750,000 or more from a foreign resident or from an Australian resident who has not provided the purchaser with an ATO clearance certificate. The ATO website provides further details.

Need to know

- Only partial CGT exemption applies if a main residence is rented out for longer than six years.

- New laws have been proposed regarding CGT tax exemption for non-residents.

- A clearance certificate is necessary when an Australian sells to a non-resident.

David Shaw

is CEO of WSC Group