Tax Q&A: Minimum period required to re-establish property as main residence

Question: My husband and I purchased a property in 2004 and lived in it until 2010. We then rented our property out (our main and only residence) as my husband accepted a job overseas. Just before the six-year anniversary of the purchase, we decided to return to live in our property. Our tenants were asked to move out in September 2016.

In October we put our water and electricity back on under our names. My husband and I flew back to Australia at separate times to start doing maintenance on our property. My husband was there for five days; I followed one month later and stayed for two weeks. However, things changed and we decided to stay abroad, so we ended up re-advertising the house. New tenants moved in in February 2017 and have been there since then.

I’ve been informed by the ATO and my accountant that we should not be required to pay CGT; however, when I phoned the ATO about a land tax concern, the representative mentioned something about proving that you are resident back home for a specific time (eg a few months) and the proof showing on my passport.

Can you please confirm if we will need to pay CGT?

Many thanks, Lynda

Answer: Sect 118-145 of ITAA1997 details the circumstances in which a property can continue to be considered a principal place of residence (PPOR) after it ceases to be your main residence.

An owner can move back in to re-establish a property as their main residence when the six-year absence period expires. If the main residence requirement during the second residence period is satisfied, the owner will be entitled to another six years of capital gains tax (CGT) exemption if they later move out and rent it again. The following factors are considered collectively:

• the length of time you live there (there is no minimum time a person has to live in a home before it is considered to be their main residence)
• whether your family live there
• whether you have moved your personal belongings into the home
• the address to which your mail is delivered
• your address on the electoral roll
• the connection of services (phone, gas or electricity)
• your intention in occupying the dwelling

The period of ‘moving back’ [to Australia] may appear too short and temporary. Hence, the main residence may have not been successfully re-established

The ATO interpretation of the relevant legislation is that “a mere intention to … occupy a dwelling as your main residence, without actually doing so, is not sufficient to get the exemption. If you were not a resident of Australia for tax purposes while you were living in the property you are unlikely to satisfy the requirements”.

In your case, tax residency for you and your husband may not have been established in Australia during the 2016/17 financial year, and the period of ‘moving back’ in 2016 may appear too short and temporary. Hence, the main residence may have not been successfully re-established. If this is the case, CGT may apply for the period between 2010 and the date of sale, less six years and any non-income-producing period.

Note that it was announced in the 2018 Federal Budget that foreign residents for tax purposes will no longer be eligible for main residence CGT exemption after 30 June 2019. The Bill has not passed into legislation yet. If it does become law, it will mean that if your home is sold with a settlement date post 30 June 2019 while you remain a foreign resident at the time of sale (the contract date), the property will be subject to full CGT based on its original purchase price in 2004 plus any holding cost that has not been claimed as a rental deduction during the ownership period.

Need to know

- An owner can re-establish a property as a PPOR based on certain conditions.

- Mere intention to occupy a PPOR is insufficient to get a CGT exemption.

- Foreign residents may no longer be eligible for exemption after 30 June 2019.

Cindy Su is managing partner

at Chan & Naylor Pymble