Our tax experts are on hand to answer any tax queries you may have regarding your property investments and wealth creation strategies.
Email - editor@yipmag.com.au.
Q: I read with much appreciation your summary of the six-year rule in regard to capital gains tax, in particular this line: “When the dwelling is reoccupied as the main residence, the six-year exemption resets."
The ATO has a section on this, which is making me question if this rule has been recently changed and does not allow ‘resets’ of the six-year exemption when the owner moves back and lives in it?
Is it still the case that the six-year rule resets your CGT obligation, and that the six-year rule starts again if you move out and re-let it out once more?
Thank you, Helen
A: For the purposes of capital gains tax and the main residence exemption an important background point of interest to recap on is that when you choose to treat a dwelling as your main residence after you move out you cannot treat any other dwelling as your main residence for that same period of time (except for a limited time if you are changing main residences).
If this dwelling is then used to produce income (for example, as an investment property) you can choose to treat it as your main residence for up to six years after you cease living in it.*
ITAA97 Section 118-145(2) says “you are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence”. This means that if you move back into the property before the fi rst six-year period of absence has expired, then the six-year rule starts again.
ITAA97 Section 118-145(4) provides a useful example that illustrates the multiple periods of absences further. In this example, the taxpayer fi rst lives in the dwelling for three years, then is
“Determining if a dwelling is your main residence is always going to be based on the individual circumstances and facts of each case”
absent for five years, moves back into the dwelling for a further two years, before being absent for a second period of four years, at the end of which the dwelling is sold. Even though the taxpayer in this example was absent from the house for a combined period of nine years, as each period of absence was less than six years they are able to treat the dwelling as their main residence during both absences.
The ATO does not specify a minimum length of time you are required to live in the dwelling to re-establish the property as your main residence in order to reset the six-year absence rule. Determining if a dwelling is your main residence is always going to be based on the individual circumstances and facts of each case. Important factors looked at by the ATO in considering this issue are:
- the length of time lived in the dwelling
- the place of residence of the taxpayer’s family
- whether the taxpayer has moved his or her personal belongings into the dwelling
- the address to which the taxpayer has his or her mail delivered
- the taxpayer’s address on the electoral roll
- the connection of services such as telephone, gas and electricity
- the taxpayer’s intention in occupying the dwelling
*Note that according to the ATO, if a dwelling is left vacant upon moving out or used as a private holiday home, then you can continue to treat the dwelling as your main residence for an unlimited period after you cease living in it.
For further information, see:
1. ITAA97 section 118-145
2. ATO CGT Determination 51
(note: the determination has been withdrawn as the factors listed are now included in the ATO’s yearly Guide to Capital Gains Tax)
3. ATO website: ‘Treating a dwelling as your main residence after you move out’
- DAVID SHAW
Q: I moved to Newcastle from overseas two and a half years ago and bought a house in Newcastle. My wife and I have just been offered a job on the Gold Coast starting in January.
We got our house valued and would make next to nothing if we sold it. However, we want to buy on the Gold Cast. Can we rent out our house in Newcastle, keeping it as our primary residence from a tax perspective, and also purchase a house to live in on the Gold Coast, but treat it as our investment?
Regards, Mike
A: Assuming that you moved into the Newcastle property as soon as was practicable after you bought it, the house has been your main residence for Australian capital gains tax (CGT) purposes, provided that you do not own any other homes elsewhere.
Generally, the CGT rules apply such that when you buy the new property on the Gold Coast and move into it as your home, it will be treated as your tax-free main residence by default unless you choose to continue treating your Newcastle property as your tax-free main residence.
However, given that the Newcastle property will be rented, you will be deemed to have acquired the Newcastle property at its market value when
it first produces income for future CGT purposes, and you may continue to treat this property as your main residence for up to six years.
Meanwhile, the Gold Coast property will not be covered by the main residence exemption as you have chosen the Newcastle property to remain as your main residence – in which case, if you make a capital gain on the sale of the Gold Coast property in the future, it will be taxable.
Notwithstanding the above, there are a number of scenarios that could transpire in relation to the properties in the future; for example, what happens after the six years during which the
“There are a number of scenarios that could transpire … [which] could give rise to complicated tax implications”
Newcastle property was treated as your main residence? What if you start treating the Gold Coast property as your main residence before then?
These issues could give rise to complicated tax implications, so it is highly recommended that you seek professional tax advice to understand and optimise your tax position.
- EDDIE CHUNG
Q: As a New Zealand resident purchasing property in Queensland, if I decide to rent it out, do I need to pay non-resident tax on the rental income? I have heard I do not need to as a New Zealand citizen.
Or would I file a tax return in New Zealand and pay tax on the income in New Zealand?
If I were spending some time living in Australia throughout the year, would this alter things?
Thanks, Sharon
A: As a non-resident of Australia for income tax purposes, all income and investment expenses from Australian-sourced investments and assets (such as your investment property in Queensland which generates rental income) is required to be lodged via an Australian income tax return.
The same rule would apply if you decided to sell your Queensland property for a capital gain/loss
(irrespective of whether or not you have used it for rental income purposes and/or it was vacant while you were living overseas).
Australian non-residents for income tax purposes are not entitled to the tax-free threshold and are not entitled to the capital gains 50% discount concession either.
Your Australian-sourced income would also be included in your New Zealand income tax return, and as you would have already paid income tax in Australia you would be entitled to a tax offset in your New Zealand income tax return as well, which will ensure that you are not double taxed on the Australian income.
Therefore, you would be required to file an income tax return in New Zealand which will include all your worldwide income, plus an
“Australian non-residents … are not entitled to the tax-free threshold and are not entitled to the capital gains 50% discount concession either”
Australian income tax return which will only include income derived in Australia.
On the other hand, if you were spending time living in Australia throughout the year, it might still not be adequate to change things because the non-residency laws are quite complex and a few tests would need to be passed in order to qualify. The mere fact that you may be spending some time in Australia does not automatically qualify you to be an Australian resident for tax purposes. It’s always a case-by-case scenario and a question of fact.
However, if you were an Australian resident for income tax purposes for the required period, the opposite of the above would apply, in that you would be required to fi le an income tax return in Australia, which would include all of your worldwide income, including any income derived in New Zealand. Any tax that you would have paid for your overseas income would entitle you to a foreign income tax offset (thus again avoiding being double taxed) in your Australian income tax return, and will also mean you are eligible for the tax free threshold and the capital gains 50% discount concession as well.
- ANGELO PANAGOPOULOS
Do you have a Tax question? Email - editor@yipmag.com.au.
