Written by Aaron Alston
A capital gain made on the sale of your main residence is exempt from capital gains tax (CGT). The situation becomes more complicated when a dwelling is not used as a client’s main residence throughout the entire ownership period or is used to produce income. For simplicity in this article, I am only going to discuss what constitutes a main residence and the 6 year absence rule. Many clients are unaware they can produce income from their main residence and still be fully exempt from CGT.
What is a main residence?
A client’s main residence is generally the dwelling in which they live. The ATO will take the following factors into consideration when determining whether a dwelling is a client’s main residence.
- The length of time they have lived there
- Does the family live there and are their personal belongings held there?
- Is mail is being delivered there and is their address on the electoral roll?
- The connection of their services (phone, internet, electricity)
- Their intention to occupy the dwelling
The 6 year absence rule
If a client vacates their main residence and uses it for income producing purposes while absent, they can continue to treat it as their main residence. To be eligible for the full main residence exemption, the maximum period of time a client can use their home to produce income during a period of absence is 6 years. The client must not of treated another residence as their main residence during this time.
Gary lives in a house for 3 years before working overseas for 3 years. The house is rented out during his absence for $500 p/w. Upon his arrival back to Australia, Gary moves back into the house for a further 3 years before working overseas again for a further 2 years and rents it out again for $500 p/w. When Gary returns to Australia for the 2nd time, he decides to sell the house for $1 million (Gary purchased the house 11 years ago for $500 000).
Question – Does Gary have to pay CGT?
Answer – NO
Providing Gary meets the above criteria of not treating another residence as his main residence during this time, he may choose to treat the house as his main residence during his absence because each absence is less than 6 years (in Gary’s case 5 years total). When Gary prepares/lodges his tax return, he can make this choice for the income year in which he sells the house.
Ann (Gary’s sister) lives in a house for 5 years before working overseas for 6.5 years. The house is rented out for the first 5 years of her absence and is vacant for the remaining 1.5 years. Ann also sells her house when she returns to Australia for $1.5 million (purchased for $750 000 11.5 years ago)
Question – Does Ann have to pay CGT?
Answer – NO
Much like Gary, providing Ann meets the above criteria of not treating another residence as her main residence during this time, she may choose to treat the house as his main residence during her absence. Although Ann was overseas for 6.5 years, she only the used the house to produce income for 5 years total. When she prepares/lodges her tax return, she can make this choice for the income year in which she sells the house.
- If your house meets the criteria of “main residence” and has never been used to produce income, it is exempt for CGT.
- If your house meets the criteria of “main residence” and has produced income for less than 6 years, you may be eligible for a full main residence exemption.
- If you are unsure if you meet the above criteria, speak to your financial adviser or your tax accountant (they will be more equipped to be able to provide you feedback).