Latest Update: 5th December 2019 – Following on from our last update, the Federal Government today passed the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 into law without amendment, resulting in the scrapping of the main residence exemption for non-resident Australian expats.
In effect this means that if an Australian expat sells their former Australian home (their main residence) the 6 year temporary absence rule will NOT be available to them where they sell their property whilst they are non-resident for Australian taxation purposes.
Note however, that if the property is sold at the time that the person IS a resident for Australian taxation purposes, the 6 year rule will still apply. This only affects non-residents and as such, if you are considering selling your home, extreme care should be taken to understand exactly how these rules apply to you.
To read more about this disappointing turn of events click here: Death of the Main Residence Exemption for Australian expats
Update – 9th May 2017: Please note that the Australian government handed down it’s 2017 Australian Federal budget today, with proposals to stop non-residents from being able to access the main residence capital gains tax exemption (discussed in our original article below) from 9th May 2017.
Existing properties held by Australian expats and non-residents will continue to be exempt but only until 30 June 2019. After that date, any existing properties held by non-residents (as at 9th May 2017) will become subject to capital gains notwithstanding that the property may continue to be that taxpayer’s main residence. It is expected that this will cause a large number of Australian expats to re-evaluate how long they will continue to live and work overseas in light of these changes.
To learn more about these and other 2017 budget measures proposed, take a look at our recent blog post 2017 Australian Federal Budget – Expats the Clear Losers.
Source: Budget Paper No 2, p 27.
Original article below
It’s a six-year itch in a good way. Australians know their main (principal) residence is exempt from capital gains tax (CGT). If you sell your home, any money you make from capital appreciation is not taxable.
Most people think if they move out of their home and rent it out, it becomes a rental investment and they are subject to CGT if they sell it later down the road.
This may not necessarily be true. Australian taxation allows you to be temporarily absent from your principal place of residence (if you have not declared any other main residence) for up to 6 years, and this home will remain eligible for CGT exemptions.
When does the 6-year rule apply?
Expat Australians working overseas for up to 6 years can declare their home as their main residence even if they are temporarily absent from it.
If you return to live in Australia before this 6-year period is up and take up residence again, then the 6-year rule can start again. You will need to show the Australian Tax Office (ATO) that you have not formally moved back in and then had to move away again for the CGT period to start again.
If you return within the 6-year period and live in this residence for a year before you sell, then your CGT could be halved. The rate you pay is determined by your income tax rate.
If you return to Australia before the 6-year period is up and you decide to sell your home within the year, then you are entitled to the full CGT exemption.
When does the 6-year rule not apply?
The 6-year CGT exemption does not apply to homeowners if:
- You do not collect rent for your main residence while you are away. CGT exemption applies indefinitely then.
- You own more than one property in Australia. You are permitted to make a choice on which property you would like to declare as your main residence. The decision does not need to be made until you lodge your end of year returns for the relevant year.
If you are an Expat Australian living overseas who meets all the criteria above but have not taken advantage of the 6-year rule, you may want to contact a tax consultant urgently.
Australians planning to go overseas in the near future may also want to consult tax consultants to find out how they can leverage their homes to the 6-year rule. For advice on this and completing your expat Australian tax return, contact us today.
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Comments 6
I’ve been living outside Australia for a period of 13 years. I still own the home I used to live in and have rented it out for that time. Am I eligible to claim CGT exemption for 6 of those years? If so which 6? The most recent or the first 6?
Hi Ben,
Unfortunately from 30 June 2020 the CGT exemptions have been removed for non-residents. This means if you sell your property while you are a non-resident for Australian tax purposes you are not eligible for any exemptions, so you won’t be able to use the 6 year rule.
If you were to sell your property while a non-resident you will likely pay tax on the gain for your whole period of ownership.
Here is a link to an article Shane has written called Death of the Main Residence Exemption
Please contact us or book an appointment if you would like to discuss further.
Dear Shane,
If I purchased a house in Australia in 2010 when I was living overseas (and had no other property), rented it out straight away after purchase (never lived in it until 2013), and then returned to Australia in 2013 and lived in it, can I get the CGT exemption for the 3 year period 2010 to 2013 while I was overseas?
Kind regards,
Alexandra
Hi Alexandra,
Shane is busy working through reviewing returns for our upcoming lodgement deadlines so I am responding to your question for him.
Unfortunately you will not be eligible for the full main residence exemption. To be eligible for the full main residence exemption it would have had to be your main residence as soon as practicable after you acquired it, this would generally be at settlement. Also the 6 year temporary absence rule will not be applicable for that first 3 years of ownership.
However where a taxpayer has used the property as their main residence for part of the ownership period they are eligible for a partial main residence exemption, this is calculated as a percentage of the time the property was the main residence.
If you are currently a non-resident then the treatment could be different.
For advice on this and assistance with determining your main residence exemption percentage, contact us.
Regards,
Terryn
How long do you need to live in it again to reset the capital gain tax exemption? You say a year here but I’ve seen 3 months mentioned elsewhere. No time is specified by the ATO as far as I can see?
Author
Hi Claire,
Thanks for your question – it’s an excellent question indeed. As you’ve quite rightfully stated, there’s no set timeframe at all. The ATO itself doesn’t give any real clear guidance, although as far as we understand, they tend to use a period of at least 6 months as guidance. But again, there’s no set timeframe so arguably, a shorter period could suffice potentially. Ultimately it would come down to a whole series of factors based on the facts and circumstances of your life.
From our perspective, we tend to advise clients to err on the side of caution and to aim for a period of at least 6 months (but preferably longer if they can, as it helps to strengthen the argument that the property is again their main residence).
I wish we could point you in the direction of something more concrete, but alas, nothing exists. Either way, I hope this has helped you?
Thanks
Shane