Tax Q&A: Main residence CGT exemptions

By Contributor | 11 Apr 2019

Queston: My mother owns a house in NSW valued at $850,000 with a $350,000 mortgage owing. It was purchased in 2010, and we lived in it till 2016. The house then became an investment property rented out at $520 per week, as my mum lived with a friend and I moved to Melbourne. The value of the property when she moved out was $580,000.

My mother wants to sell the house so I can use the proceeds to purchase in Melbourne. She has also recently given me full power of attorney as she wants me to start building a property portfolio.

However, she is hesitant to sell as she thinks there will be CGT payable, but as she is no longer employed and is living overseas six months of the year, the stress of maintaining an investment property is huge for her. Her solicitor said that this, along with her recently becoming a dual citizen (she acquired Filipino citizenship this year), means that she will incur CGT on her PPOR. She hasn’t had another PPOR since moving out of the property.

Can you shed some light on this?

Regards, James


Answer: Establishing a property as a main residence by occupying it immediately after purchase will make it exempt from capital gains tax (CGT) when later sold as a main residence. The exemption from CGT can be extended for another six years under the ‘absence rule’. So if a property is sold at a capital gain within those six years, there should not be any CGT liability. The condition is that no other property can be nominated as the main residence for that same period of ownership.

This contrasts with where a property is first established as a rental at purchase. In that situation, there will be liability for CGT when it is sold at a profit/gain, even if the dwelling is later occupied as a main residence. The liability is likely to be lower as the period the property is occupied as a main residence is exempted.

After 30 June 2019, the main residence exemption will not be available if the individual owner is a ‘foreign resident’

The six-year absence rule that extends the main residence exemption does not require the individual owner to be an Australian resident for tax purposes. However, this exemption is available where the property was owned before 9 May 2017, and will only apply until 30 June 2019.

In the 2017/18 Budget, the government announced that foreign residents would no longer be entitled to claim the main residence exemption when they sold property in Australia. However, this change is not yet law and is subject to the parliamentary process. Under the proposed legislation, where the sale contract is signed after 30 June 2019, the main residence exemption will not be available if the individual owner is a ‘foreign resident’ – that is, someone who is not a tax resident of Australia – for tax purposes at that point in time.

So, consideration should be given as to whether the individual is a non-resident for tax purposes. Careful review and planning are critical.

Being overseas for six months each year may not in itself be confirmation of non-residence. Declaring on the tax return that the individual is a non-resident will have an impact.

Need to know
- No capital gains tax applies on a principal place of residence that is sold within six years of renting it out.
- The six-year rule also applies to foreign residents, but only until 30 June 2019.
- Being overseas may not in itself be confirmation of non-residence.

Shukri Barbara
is principal adviser at
Property Tax Specialists



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