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Q: Hello, I have a question about the capital gains tax six-year exemption rule. I have a property that I bought and lived in, but after I moved overseas I rented it out. It is still less than six years since I bought it.
I plan to sell the property soon and I want to confirm that I am eligible for the capital gains tax six-year exemption rule in my circumstances. Also, is there anything I need to submit to the ATO for the six-year exemption once I sell my property?
Thank you, Su
A: Based on the details given, you can apply the six-year absence rule and continue treating the property as your main residence under section 118-145.
If the property is sold within six years, a full main residence exemption will be available.
However, please note that an exposure draft has been introduced to Parliament with the aim of removing the main residence exemption for non-residents. If adopted, this be announced in the 2017/18 Federal Budget.
"An exposure draft introduced in Parliament aims to remove the main residence exemption for non-residents"
The proposed bill would remove the capital gains tax (CGT) main residence exemption on the sale of an interest in a dwelling (regardless of prior use or tax residence status) where the seller is a foreign resident for income tax purposes.
CGT will apply when a CGT event (usually a sale at contract date) occurs after 1 July 2019. But CGT will apply immediately for the disposal of dwellings (and other CGT events) where the interest in the dwelling was acquired after 7:30pm AEST on 9 May 2017.
The Australian Department of the Treasury’s Exposure Draft Explanatory Material to the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 provides an example as follows:
Example 1.2: Main residence exemption denied: Vicki acquired a dwelling on 10 September 2010, then moved into it and established it as her main residence as soon as it was first practicable to do so.
On 1 July 2018 Vicki vacated the dwelling and moved to New York. Vicki rented the dwelling out while she tried to sell it. On 15 October 2019 Vicki finally signed a contract to sell the dwelling, with settlement occurring on 13 November 2019. Vicki was a foreign resident for taxation purposes on 15 October 2019.
The time of the CGT event A1 for the sale of the dwelling is the time the contract for sale was signed; that is, 15 October 2019.
As Vicki was a foreign resident at that time she was not entitled to the main residence exemption in respect of her ownership interest in the dwelling.
Note: This outcome is not affected by:
• Vicki previously using the dwelling as her main residence; and
• the absence rule in section 118-145 that could otherwise have applied to treat the dwelling as Vicki’s main residence from 1 July 2018 to 15 October 2019 (assuming all the requirements were satisfied).
Please remember that capital gains tax is a complex area, so we suggest you seek specific advice from a property tax specialist.
Need to know
- A proposed bill aims to remove the CGT exemption for non-residents.
- CGT will apply when a property is sold after 1 July 2019.
- CGT will apply immediately to a disposed property in which interest was acquired after 9 May 2019.
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Chan & Naylor Redlands
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