Q: I purchased an apartment in Sydney in August 2009 and lived there until June 2011 when I had to move to Perth for work. The property first became available for rent around June 2011 when I moved out and has been rented out ever since.
After Perth, I moved to Auckland and became a New Zealand tax resident in November 2012.
I intend to move back into the Sydney apartment in early 2020. I will have been away for more than six years all up, so my question is, will I be required to pay capital gains tax if I dispose of the property shortly after moving back into it?
Many regards, Rob
A: At the outset, it should be noted that real estate situated in Australia is generally considered to be ‘taxable Australian property’ for capital gains tax purposes. Therefore, whether you cease or resume being a tax resident of Australia generally does not afffect the tax status of your property for Australian tax purposes – it will always be caught in the Australian tax net.
Further, given that you will otherwise be entitled to a partial main residence exemption if you sell the property in early 2020, assuming the current law still applies, the special ‘first used to produce income’ rule will apply to your property, ie you will be taken to have acquired the property when it first became available for rent in June 2011 at its market value at that time.
Whether you cease or resume being a tax resident of Australia generally does not affect the tax status of your property
For example, if you originally bought the property for $500,000 in August 2009 and its market value had increased to $600,000 by June 2011, you would be taken to have acquired the property in June 2011 for $600,000 for capital gains tax purposes.
While you are technically not required to obtain a retrospective valuation of the property in June 2011, you may consider doing so to defend the market value cost base you adopt.
Assuming that you moved back into the property on 1 February 2020, lived there for six months, and sold it on 30 June 2020, your deemed ownership period would be from 1 June 2011 to 30 June 2020 (ie 3,318 days). Although the property would not actually have been your place of residence until 1 February 2020, you would be able to treat it as your main residence for a maximum period of six years after June 2011.
Further, as the property was rented for more than six years in total, you would be entitled to a partial main residence exemption. The non-main residence days would be from June 2017 (say, 1 June 2017) to 31January 2020 (ie 975 days) because the property was not treated as your main residence during this period. On the other hand, the main residence exemption would apply to the period from 1 June 2011 to 31 May 2017 (ie 2,192 days) and from 1 February 2020 to 30 June 2020 (ie 151 days).
If you make a capital gain on the property from 1 June 2011 to 30 June 2020, you will need to apportion the gain to determine the amount that is attributable to the period during which the property was not covered by the main residence exemption.
Need to know
- All property in Australia is taxable regardless of the owner’s status.
- The market value at the time a property is first rented is treated as its cost base.
- The capital gain should be apportioned to determine the amount attributable to the period when the property was not covered by the main residence exemption.
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