I built my home in 1991 and lived there until 2005, before renting it out until 2017. I was not living in another rental home during that time – I spent most of that time overseas, visiting Australia usually once or twice a year and staying with family. In November 2017, I returned to live in this home permanently; however, I have since been told that I must remain in Australia for a set number of days per year in order to qualify again as an Australian permanent resident and avoid capital gains tax when the house is sold. I had no idea about the six-year rule and could have come back and lived in the house and then rented it out again if I had. I am now a permanent resident again, but must I spend 289 days per year from now on in Australia to qualify for permanent residency? I would really appreciate your advice on this.
A: Your house was your main residence between 1991 and 2005, when you rented it out while living overseas. The length of time you were away, 12 years, certainly indicates that you would have been a non-resident for Australian income tax purposes during that time.
People ceasing to be Australian residents for income tax purposes are deemed, by virtue of section 104-160 of the Income Tax Assessment Act 1997 (the 1997 Tax Act), to have disposed of some of their assets at market value at the time of departure. These provisions don’t apply to other assets, including Australian real estate. For capital gains tax (CGT) purposes, you are therefore taken to have owned the property for the whole period of actual ownership, and the real issue is identifying what part of that period of ownership will be eligible for the main residence exemption.
Your question is whether your current Australian residency, which commenced in November 2017, is unqualified or requires 289 days a year in Australia to ensure it is added to your earlier period of occupancy in order to calculate the gain that is exempt from CGT. The answer lies in what the legislation describes as the ‘Basic case’ for CGT exemption on a main residence in section 118-110 of the 1997 Tax Act. This simply specifies that the capital gain is disregarded if the dwelling was your main residence throughout your ownership period. That is, the gain is taxable to the extent that the dwelling was not used as your main residence.
The exemption has regard only to the factual periods when the property was your main residence and not to your residency status for income tax purposes. Temporary absences from your home during a year do not constitute the property ceasing to be your main residence.
There was legislation proposed by the government for the main residence exemption to be changed so that residency became a factor in its application.
That legislation lapsed prior to the election and was criticised by Shadow Treasurer Chris Bowen for needing unintended consequences to be ironed out. It remains to be seen whether and how the new parliament will look at this issue.
Need to know
- Capital gain is taxable to the extent that the dwelling was not used as a main residence.
- A property remains a main residence even when the owner is a non-resident.
- Temporary absences do not constitute the property ceasing to be your main residence.
is partner at PKF Chartered
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