Tax Q&A: If I move back, will I still be exempt from CGT?

Q: I am an Australian citizen, and I bought a property in Melbourne’s Roxburgh Park in June 2015. Although I am married, the property is solely in my name.

As a result of an accident, my spouse and I moved to our parents’ home and began renting out the Roxburgh Park property in December 2015. I then lost my job, and we moved to Sydney, where we rented a property. In December 2016, we moved back to Melbourne, but we rented another property instead. We then bought a second property in Craigieburn, Vic, in November 2017, where we have been living until now.

In June 2021, it will have been six years since I bought the property in Roxburgh Park. If I move back to the Roxburgh Park property before then, will I be able to claim capital gains tax exemption in case I decide to sell it in the future?

Thanks, Dileepa

A: I will work on the basis that between June 2015 and December 2015, when you commenced renting it out, the Roxburgh Park property was your main residence. Your question is whether there is something that can be done now, such as moving back into the property, which will exempt you from paying any capital gains tax (CGT) on its eventual sale.

As a generalisation, a person’s main residence is exempt from capital gains tax on a pro rata basis having regard to the period of ownership when it was solely used as their main residence, relative to the period of ownership when it was rented out.

There is an exception to this general rule that could be applicable to you. Section 118-145 of the Income Tax Assessment Act 1997 provides that you can continue to treat a property as your main residence for up to six years after you move out.

This means that if you move back into the property before December 2021, then you can treat it as having been your main residence for the whole period between June 2015 and December 2021. The law also allows you to move out again later and start another six-year period. There is no limit to the number of times you can do this.

The one catch is that you can only have one main residence for capital gains tax purposes at any point in time. That is, if you nominate Roxburgh Park as your main residence for any period of time when you owned the Craigieburn property, that same nominated period cannot be considered a time when Craigieburn was your main residence for CGT purposes.

A benefit in your situation is that your spouse only has ownership of the Craigieburn property and is therefore entitled to treat it as their main residence from the time it was first owned. If you are both going to live in the Roxburgh Park property to gain a complete CGT exemption for you, it will be important that the period of absence from the Craigieburn property is less than six years if that property is rented out. If you do this, then your spouse’s proportion of the gain on any sale of that property will also be completely exempt from CGT.

With some forward planning and a few changes of address, you could signifi cantly limit the CGT from any sale of these properties.

Need to know

• A property can be treated as your main residence for up to six years after you move out and rent it.
• Another property cannot be nominated as your main residence during this time, except for a six-month crossover period.
• You can move back out of the property and restart the six-year exemption period.

Daniel Rands

is partner at PKF Chartered Accountants

& Business Advisers Tasmania