Ask Ban Tacs Question
Background
My wife and I (dual UK/ Australian citizens) have a house in London which we rent to tenants. We are registered with the UK’s tax authorities and, following interest, expenses and allowances, have had little or no annual tax liability on the property. UK tax Returns are submitted annually.
The house has been leased to tenants since we moved to Sydney almost four years ago.
Prior to the move it was our main residence.
We rent in Sydney and have no other residence.
My tax understanding
1. UK perspective – If we are not resident in the UK for FIVE complete tax years we will be completely exempt from UK capital gains tax should we sell the property at any time after those five tax years.
2. Australia perspective – One has SIX years between moving out of your main residence and selling it where you will pay no (capital gains) tax on it to the ATO.
So, based on the extent and limit of my understanding and in order not to pay tax on this London house in either Australia or the UK on its sale; there is a small window of opportunity between:
being non resident in the UK for at least 5 full tax years
and before the 6th anniversary of moving out of the house
where the house can be sold and attract no tax on its sale in either Australia or the UK.
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Question
Is this ‘small window’ the only opportunity not to pay tax on the sale of this house?
For example, we may have a preference to sell the house in 7, 10 or 12 years time and buy for cash in Sydney. We would pay no UK tax, but would we have to pay Australian tax on its UK sale – even if we did not acquire any other property (ie any other ‘main residence’) in the meantime?
Ie – Is Australian tax payable after that 6 year window even if you acquire no other residence before the UK sale? If it is UK tax exempt after 5 tax years ; could it be Oz tax exempt after 6 years under the UK/Oz double taxation treaty?
(It would seem a bit steep to have to pay tax in Australia to the Australian tax authorities on a UK property and in which the UK tax authorities have no (tax) interest in after 5 years)
Are there any circumstances where the property can be exempt from tax in Australia beyond this 6 year window (other than taking up residence again in the house)?
Answer
The six year rule is section 118-145 ITAA 1997 and it only applies to the period of time the property is producing income. If it is not producing income then the period you can cover it with your main residence exemption is infinite. For example you could own it for 8 years with the first 2 years as a rental then maybe family stayed in it for free for three years and then you rented it out for another 3 years so at the 8 year mark you have only used up 5 of your 6 years. The only way you can reset the clock on the 6 years is to move back into it as your home or if your child under 18 moves in. You would have to be a resident of the UK for tax purposes to do this so as you say it is not worth considering,
Your conclusion is pretty much correct except for being able to extend the 6 years if it is no earning income. Australia will tax it even though the UK won’t. Our CGT laws are draconian when you think about how long people will have to keep records for. I have been saying for years that one day they are going to have to say no CGT if you own for a certain number of years, but no relief yet. Years ago the LNP suggested a 5 year limit but they didn’t get elected and there has not been a murmur since, in fact if anything there has been talk about increasing the CGT net not decreasing it.
The first element of your cost base is the market value when you became a resident of Australia for tax purposes. You can then increase this by any costs not otherwise claimed as a tax deduction (you may have to write back depreciation) this includes the selling costs, so there may not be a lot of capital gain to worry about. If say, you owned if for 10 years after you moved out and it was rented out for all that time then only 40% of that gain will be taxable and then you will be entitled to the 50% CGT discount. Possibly 50:50 split again between you and your spouse. If you pick a low income year to sell the tax might not be that bad.
