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Regarding the Main Residence Exemption (6yr rule) and renting out your PPR.
Over the past several months I have had multiple friends & colleagues tell me that they use the 6yr rule and rent out their PPR’s while they travel for a few months. They believe that simply travelling for a few months will not subject their homes to CGT.
I always understood that you needed a special reason, like working overseas, to apply that rule to your PPR – simply “travelling” for a few months didn’t cut it. I also vaguely recall that renting only part of your PPR (locking off a bedroom or part of the house) might even attract a QLD Land Tax bill (not sure if that’s correct).
My accountant believes that simply travelling would subject my PPR to CGT. It would not qualify as “stopped living in” the PPR as per the “Treating former home as main Residence” webpage on the ATO website.
Although it seems to me, the term “stopped living in it” is quite grey, and the ATO uses a number of “indicators” (e.g., belongings remaining, electoral roll address, utilities in name) that perhaps can be interpreted either strictly or flexibly.
My query:
- Does the ATO consider that I have “stopped living in it” (PPR) — and therefore can start using the 6-year rule — if I leave the property to travel for several months, rent it out fully (or maybe lock off one small bedroom) during that time, don’t treat any other dwelling as my main residence and then return?
- Or is there a new tax ruling that might apply that would exempt PPR’s from CGT in this “travelling and renting” scenario – is this 6 yr rule obsolete?
- Also, is the QLD Land tax bill a possibility?
Answer
I agree basically with your Accountant but let me explain. Here is the section that covers the 6 year rule.
SECTION 118-145 Absences
118-145(1)
If a * dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence.118-145(2)
If you use the part of the * dwelling that was your main residence for the * purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.118-145(3)
If you do not use the * dwelling for that purpose, you can treat it as your main residence under this section indefinitely.This section does not apply if the * dwelling was your main residence because of section 118-147 and ceases to be your main residence because of subsections 118-147(3) and (4) .
View history reference If you make the choice, you cannot treat any other * dwelling as your main residence while you apply this section, except if section 118-140 (about changing main residences) applies.
Example:
You live in a house for 3 years. You are posted overseas for 5 years and you rent it out during your absence. On your return you move back into it for 2 years. You are then posted overseas again for 4 years (again renting it out). You then move back into it for 3 years, after which you sell the house.
You have not treated any other dwelling as your main residence during your absences.
You may choose to continue to treat the house as your main residence during both absences because each absence is less than 6 years.
You can make this choice when preparing your income tax return for the income year in which you sold the house.
As you can see it is only the example that talks about being posted overseas, nothing in the actual sections themselves to say that you need a certain reason for being absent. And certainly travelling is not ruled out but it is whether you are truly absent.
I have highlighted the area that affects whether you are absent or not. The word ceases is critical. Your problem is that you do not have another home to say this one has ceased to be your home. Factors that make it your home are listed in the dot points below. Having your personal effects locked in a room is relevant too.
Here is a published version of a private ruling on this topic from the ATO https://www.ato.gov.au/law/view/print?DocID=EV%2F1051409678092&PiT=99991231235958
In that case the taxpayer was absent for a month, the ruling is worth a read, though you can’t rely on it, you would need to apply for your own ruling. In particular it says:
“While the Act is silent on the specifics of what constitutes cessation for purposes of section 118-145, the examples it uses and the language of the EM suggests it is intended to be more than any mere absence from your dwelling. It is this offices view it is intended to be something more, of longer duration or effect, though not requiring a permanent vacation of the dwelling in question.”
I hope someone challenges this one day as the ATO even admit that the law does not specify the period of time and in my opinion that means there was no intention to require a certain period of time. In my opinion you cease to reside in a property once you have given someone else exclusive use of it, but that view is clearly not shared by the ATO they want to split hairs about the period of time you are absent.
Ignoring my little rant in the paragraph above we still need to address whether the home has ceased to be your home and as you have no other home to point to I think you will lose on that basis. That it is still your base, your address on the electoral role, licence etc. There is support in the legislation for the argument that you need to have taken up residence elsewhere. Also from the private ruling:
“As a general rule, a dwelling ceases to be your main residence once you stop living in it (i.e. when you move out). To determine whether a dwelling that was a main residence has ceased to be one, we give consideration to the obverse statement to those described in our Guide to capital gains tax 2018 about when a dwelling will be considered your main residence. We consider the following are factors relevant, though not exhaustive, to the question of whether a dwelling has ceased to be your main residence include:
● the length of absence from the dwelling
● whether you and your family no longer live in it
● whether you have moved your personal belongings out of it
● it is no longer the address your mail is delivered to
● it is no longer your address on the electoral roll
● services are no longer connected (for example phone, gas or electricity)
● the purpose of your absence and your intention to reoccupy the dwelling following your absence
Whether a dwelling has ceased to be your main residence is not determined based on one or more factors alone and the weight given to each varies depending on individual circumstances.”
As for land tax that is a state tax so I claim no expertise. But I think your concerns maybe triggered by the reduction in the land tax threshold in Victoria to $50,000. This means that people just using part of their home to produce income become exposed by the mere fact that the land value under the area not used as their home is more than $50,000. Fortunately, in Queensland the threshold is $600,000.
When applying all this to your circumstances I would recommend that you move all personal affects out of the property to say your parent’s or children’s home, change all addresses and live in your parent’s or children’s home before you go. Ideally sign up a tenant on a 6 months lease so even the electricity is in their name. But if you do Airbnb that one point should not work against you. You don’t have to be going overseas to work to use the 6 year rule but you do have to cease using the property as your home ie establish your home elsewhere.
