Ask Ban Tacs Question
My wife and I bought a house in Sydney s joint tenants in September 2005, moved into it right away and lived there until August 2006, when moved to the USA. We have rented the house continuously since we moved, and expect to utilise the Absences rule in section 118-145. However we are approaching the 6 year limit.
We are not claiming a main residence exemption for any other dwelling.
If we move back into the dwelling before the 6 years, and then move out again, can we start another 6 year period? How long must we live there, and what other action could we take to re-establish it as our main residence?
We have been submitting Australian tax returns as non-resident for tax purposes for several years. Is it possible for our dwelling in Australia to be our main residence while remaining non-resident for tax purposes? Does one imply the other?
Say we continue to rent it out for 1 more year (7 in total), then move back in for 2 years, then sell it (owning it for 10 years in total). Will the capital gain be apportioned at 1/10th or 7/10th? Presumably also the cost base was involuntarily reset in August 2006 under 118-192.
Answer
Sounds like you are well read in this area!
No you cannot re establish your home as your main residence while you are a resident of another country for tax purposes. Only you or your wife or your child under 18 have to live there and be a resident to re establish it for you. The legislation does not specify a period of time, it is a question of fact ie holiday or setting up house. Once you have establish the fact that you are setting up house then 3 months would be fine, possibly less.
Note section 118-145 is limited to 6 years while the property is producing income. While it is not being used to produce income the period it can be covered by your main residence exemption is unlimited.
The example given in section 118-145 is of a person going overseas for work so yes you can most definitely use the 6 year rule while you are overseas. The trap is you can’t extend that 6 years unless you again become a resident of Australia for tax purposes.
So if you cannot organise for your main residence exemption to be re established you have two options:
1) Pay CGT on the property on a pro rata basis. Section 118-192 resets the cost base to market value when it was first rented out 2006. If after that it is rented for 7 years and lived in by you for 2 years before being sold then 1/9th of the capital gain will be subject to CGT and of course that will the be entitled to the 50% discount and split between you and your wife, assuming you are a resident of Australia when you sell it. Further, the cost base will be increased by any expenses you have not been able to claim a tax deduction for since 2006 and selling costs. When you are living there the expenses that will increase your cost base are huge. For example interest, rates, insurance, repairs and maintenance. These can even include cleaning materials, light globes and lawn mower fuel. The way the formula works the costs associated with the period that you were living there can partially reduce the capital gain on the period you didn’t. Considering that the property market was doing well in 2006 you may not have much capital gain at all. It is just the record keeping nightmare but at least it is only for a short period of time.
2) Alternatively, you could choose not to collect rent on the property for any period in excess of 6 years. You will no doubt need someone to live there to look after the place but is the rent worth exposing your property to CGT?
Last night our Federal Budget was handed down. Now it hasn’t got through parliament yet so no certainty. Nevertheless, it stated that non residents will no longer be entitled to the 50% CGT discount. At this stage there seems to be no carve out for expats. So if you do end up exposing your home to CGT you must make sure you don’t sell it until you return to being a resident of Australia for tax purposes.
