A new perspective on Capital Gains Tax
Here’s something you don’t knoq and some tips and a new perspective on Capital Gains Tax
Absence makes the heart grow fonder
It’s a quote that resonates with hundreds of thousands of people the world over. But did you know it’s also true when it comes to Capital Gains Tax (CGT). There are many benefits to the Absence Rule under the CGT main residence exemption.
FAST FACT: A dwelling wouldn’t normally be a taxpayer’s main residence for CGT purposes once they stopped living in it, but in some cases they can choose to continue to apply the CGT main residence exemption after they move out.
In fact, if the dwelling is not used for income-producing purposes (that is, it’s left vacant or used as a family holiday home) while the taxpayer is absent, it can continue to be treated as their main residence for CGT purposes for an unlimited time after they stop living in it.
How the absence rule works in general
Did you know, if a taxpayer leaves their main residence and uses it for income-producing purposes while they are away (for example, if it is rented out), it can continue to be treated as their main residence under the Absence Rule in section 118-145 of the 1997 Tax Act.
However, to be eligible for the full CGT main residence exemption the maximum amount of time it can be used to produce income during a period of absence is six years.
A taxpayer is entitled to a new six-year period each time the dwelling again becomes their main residence.
Here’s an example.
Phil buys an apartment in 2016 and lives in the apartment as his main residence for two years before being posted overseas for four years. The apartment is rented out during his absence. On his return to Australia, Phil moves back into the apartment for another two years before again being posted overseas for three years (once more renting it out). He then returns to Australia at the end of his second overseas posting and sells his apartment.
Despite the fact that Phil has rented his apartment out for seven years in total while he was away – that’s providing he has not chosen to treat any other dwelling as his main residence for CGT purposes during this time – he may choose to treat the apartment as his main residence for both leaves of absence because each time was less than six years.
Due to this, Phil can claim the full CGT main residence exemption when he sells his apartment.
An important point to note about the Absence Rule (section 118-145, 1997 Tax Act) is that if a dwelling is not used for income-producing purposes for more than six years it can be treated as a main residence for an indefinite period.