Capital Gains Tax Definition
Capital gains tax (CGT) applies to gains you have made on the sale of capital assets (assets you make money from). Unless an exemption or reduction applies, or you can offset the tax against a capital loss, any gain you made on an asset is taxed at the marginal tax rate for your assessable income.
What is main residence exemption?
Your main residence is the home you live in. In general, though your main residence is generally exempt from land tax, CGT applies to the sale of your home unless you have an exemption, partial exemption, or you are able to offset the tax against a capital loss.
If you are an Australian resident for tax purposes, you can access the full main residence exemption when you sell your home if your home was your main residential accommodation for the whole time you owned it, the land your home is on is or is under 2 hectares, and you did not use your home to produce an income – for example running a business from your home or renting it out.
If the home is on more than 2 hectares, if eligible, you can treat the home and up to 2 hectares of the land it is on as one asset and claim the main residence exemption on this asset.
However, if you use your home to produce an income by running a business from home or renting it out, CGT can apply to the portion of the home or land owned and used to produce income from that time onwards.
Main residence definition – what is main residence?
For CGT purposes, your home normally qualifies as your principal place of residence from the point you move in and start living there. However, if you move in as soon as practicable after the settlement date of the contract, that home is considered your main residence from the time you acquired it.
If you cannot move in straight away because you are in the process of selling your old home, you can treat both homes as your main residence for up to six months without impacting your eligibility to the main residence exemption. For example, where you have moved into your new home while finalising the sale of your old home. This applies if you were living in your old home for a continuous period of 3 months in the 12 months before you disposed of it, you did not use your old home to produce an income (rented it out or used it as a place of business) in any part of that 12 months when it was not your main residence, and your new property becomes your main residence.
Main Residence Exemption – 6-Month Rule
If the sale takes more than six months and if eligible, the main residence exemption could apply to both homes only for the last six months prior to selling the old home. For any period before this it might be possible to choose which home is treated as your main residence (the other becomes subject to CGT).
If your new home is being rented to someone else when you purchase it and you cannot move in, the home is an investment property and not your main residence until you move in.
If you cannot move in for some unforeseen reason, for example you end up in hospital or are posted overseas for a few months for work, then you still might be able to access the main residence exemption from the time you acquired the home if you move in as soon as practicable once the issue has been resolved. Inconvenience is not a valid reason and you will need to ensure that you have documentation to support your position.
Proof that your property is first established or continues to be your main residence is subjective and if the issue is ever queried, some of the factors the Australian Taxation Office (ATO) will look at include:
- The length of time you have lived in the dwelling
- Where your family live
- Whether you moved your personal belongings into the dwelling
- The address you have your mail delivered
- Your address on the Electoral Roll
- Your connection to services such as telephone, gas and electricity, and
- Your intention.
Foreign resident or resident?
The main residence rules changed in 2017 to exclude foreign residents and non-residents from accessing the main residence exemption.
The rules focus on your tax residency status at the time of the CGT event (normally the time the contract of sale is entered into). That is, in most cases if you are a non-resident at the time you enter into the contract of sale, you will be unable to access the main residence exemption. This is the case even if you were a resident for part of the ownership period.
Conversely, if you are a resident at the time of the sale, and you meet the other eligibility criteria, the rules should apply as normal even if you were a non-resident for some of the ownership period. For example, an expat who maintains their main residence in Australia could return to Australia, become a resident for tax purposes again, then sell the property and if eligible, access the main residence exemption.
It’s important to recognise that the residency test is your tax residency not your visa status. Australia’s tax residency rules can be complex. If you are uncertain, please contact us and we will work through the rules with you.
The tax rules also contain integrity provisions that can deny the main residence exemption where someone circumvents the rules by deliberately structuring their affairs to access the exemption – for example, transferring the property to a related party prior to becoming a foreign resident to access the main residence exemption.
Can I treat my home as my main residence even if I don’t live there?
Once you have established your home as your main residence, in certain circumstances, you can treat it as your main residence even if you have stopped living there. The absence rule allows you to treat your home as your main residence for tax purposes:
- For up to six years if it’s used to derive income, for example you rent it out while you are away; or
- Indefinitely if it is not used to produce income.
By applying the absence rule to your home, this normally prevents you from applying the main residence exemption to any other property you own over the same period. Apart from limited exceptions, the other property is exposed to CGT.
Let’s say you moved overseas in 2019 and rented out your home while you were away. Then, you came back to Australia in 2021 and moved back into your house. Then in early 2022, you decided it is not your forever home and sold it. You elected to apply the absence rule to your home and didn’t treat any other property as your main residence during that same period. In this case, you should be able to access the full main residence exemption assuming you are a resident for tax purposes at the time of sale.
The 6 year period also resets if you re-establish the property as your main residence and subsequently stop living there but rent it out in between. So, if the time the home was income producing is limited to six years for each absence, it is likely the full main residence exemption will be available if the other eligibility criteria are met.
Disclaimer: Any advice on this site is general nature only and has not been tailored to your personal objectives, financial situation and needs. Please seek personal advice prior to acting on this information. Because of that, before acting on the advice, you should consider its appropriateness to you, having regard to your objectives, financial situation or needs. Content in partnership with Taxpayers Australia.
