Australians have always placed great importance on owing one’s own home. Given this ‘Australian Dream’ it perhaps not surprising that, while almost every OECD country offers concessional tax treatment to gains made on owner-occupied housing, the Australian tax code is amongst the world’s most generous. Specifically, there is a full ‘main-residence’ exemption (subject to conditions of course) from capital gains tax where you sell a dwelling that was your main residence throughout the ownership period.
While many, including myself, have criticised the exemption on both equity and efficiency grounds (perhaps a topic for another day), the Australian Dream and indeed the Main Residence Exemption is likely to remain sacrosanct and therefore largely unchanged. It therefore behoves all home owners and prospective home owners to understand the exemption and how they can maximise its benefits. This article aims to help them do this.
A capital gain (or loss) will be exempt if it is made by;
- An individual
- on the disposal (and some other CGT events) of their
- dwelling (pretty much anything beyond a tent that is habitable)
- that was their main residence throughout the period of ownership
It is worthwhile mentioning that nowhere does it say the individual must be a resident or that the dwelling must be located in Australia. Please also note that there are special rules for dwellings owned by Special Disability Trusts or acquired from a deceased estate but, to keep things brief and simple, I will not be covering them in this article.
The term ‘main residence’ is not defined but is of course absolutely key. Clients often ask what they need to do to establish a residence as their ‘main residence’ and in particular how long they need to live there. There is no stated minimum period though perhaps the ‘building concession’ (see below) period of 3 months may provide an informal ‘rule of thumb’. It is even conceivable that a much shorter period could be sufficient. Such a situation may occur, for example, where a person moves in to the dwelling with the intention of occupying it is their main residence indefinitely but, shortly after moving in, is relocated by their employer.
Where an individual owns multiple residences it may not always be easy to tell which is their main residence. Factors that are likely to be taken into account are;
- Where their personal belongings are located
- Where their mail is delivered
- Their address on the electoral roll and
- The taxpayer’s intentions.
Practically, where a strong case can be made for both dwellings, an accountant is likely to recommend simply choosing the dwelling that will give the most favourable outcome for the taxpayer.
Maximising the exemption
There are a number of generous concessions that extend the exemption.
Adjacent land and structures
The main residence exemption is also available to adjacent land and adjacent structures (e.g. a garage, storeroom, shed or granny flat) provided that it is used “primarily for private or domestic purposes in association with the dwelling” and it is disposed of together with the dwelling.
The extension to adjacent land is limited to 2 hectares (including the land underneath the dwelling) but where the land being sold exceeds this the taxpayer can choose which 2 hectares of the property will qualify.
Time required to move in to a dwelling
The main residence exemption covers the period from when an ownership interest is acquired until it is “first practicable” to move in to the dwelling. The courts have not taken a particularly generous view of what is practicable. For example, iIt does not apply where a dwelling is subject to a lease with a third party that prevents the new owner from moving in. However, it would apply where “illness or other reasonable cause” prevented the new owner from moving in straight away or where a dwelling needed to be repaired first.
Changing main residence
Where a taxpayer acquires a new dwelling before disposing of their current residence they are permitted to claim the exemption on both dwellings for up to six months. This is provided that the original dwelling was their main residence for at least 3 of the 12 months prior to its disposal, it was not used to produce income in the previous 12 months and the new dwelling becomes their main residence. This is the only concession that allows a taxpayer to claim the main residence exemption on two dwellings at the same time. Under all other concessions if a dwelling is deemed to be the main residence then another dwelling cannot also be treated as such at the same time.
Once a dwelling has been established as a main residence the owner can move out and chose to treat it as if it continued to be their main residence. They can do so for up to six years if it is used for income producing purposes or indefinitely where there is no income use. It is not necessary for the taxpayer to move back in to the dwelling before selling it though if they do re-establish it as their main residence the absences concession resets and can be applied again.
Typically the main residence exemption cannot be claimed on land. However, where a taxpayer builds, renovates or repairs a dwelling and is not occupying it, the land that the dwelling is on can be treated as their main residence for a maximum of 4 years (or longer in such rare cases that the Commissioner allows it). This concession could be used, for example, where a taxpayer demolishes an existing residence and builds a new one. There are two conditions, however; the dwelling must become the taxpayer’s main residence “as soon as practicable after the work is finished” and it must continue to be their main residence for at least three months.
Sale of land after destruction of a dwelling
If a dwelling is “accidentally destroyed” (e.g. by a fire or natural disaster) and it was your main residence immediately before its destruction, you can chose to apply the exemption to a sale of the vacant land on which the dwelling was built.
Restrictions on the exemption
Though the main residence exemption is generous there are still restrictions owners need to know about.
Spouses with different main residences
Where spouses (this includes de facto and same-sex relationships) have different main residences they can either chose to claim a full exemption on one of the properties or a partial exemption on both properties.
Income producing use
If a dwelling was rented (or made available for rent) or used as a place of business (e.g. a doctor’s surgery), for some or all of the ownership period then a full CGT exemption is not available.
Where a main residence is first used to produce income after 20 August 1996 there is a deemed acquisition for market value (refer to PS LA 2005/8 for what this means) at that time. However, this rule interacts with the absences concession (described above) such that where an election is made to apply the absences concession there is no deemed acquisition for the first 6 years of income producing use. Where the dwelling is rented for a period exceeding 6 years, the deemed acquisition occurs immediately after the end of the 6 year period.
Finally, it should be noted that where a dwelling qualifies for only a partial exemption, the CGT general discount (50% for individuals) can reduce the taxable gain, though the deemed acquisition for market value described above resets the 12 month ownership period required to access the discount . The small business CGT concessions may also be available.
This article does not seek to be a comprehensive or definitive reference on the main residence exemption for all tax payers. For the sake of simplicity, flow and brevity I may not have mentioned something that is important to your circumstances.
It is important to remember that everybody’s situation is different and what is mentioned in this blog may not apply to you. I urge you to seek professional advice that is tailored to your circumstances.
Please ensure that you also read the full disclaimer on my ‘welcome’ post.