The main residence exemption, and the application of the absence rule, remain hot topics. The legislation talking about the main residence absence rule is only 175 words and looks simple enough until applies to real life. In this blog, we’ll discuss everything about the absence rule.
The Rules: What ITAA 1997 Says?
- If your primary residence ceases to be your main residence, you may continue to regard it as your main residence.
- If you utilise the part of the dwelling that was your main residence to generate assessable income, the maximum time for which you can treat it as your main residence under this section is 6 years. You are entitled to an additional maximum period of 6 years each time the dwelling becomes and then ceases to be your main residence.
- If you do not utilise the home for that purpose, you can treat it as your primary residence forever under this section.
- This section is not applicable if the home was your main residence because of sections 118-147 and ceases to be your main residence because of subsections 118-147(3) and (4).
- You are not allowed to treat any other dwelling as your main residence when you apply this section.
In a nutshell:
- The taxpayer must have made the relevant dwelling their main residence.
- The property must be the taxpayer’s main residence.
- If no other property is classified as the taxpayer’s primary residence, the property can be treated as if it were the taxpayer’s primary dwelling:
- For up to 6 years while it generates income
- Indefinitely if the property is not used to generate revenue.
- If the taxpayer returns to the property and makes it their primary residence, the 6-year period is reset.
Special rules in sections 118-140 allow a taxpayer to claim the main residence exemption on two properties for an overlapping period of ownership of up to 6 months if some conditions are met. This concession can be applicable along with the absence rule and when applying the rules in sections 118-150 that deal with circumstances where a dwelling is being established, renovated or repaired.
Section 118-145 of the tax laws allows a taxpayer to choose to keep treating a dwelling as their main residence even after they have moved out of it. However, some conditions need to be met in order to qualify for this. Firstly, the property should already have been established as their main residence. Secondly, it must have actually ceased being their main residence.
If only a part of the property is the taxpayer’s main residence just before they move out, then the absence rule can only apply to that specific part of the property. This could be relevant for clients who rent out some rooms in their house/unit before moving out or who use part of the property as a place of business.
If the dwelling is not used to generate income, it can be treated as the taxpayer’s main residence indefinitely. However, if it is used to generate income during the taxpayer’s absence, they can only continue to treat it as their main residence for a maximum of 6 years.
The choice to apply the absence rule is made when preparing the tax return for the income year in which the CGT event occurs on the property’s sale. However, if a customer has two properties that could be eligible for the main residence exemption, then it is important to make a choice when preparing the tax return for the income year in which the 1st of the properties is sold. After making a choice, it is not possible to change this under the CGT rules.
The 6-year time period applies to each period of absence. It means, that if the taxpayer shifts back into the dwelling and builds it as their main residence again, then 6 year period is reset under the absence rule. It means that the taxpayer could move out again and treat the dwelling as their primary residence for a further 6 years even if it used to generate income during this period.
The absence rule only applies when the property is stopped to be the taxpayer’s main residence. That means, it can’t be applicable in circumstances where the taxpayer lives in the property while it is being used to generate income.
The following facts would indicate that a dwelling has ceased being someone’s main residence, according to the ATO:
- The taxpayer and their family don’t live in it.
- The personal belongings of a taxpayer are not kept in it.
- The address is no longer used where the mail is delivered to.
- The address of a taxpayer is no longer on the electoral roll.
- Services such as power and gas are no longer connected.