What Accountants Are Asking about the Absence Rule?

The blog shares the most common questions that are asked by accountants about the absence rule.

Does the Absence Rule Apply?

• Main residence that becomes a rental property and a new property purchased

For instance, a person purchased his main residence in January 2015 and moved in immediately (property A). He lived in Property A for 4 years and moved out in January 2019. After that, he rented Property A from February 2019 to March 2022. He didn’t get a completed valuation when he moved out of his old home. He bought a new property (Property B) and settled in March 2019. Until October 2023, he lived in Property B. After that, he sold his old home in May 2023. Now, the questions arise:

1. Can a person apply for the 6-year absence rule for his old home, given he has bought a new property?

Under the 6-year absence rule, a person can treat the old home as their main residence from the time they moved out in Jan 2019 until they sold it in May 2023. However, when they purchase a new property, it doesn’t prevent them from applying the absence rule to the old property. In that case, the sale of the old property could be completely CGT-exempt, but CGT may apply to the new property for the overlapping ownership period. There could be a chance to apply the 6-month overlap rule in sections 118-140 to treat both homes as being exempt from CGT under the main residence rules for 6 months.

2. Is it possible to apply for a partial main residence exemption?

3. We can’t apply for the 6-year exemption rule as he bought another property when he rented his old home?

4. Should we apply the market substitution rule at the time he moved out? Then, no 6-year rule exemption because he bought another PPoR?

Based on the answer provided earlier, questions 2, 3, and 4 are not applicable.

5. Can he choose his old property as his PPoR (Property A) and apply the 6-year rule exemption? Or, he can’t do that because he bought another permanent residence (Property B).

Certainly! When someone buys a new property and stops considering their old home as their main residence, they can choose to apply what’s called the “absence rule.” If they don’t use this rule for the old home, they might not get a full exemption when selling it. Instead, a different rule—related to the first time the old home was used for income—could come into play. This might lead to a taxable gain when selling the old home. However, any future sale of the new property might still be tax-free, depending on the circumstances.

• Airbnb or Long-Term Rental

For instance, a person finds a job in another state and needs to move. He plans to rent his main residence out. Option 1 is to sign a contract with a real estate agent who will find a long-term tenant for him. Option 2 is to list the residence on Airbnb and deal with it himself or the Airbnb agent. He is likely to shift back to his main residence within 6 years. He has questions:

• • If he wants to use the house as his main residence, is it possible to use both options?

If the property stops being his primary residence, they can apply the absence rule in section 118-145 ITAA 1997 to treat it as if it was still their primary residence for CGT purposes. If the house is used to generate income during this time, then the absence rule can apply for 6 years.

• • Will he have to pay CGT for both options if he chooses to sell his house after he moves back?

A full exemption is applied if:

• • • The dwelling as his main residence is still located on the property when it is sold;
    • The client built the property as their main residence after acquiring it;
    • The land is 2 hectares and all the property has been used for personal purposes in relation to dwelling;
    • The client is an Australian resident when the CGT event occurs;
    • While the client was living in the property, the land was never used for income-generating purposes;
    • The absence rule is applied after the property is stopped from being their main residence; and
    • No other property is treated as the primary residence of the client for Australian CGT purposes for the time they own an interest in this property.

When a Client Returns from Overseas or Moves Overseas

• Is it possible to apply for the 6-year main residence exemption when a non-resident during absence but a resident when the CGT event of selling the property occurs?

Yes, it is correct. The main residence CGT exemption under sections 118-110 and the absence rule under sections 118-145 can apply if the individual is an Australian resident when the CGT event occurs.

• Is it possible to apply the main residence exemption to overseas property after migrating to Australia?

Yes, it is possible to apply the main residence exemption to a property situated overseas and can also apply the 6-year absence rule in section 118-145 ITAA 1997 to an overseas property to allow a person to claim a full or partial exemption under the main residence rules.

• Client moves overseas

The client lives overseas and is currently a non-resident.

Timeline:

• The client bought a house in Australia in 2010 and lived in the property.
• In June 2012, he moved out of that apartment and the property started producing rental income.
• He moved back into the property in 2017 and believes the 6-year rule was reset and the main residence still applies.
• He moved out of the property in June 2018 and moved overseas and became a resident of another country.

Now, questions arise:

1. Can the 6-year main residence rule still apply if they become Australian resident and buy a home before June 2024?

(1. a) If yes, can the property’s cost base be reset with the market valuation as of June 2018 and the main residence exemption applied pro-rata from this date or cost base can be reset when a new home is bought?

2. In case the client doesn’t become a non-resident and buys a home before June 2024, can the 6-year rule still be applied up to June 2024?

1. Buying another property won’t affect the application of the 6-year absence rule to the original property. If the client applies the absence rule to the original property, then the main residence exemption can’t be applied to any other property. After returning to Australia, if the client moves into the original property and builds it as the main residence before the expiry of the 6 years, the capital gain will be fully exempt from CGT on the future sale of this property.
2. If the client rents the main residence for over 6 years, the ‘home-first used to produce income’ rule in section 118-192 could apply so that the client is treated as having reacquired the property for its market value when it was first used to generate rental income. Once gross capital gain is calculated, after that, you would apply for the partial main residence exemption. After that, you can apply capital losses before you apply the general CGT discount.
3. The purchase of a second property before or after 2024 is not relevant to whether the client can apply the absence rule to the first property. However, if the absence rule is applied to the original property, then it can affect the ability of the client to apply the main residence exemption to the second property.

What Influences the Absence Rule?

• When a client doesn’t re-establish the property as their primary residence

A person who purchased the primary residence in Oct 2014, and lived in it until they moved to the US for work at the beginning of 2020. During that time, the property was used to generate rental income. In May 2023, they (husband and wife) moved to Australia permanently, and in July 2023, the husband got a job in Sydney. They haven’t re-established the home as their main residence but started living with their parents. Now the questions are:

• • Is it necessary for a taxpayer to re-establish the main residence as their home before accessing the 6-year period under the absence rule? Could they sell their house now, and claim the exemption?

No, it is not necessary to re-establish the property as their main residence to apply the absence rule. A full exemption is available under the primary residence rules on the property’s sale:

• When a property is sold, the client’s main residence should still be on the property.
• If the client acquired the property, they should establish it as their main residence as soon as possible.
• The land area should not exceed 2 hectares and should have been used for private purposes related to the dwelling.
• During the CGT event, the client should be a resident of Australia.
• The property should not have been used for income-producing purposes while the client was occupying it.
• After the property ceases to be the client’s main residence, the absence rule should be applied (a 6-year time limit applies while a property is used to produce income).
• Also, no other property should be treated as the main residence of the client (or their spouse) for Australian CGT purposes during the period they own an interest in this property.

• • If they continue to rent the house beyond the 6-year period, does the exemption apply for the entire ownership period until the end of the 6-year period, and does the cost base of the house for any future CGT event beyond this 6-year extended time period go back to the original purchase date and price?

If you can’t get a full exemption for your property under the main residence rules when you sell it, you can check if the ‘home first used to produce income rule’ applies. This rule should apply automatically if:

• • • Your house only qualifies for a partial main residence exemption because it has been used to produce income, and the absence rule can’t provide a full exemption;
    • Your house would have been eligible for a full exemption under the main residence rules if it had been sold just before the first time it was used to produce income; and
    • Your house was first used to produce income after August 20th, 1996.

If all the above conditions are met, then you will be considered to have acquired the house and adjacent land for its market value at the time it was first used to produce income. This is a mandatory rule and not optional.

• When not to apply the absence rule

While certain components of the principal residence exemption regulations function automatically, others are voluntary. For example, the absence provision in section 118-145 ITAA 1997 is optional; the taxpayer may choose to use it if they so desire. This means that if the client can get a better tax result (i.e., recognise a capital loss) by not using the absence rule, they should be free to do so. If the clients choose not to apply the absence rule to the property at all, they should have a capital loss equal to the difference between the sale proceeds and the market value of the property at the time it was first used to generate income (assuming section 118-192 applies) – adjusted for incidental costs on the sale.

• The main residence and new couples

The client purchased their first home in 2017 and lived in PPR up to 2019. Shifted to Sydney and rented until 2021. In 2021, he moved in with his partner to a new home (100% owned by his partner) treated as his PPR. The first property now has been sold. The questions are:

• • Any chance of CGT exemption?

Section 118-170 ITAA 1997 ensures that the spouse can’t have 2 properties that are fully exempt from the CGT under the main residence rules simultaneously. However, the criteria are somewhat flexible, and there are usually a few different ways to apply for the principal residence exemption. When the persons are spouses and have more than one property between them that could potentially be classified as a main residence, they must either:

• • • Choose one of their dwellings as their main residence for CGT purposes.
    • Choose to divide the exemption across the two dwellings, in which case there are rules for how the exemption is split between the properties.

• • Market value will be taken from 2019 or 2021?

If a full exemption is not available, then you need to look at whether the ‘home first used to produce income rule’ in section 118-192 is applicable to the client’s property. The rule should apply if:

• • • The property is eligible for a partial main residence exemption because it has been used to generate income and the absence rule is not applied to provide a full exemption.
    • The property would have qualified for a full exemption under the main residence rules if it had been sold just prior to the first time it was used to generate income; and
    • The property was first used to generate income after 20 August 1996.

If the above conditions are satisfied, then the client is treated as having acquired the property and relevant adjacent land for its market value when it was first used to generate income.

• • Impact of capital works deductions
    • If a client is to apply the 6-year rule on the sale of a main residence that was rented and on which Div 43 allowance was claimed, Is there any CGT paid in respect of the allowance claimed?

If the individual decides to apply the 6-year absence rule after they moved out and rented out the property, the capital gain could be fully CGT exempt, supposing the property was rented for less than 6 years. However, the deductions claimed by a client for capital works under Div 43 won’t stop them from applying the absence rule in sections 118-145.

• • Partial main residence
    • If you’ve used your main residence for a home business like a daycare in an exclusive area for less than 6 years, can you use the temporary absence rule to disregard Capital Gains Tax (CGT) and still claim the full Main Residence Exemption (MRE)?

If you use a dwelling for income while still considering it your main residence, the absence rule likely won’t apply, leading to potential eligibility for only a partial main residence exemption under section 118-190, and possibly triggering the ‘deemed reacquisition rule’ under section 118-192, depending on circumstances.