Tax Q&A: Six-year CGT Exemption Rule

2/08/2018

Q: We purchased a property in January 1998 and lived there until February 2012, at which time we moved out as we were provided with accommodation by an employer. We rented the property out from February 2012 and the tenants moved out on 31 January 2018. 

My question is about the six-year rule. If we move back in, I understand that the six-year CGT exemption rule applies when we sell the property in the future. 

If we re-let the property from February 2018, I understand that CGT will apply to any future sale of the property. My question is, would CGT be applicable from the initial rental of the property (February 2012) or would those first six years of rental be CGT exempt? That is, would CGT only apply from February 2018 until a future sale date (we are thinking of selling in February 2020)?

- Many thanks, John

A: In this case, you used the property as your main residence until February 2012. Provided you did not have any other main residence during your absence, you can elect to treat that property as your main residence during the period when you had moved out of the property, up to a maximum of six years, ie to 31 January 2018. 

Each time the property becomes your main residence following a period of absence, you can reapply the six-year absence rule. Thus, if you move back into the property for a sufficient period, such that you are treating the property as your main residence, the six-year rule starts again.

"You can reapply the six-year rule, and if you sell within six years, the full main residence exemption will apply"

The ATO does not specify a length of time that you are required to live in the property in order to treat it as your main residence. Instead, the ATO considers factors such as:

• length of time you live there

• whether your family lives there

• whether you have moved your belongings into the home

• address to which mail is delivered

• address on electoral roll

• connection of services

• intention in occupying the dwelling

Without further facts it is difficult to say whether you used the property as your main residence when you returned in February 2018. This is a key question, and you will need to obtain specific advice from a tax agent on this point. 

However, assuming the property was used as your main residence in February 2018, you can reapply the six-year rule, and if you sell the property within six years the full main residence exemption will apply. But if you sell the property after renting it for, say, eight years, then CGT will apply to the sale.

In that case, you would work out your capital gain by applying the ‘first used to produce income’ rule.

The first element of your cost base would be the market value of the property at February 2018. For example, if you sold the property for, say, $2m, and it was valued at, say, $1m in February 2018, your capital gain would be $1m.

A partial main residence exemption would then apply. To calculate this you would multiply your capital gain by the proportion of time the property was not used as your main residence since February 2018. Using the above example, you would be able to treat the property as your main residence for six years of that eight-year period, leaving a gain of 25%, or $250,000. You could then apply the 50% CGT discount.

Jessica Pengelly

is senior associate at

Finlaysons Lawyers