The 6-year absence rule is a valuable provision under Australian capital gains tax (CGT) law, allowing homeowners to maintain the main residence exemption even if they move out and rent their property for a period. This article outlines the key features, eligibility criteria, and practical implications for clients considering an extended absence from their principal residence.
Key Features of the 6-Year Absence Rule
- Under section 118-145 of the Income Tax Assessment Act 1997, if you move out of your main residence, you may choose to continue treating it as your main residence for CGT purposes during your absence.
- If the property is used to produce assessable income (e.g., rented out), you can apply the exemption for up to 6 years per absence. If not used for income-producing purposes, the exemption can apply indefinitely.
- Each time you move back in and then move out again, a new 6-year period applies.
- You cannot treat another dwelling as your main residence during the period you apply this rule, except in limited circumstances (such as changing main residences).
- The choice to apply the 6-year absence rule is made when preparing your income tax return for the year in which you sell the property.
Eligibility Criteria
- The property must have been established as your main residence before your absence.
- You must not treat any other property as your main residence during the absence, except in specific situations.
- You must be an Australian resident for tax purposes at the time of the CGT event (usually the date of contract for sale). Foreign residents are generally not eligible for the main residence exemption, including the 6-year absence rule, unless they meet certain life event exceptions
- The rule is available to individuals who use the property for income-producing purposes for no more than 6 years per absence (or indefinitely if not income-producing)
Practical Example
- If you live in a house, move overseas and rent it out for 5 years, return and live in it for 2 years, then move overseas and rent it out for another 4 years, you may choose to treat the house as your main residence during both absences (as each is less than 6 years), provided you do not treat any other property as your main residence during those periods
Conclusion
The 6-year absence rule provides flexibility for homeowners who need to move out of their principal residence, allowing them to retain the CGT exemption under certain conditions. It is essential to carefully consider residency status, income-producing use, and compliance with the rule’s requirements before making decisions regarding property absences. For tailored advice and to ensure compliance with current legislation, clients should consult with us in detail.