Temporary Residents – the CGT main residence absence rule & the 6 year clock

by | Sep 2, 2016

As noted in last month’s newsletter featuring temporary residents, Australia’s tax rules provide generous concessions and exemption for individuals that are classed as a ‘temporary resident’ for income tax purposes.

To recap, in general, foreign-source income derived by a temporary resident will be exempt and capital gains and losses made by a temporary resident will be treated as if they had been made by a non-resident. This essentially means temporary residents only have a CGT exposure for CGT assets that constitute taxable Australian property.

We had reason to consider recently the interaction of the CGT main residence absence rule and how it applies where a temporary resident becomes a permanent resident.

If we take the example of a UK couple who moved to Australia for work purposes on 457 visas and who subsequently apply for permanent residency status after 3 years of living in Australia. Assume their permanent residency application is granted after 3.5 years of residing here. Further assume that they have rented a dwelling in Australia in which to live.

Prior to leaving the UK the couple owned a property in the UK acquired post 20 September 1985 that was being occupied by them as their main residence. Upon moving to Australia they commenced to rent this dwelling – the rent of course being non-assessable non-exempt (NANE) income during their temporary residence status.

For the purposes of the CGT provisions, when a temporary resident becomes a permanent resident, they are deemed to acquire all their post-CGT non-taxable Australian property at that time for its market value at that time – refer section 768-955 ITAA 1997. This deemed acquisition rule overrides the ‘first used to derive income’ rule in section 118-192 ITAA 1997 – refer subsection 768-955(3) ITAA 1997.
As the dwelling was the couple’s former main residence, they are able to utilise the 6 year absence rule in section 118-145 ITAA 1997 to continue to treat it as their main residence. This conclusion seems to be supported by the Commissioner in TD 95/7 as it applies to non-residents that become residents of Australia.

Where section 118-145 ITAA 1997 is chosen the dwelling can be treated as the main residence indefinitely where it is not being used to derive assessable income. If the dwelling is being used to derive assessable income the maximum the period the choice can apply for is 6 years after which point a pro rata gain/loss calculation is required.

Given the above, the million dollar question here is when has the 6 year time clock commenced for our UK couple who have now become permanent residents?

In our view, the 6 year time frame for the absence rule does not commence to start until the point in time that the couple obtained permanent residency. This is because prior to this date they were not using their former UK property to derive assessable income (such income being NANE of a temporary resident). The 6 year time limit only applies during the time the property is used to derive assessable income.

As such, it would appear the UK property can be sold CGT free provided the rental period is less than 6 years from obtaining permanent residency.

PS – don’t forget to account for the UK rent from the time temporary residence status ceased!

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