Impact of new changes on the ‘temporary absence rule’
When a dwelling cease to be used as a taxpayer’s main residence, the taxpayer can choose to continue to treat that dwelling as their main residence for all, or part, of their period of absence. Refer to S.118-145. The maximum period over which a taxpayer can continue to treat a dwelling as their main residence under the ‘temporary absence rule’ is as follows:
- If the dwelling is not used for income-producing purposes during the period of absence – the taxpayer can treat the dwelling as their main residence indefinitely.
- If the dwelling is used for income-producing purposes during the period of absence – the dwelling can be treated as the taxpayer’s main residence for a maximum period of six years whilst it is used for that purpose during that time.
Where a taxpayer has chosen to apply the temporary absence rule, they may not treat any other dwelling as their main residence at the same time (subject to S.118-140, which broadly allows two concurrent main residences for up to six months when a taxpayer is changing their main residence).
In the past, taxpayers who have moved overseas and ceased to be a resident have been able to rent out their former main residence in Australia for up to six years before selling without attracting any Australian CGT by virtue of the temporary absence rule.
Whilst the new changes do not directly impact or alter the way in which the temporary absence rule applies, foreign residents will generally no longer be able to benefit from it if the dwelling is sold whilst they are a foreign resident. This is because the temporary absence rule simply ‘extends’ the period over which the dwelling is treated as one’s main residence, but if the taxpayer is a foreign resident at the time of the CGT event, the temporary absence rule will not assist them in relation to their eligibility for the MRE.
However, if the taxpayer subsequently returns to Australia and becomes a resident again by the time they dispose of the dwelling (i.e., at the time of the relevant CGT event), the temporary absence rule can be relied upon to extend the period over which the dwelling is treated as their main residence.
Impact of new changes on the ‘market value rule’
Under the ‘market value rule’, if a taxpayer’s post-CGT main residence is first used to produce income after 7:30pm on 20 August 1996 (the ‘first income time’), then the dwelling is generally taken to be acquired at this time for its market value. This effectively ensures any capital gain (or loss) that has accrued up until the first income time is disregarded. Refer to S.118-192.
Specifically, the market value rule will only apply where both of the following conditions are met:
- The taxpayer would only obtain a partial MRE when the dwelling is eventually sold because it was used for income-producing purposes.
- The taxpayer would have obtained a full MRE if the dwelling was sold immediately before the first income time.
Unfortunately, as a result of the new changes to the MRE, in the event the taxpayer is a foreign resident when they enter into a contract to dispose of the dwelling (i.e., when the CGT event happens), the market value rule will generally have no application. This is because, for the market value rule to apply, the taxpayer must be entitled to a partial MRE at the time a CGT event happens to the dwelling, and a foreign resident would generally not satisfy this requirement in such cases (as they are generally ineligible for the MRE, unless an exception or transitional measures apply).