Tax Q&A: Six-year rule for non-residents?

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Q: I lived in Australia from 2000 to 2015, but my only house is in the UK. I paid the deposit prior to 20 September 1985, but exchanged contracts in October of that year. I have rented the house out since 1995, but I plan to move into it again in the next 12 months.

Shortly after I return to Australia, I want to sell the house. If I am a non-resident when I sell, there’s no Australian CGT, but if I sell when back in Australia, do I have to work out capital gain based on the house’s value in 1995 (date I moved out) or in 2001 (plus six years)? I’m not clear on how the six-year rule applies in this situation.

Regards, Mike

A: When you become an Australian tax resident you are deemed to have purchased your worldwide assets at their market value on that date. However, assets acquired prior to 20 September 1985 are exempt from those rules.

In your instance, the question is when you acquired the property. A contract typically has two types of clauses. The two clauses are either a ‘condition precedent’ or a ‘condition subsequent’. A condition precedent clause is one that must be completed prior to the contract coming into existence. A condition subsequent clause is one that can cause a created contract to fail.

A property is ‘acquired’ under Australian tax law when the contract commences. So this means that all condition precedents must be met. If this was done prior to 20 September 1985, then the property is exempt from capital gains tax.

The UK law is different to Australia’s. A person is only committed to the property after exchange has taken place

The exchange of contracts in the UK is subject to a ‘condition precedent’ clause. The UK law is different to Australia’s. A person is only committed to the property after exchange has taken place. In Australia, the signing of a contract binds two people together.

So the property will most likely have an acquisition date of October 1985. And you are likely to have an Australian tax purchase price equal to the market value of the property in 2000 when you became an Australian tax resident.

There is potential to extend the market valuation of the property by one year using the main residence exemption and the six-year concession (TD 95/7). However, you can only enjoy the main residence exemption if you sell the property as an Australian tax resident.

When you became a non-resident of Australia, you had a choice. You could either have paid tax on the increased value of your UK property at that time, or elected for the UK property to become ‘taxable Australian real property’ (TARP). And it sounds like you made the choice for the UK property to become TARP. So the UK property is likely to be subject to Australian tax irrespective of whether or not you are an Australian tax resident.

You will enjoy some of the 50% capital gains tax discount for the period up to the time you ceased being an Australia tax resident (2000 to 2015). This will probably be calculated on a straight-line basis.

Your set of facts is quite unusual, and the contract wording for the UK property is important. You should contact an advisory firm with offices in the UK and in Australia so that a single piece of tax advice can be provided. You will also need to engage valuers to determine your cost base.

Need to know

  • The exchange of contracts in the UK is subject to a ‘condition precedent’ clause.
  • The main residence exemption applies only to Australian tax residents.
  • Overseas property can become taxable Australian real property.

Ross Forrester
is director of Westcourt
Family Business Accountants

 

 

Have you got tax queries regarding your property investments and wealth creation strategies? Our experts are on hand to answer them.
If you would like your tax question answered in our magazine or on our website, please email your question to: editor.yipmag@keymedia.com.au

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