What is the Six-Year Rule?
Australian Tax Office (ATO) stipulates that each family can only own one principal residential property at one time. Owner-occupied property could enjoy tax advantages that when it is sold, owner has no need to pay capital gain tax (CGT), while investment property is just the opposite. Australia’s population is very mobile, and it is common for enterprises to recruit from different cities in order to absorb talents. A person living in Sydney gets a well paid job in Melbourne and can offset his living costs in Melbourne by renting out his home in Sydney, but he will lose CGT exemption when he sells his owner occupied property. In this situation, ATO issued a preferential policy, namely the six-year rule, allows homeowners to move out of their owner-occupied properties for work or special reasons, and to retain the nature of owner-occupied property while renting house for gains. As long as the house is sold within six years or continues to be used for owner occupied property after six years, owner can apply for CGT exemption at the time of sale. If the time limit for the owner to sell the house exceeds 6 years, a portion of CGT will need to be paid for the portion exceeding 6 years.
Benefits
First of all, owners have rental income, which can alleviate the pressure of renting, and even the high income from their owner occupied properties can offset the cost of living. Secondly, renting out one’s owner occupied house does not take much energy or time to manage, saving a lot of troubles. Thirdly, owners can use the six year to accumulate funds, improve their borrowing capacity, wait for the properties to appreciate, and sell their houses before purchasing a better house. The biggest benefit of the six year rule is reflected in taxation. The owner occupied property with rental income can be counted as an investment property. The owners can optimize their tax to the maximum by using negative gearing, and there is no need to worry about depreciation when sell properties. At the same time, as long as the owners sell or continue to live in the term, they can still save a large amount of CGT in the sale, to maximize the investment benefit. Their properties are only calculated as an investment property for a six year lease period, which are essentially owner occupied properties, so the owners cannot move to another property under their own name.
Application Requirements
-The policy is only available to Australian citizens and permanent residents
-The property under company or trust is not eligible for this benefit
-The property must be purchased as owner occupied home first and owner needs to live in for at least 6 months
-The property cannot be rented out for more than 6 years
- You can only rent a house to live and can not purchase a new home during the period
What about CGT over Six Years?
The entire period cannot exceed six years from the first day the owner rents the house to the end of the day he removes back. During the six-year lease term, if the homeowner moves back in for a period of time and then choose to move again, the six-year rule can be continued or reused. After 6 years, if you want to convert an investment property to a primary residence, a dwelling which was an investment property for one part of the ownership period and a principal place of residence for another part. In this case, CGT is apportioned on a pro-rata basis. For example, if you sell a property that you have owned for four years, (rented it out for a year before living in it yourself for three years), you are exempt from 75% of the capital gain (3 divided by 4 x 100). A further 50% discount would apply because the property was owned for longer than 12 months. If you acquire a new home before you dispose of your old one, you can treat both as your main residence for up to 6 months. If it takes longer than 6 months to dispose of your old home, the main residence exemption applies to both homes only for the last 6 months before you dispose of your old home. For the period before this, you can choose which home with higher CGT to treat as your main residence. The other will be subject to CGT for that period.
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