Everyone knows that the home is exempt from capital gains tax (CGT), and always will be – no politician would be game to meddle with that part of the social contract or what is often referred to as “Australia’s sacred cow”.
However, the rules that make the home exempt from CGT – the main residence exemption (MRE) – are not simple. The legislative drafters are not to blame for that, and nor is the Treasury or the ATO; the rules need to address a range of complex social relationships and events that may happen within those relationships.
Many people in Canberra are living here on a temporary basis – assigned or seconded from other parts of the country. Many locals leave to work in international postings. Defence personnel move around the country – they may buy a home in one of those places and keep moving with the intent of returning to that home one day.
Special rules about absences and spouses living separately cover these situations, including when spouses own and live in separate homes. But these rules are not straightforward – you do not simply apply the MRE to two different homes. Fundamentally, the law permits couples to have only one main residence that is exempt from CGT.
Deceased estates present further difficulties. Can a beneficiary of a deceased estate obtain the benefit of the MRE for the period during which the deceased lived in the property? What happens when someone takes a life interest in a property under a will? The answer to both of these questions is the MRE applies but only if special conditions are satisfied.
But more scenarios may arise:
- what happens when your spouse is a non-resident?
- what happens if you separate, live apart for a period, then sell?
- what happens if you buy land to build on, stay in your existing home, and the build is delayed?
- what if you rent your home out for a period?
If your circumstances resemble one of the above scenarios – or if they are unconventional for some other reason – you should consider seeking tax advice to ensure the application of the MRE.