Jimmy B Prince, author of Tax for Australians for Dummies
The dream of owning your main residence is the biggest investment decision you’re ever likely to make. The trade-off is your lifestyle could be affected while you grapple with the ongoing battle of paying off the mortgage.
Under Australian tax law a main residence is a unit of accommodation (such as a home or cottage) where you and your family normally reside, and can include up to two hectares of land that surrounds your home. It can also be a flat or home unit, a retirement village, a caravan, houseboat or other mobile home, or a structure built underground.
The good news is if you make a profit on sale; the gain is normally exempt from tax under the capital gains tax (CGT) provisions. It’s therefore prudent to reside in locations where property values are continually rising. To qualify for this concession the property must be your main residence during the entire period you own it. You can also use your main residence as collateral to secure a loan to buy investments such as shares. If the investment derives income the interest you incur to service the loan is tax deductible.
The bad news is the various holding costs associated with owning a main residence (interest, rates, insurance and repairs) are not tax deductible. Further, you cannot use your main residence to derive assessable income (for instance run a business from home). If you do carry on a business you’ll only be entitled to a partial CGT exemption.
Under the CGT provisions you cannot own two main residences (for instance one home in Melbourne and another in Sydney). Under these circumstances, you’ll need to nominate the one you intend to claim the main residence exemption. Alternatively, you could elect that 50 per cent of each property qualifies for the exemption. If you find yourself in this situation it may be a smart move to nominate the property that’s likely to appreciate in value at the faster rate.
By the way, if you happen to reside in a property that’s owned by your company or family trust, the property will not be exempt under the CGT provisions. This will be the case even if you own all the shares in the company or you’re the beneficiary of the trust.
Temporary absence rule
Under the temporary absence rule if you leave your main residence and decide to lease it, your home will continue to be exempt from tax for up to six years while you’re away. For example, this could arise if you’re posted interstate for work purposes or you leave Australia for an extended period of time. In the meantime you can’t own another main residence while you’re away. If you want to extend the six-year limit you’ll need to return and then leave again. On the other hand if the property is not leased, it will be exempt for the entire period you’re away.
If you’re experiencing difficulty paying off the mortgage, one option you could explore is lease your main residence and take advantage of the temporary absence rule. In the meantime, you’ll need to find alternate living accommodation while you’re away (for instance go and live with mum if she’ll take you back!). If you do this you stand to gain the following tax concessions:
• Your holding costs such as interest, rates, insurance and repairs will become a tax-deductible expense;
• You can depreciate your carpets, curtains, blinds, and household appliances;
• You can claim a 2.5 per cent capital works deduction if your home was constructed after 15 September 1987;
• Your main residence will continue to be exempt under the CGT provisions for up to six years while you’re away!
If you buy land adjacent to your home the additional land can be included as part of your main residence. This is on the condition the total land that surrounds your home does not exceed the two hectares limit, and you must use it primarily for private or domestic purposes (for instance you build a tennis court or extend the garden). There’s one further condition. If you sell your home at a later date, you’ll need to sell the additional land simultaneously to the new owner. On the other hand, if you decide to subdivide your home and sell off the excess land, the portion you sell is liable to CGT. To avoid paying tax you need to sell your main residence in its entirety.
Other articles in this week’s newsletter