The Australian family home is often considered tax free. While it’s true that the main residence exemption provides significant tax benefits, it’s essential to understand the nuances to ensure you maximise these advantages. This article will guide you through the main considerations and rules determining if your family home is truly tax free.
What Counts as Your Family Home?
Before we dive into the tax nuances, let’s define what can be considered as your family home first.
The Australian Taxation Office (ATO) has set criteria to determine if a property qualifies as your main residence. To qualify, the property should:
- Be where you and your family live
- Contain your personal belongings
- Serve as the address where you receive your mail
- Have utilities such as phone, gas, and electricity registered in your name
- Be listed as your address on the electoral roll
- Be intended to be your main residence
The time spent living in the property is crucial, but your intention to make it your main residence plays a significant role.
The Main Residence Exemption
The cornerstone of the tax-free family home is the main residence exemption. This exemption shields capital gains tax (CGT) when you sell your primary dwelling. However, qualifying for the full exemption requires meeting specific criteria.
Criteria for the Main Residence Exemption
The main residence exemption can save you from paying CGT when you sell your home. You qualify for the full exemption if:
- The home was your main residence throughout the ownership period
- The home was not used to produce income (e.g., running a business or renting out a room)
- The land is not over 2 hectares
Partial Exemption
You may still qualify for a partial exemption if you have used your home to earn income, such as renting out a room or operating a business. This partial exemption will depend on the extent and period the home was used for income generation.
Foreign Residents and Changing Residency
Foreign residents are not eligible for the main residence exemption. If you sell your home while being a non-resident, you cannot claim the exemption. However, if you sell the home as a resident after a period of non-residency, you may still qualify for the exemption for the time you were a resident.
Other Potential Taxes on Your Family Home
While the family home is often seen as a tax-free asset, several taxes could apply:
Capital Gains Tax (CGT)
Typically, profits made from selling a property are subject to CGT. However, the main residence exemption often protects homeowners from this tax. If this exemption doesn’t apply, the profit from the sale is added to your taxable income, increasing your overall tax bill.
Example: If you sell your home for a $200,000 profit and your other income is $90,000, your total taxable income rises to $290,000. This could result in a significant tax bill.
Income Tax
Income tax is applicable to rent received from letting out part of your home. Owner-occupiers who rent out a room or a granny flat must declare this rental income and pay tax on it.
Example: If you rent out a granny flat for $320 per week, your annual rental income is $16,640 (before expenses). This amount is added to your taxable income.
Land Tax
Land tax is assessed based on the land value of your property. Normally, the family home is exempt. If this exemption is lost, land tax is payable annually based on the land’s value, not the combined market value of the land and home.
It’s important to note that these are general examples, and individual circumstances can vary. Seeking professional tax advice is recommended to understand your situation fully.
Can the Main Residence Exemption Apply If You Move Out?
Yes, under the ‘absence rule’:
- You can treat your home as your main residence for up to six years if you rent it out.
- If the home is not used to produce income, you can treat it as your main residence indefinitely.
During this period, you cannot apply the exemption to another property, except in limited circumstances.
Timing Considerations
Your home generally qualifies as your main residence from when you move in. If you purchase a new home before selling the old one, you can treat both as your main residence for up to six months. Beyond this period, you may need to choose which home gets the exemption.
Renting out the home before moving in can result in a taxable gain on the property’s increase in value during the rental period.
Renovation and Subdivision
Renovating or building a home for profit can result in the profit being treated as ordinary income or a capital gain, potentially disqualifying the main residence exemption. Subdividing land can also affect the exemption, with the subdivided land potentially being subject to CGT.
Centrelink and the Family Home
The family home is exempt from the Centrelink assets test. However, selling the home can affect your pension entitlements. Proceeds from the sale must be used to buy a new home or aged care accommodation within 12 months to avoid inclusion in the assets test.
Couples and Separate Main Residences
A couple cannot claim the full CGT exemption on two different homes. You must choose one home as your joint main residence or split the exemption based on ownership percentages.
Divorce and Property Settlement
If the home is transferred to one spouse as part of a divorce settlement, and it was their main residence, they should still qualify for the full exemption. A partial exemption may apply if only part of the ownership period qualifies.
Conclusion
The main residence exemption offers significant tax savings, but understanding the rules is crucial. If you have any doubts, seeking professional advice is wise to ensure you maximise your entitlements and comply with tax laws. Reach to us for a tax consultation.
