Q. I have purchased a house that I wish to use as my family's main residence. I am looking to take advantage of the six-month exemption rule while I sell my existing place. What happens if I wish to rent out either of the two properties during this six-month period?
A. If the existing house is rented out in the six-month period that both houses are owned before your move into the new dwelling then, prima-facie, you will not be entitled to the benefit of the six-month "changing main residences" exemption in s 118-140 of the Income Tax Assessment Act 1997 (ITAA 1997). This is because s 118-140(2) provides that the availability of this concession is premised on the following conditions being satisfied:
- your existing main residence was your main residence for a continuous period of at least 3 months in the 12 months ending when your ownership interest in it ends; and
- your existing main residence was not used for the purpose of producing assessable income in any part of that 12 month period when it was not your main residence.
In addition, of course, the new dwelling must become your main residence.
Taxation Determination TD 1999/43, however, provides that a taxpayer can use the "absence" concession in s 118-145 to preserve the main residence status of the original dwelling if it is rented in this period so that there is no breach of the second condition (namely, that the original dwelling must not have been used to produce assessable income in any part of that 12-month period when it was not the taxpayer's main residence).
The effect of using the concession in these circumstances is that the original dwelling will be treated or deemed to still be the taxpayer's main residence – whether it is rented or not (see s 118-145(1)). If this is the case then both dwellings can continue to be treated as your main residence for the six-month period that they are owned. This is also reinforced by s 118-145(4) that provides:
- If you make the choice, you cannot treat any other *dwelling as your main residence while you apply this section, except if section 118-140 (about changing main residences) applies.
This rule is illustrated in the following example from TD 1999/43:
- Anne acquired a dwelling on 1 January 1986 where she lived until she went overseas on 1 January 1997. Anne did not rent the home during her absence.
- She acquired another dwelling on 1 February 1998 and moved into that dwelling on her return from overseas on 1 March 1998. Anne disposed of the first dwelling on 1 August 1998.
- In accordance with section 118-145, Anne chose to continue to treat the first dwelling as her main residence for the period 1 January 1997 until she disposed of it on 1 August 1998.
- In addition, under section 118-140, Anne may treat the second dwelling as her main residence from when she acquired it on 1 February 1998. Under section 118-140, Anne is able to treat both dwellings as her main residence for up to six months, ending when she ceased to have an ownership interest in the first dwelling.
Note that but for the availability of the changing main residences concession in s 118-140 (and the ability to use the absence concession in conjunction with it), if you do not move into the new house and establish it as your main residence as soon as practicable after it was acquired (see also s 118-135), then a partial exemption would apply on a pro-rata basis as calculated under s 118-185. Further, the absence concession in s 118-145 cannot be used to preserve the full exemption in this case as the dwelling was never established as a main residence: see s 118-145(1).
The application of the rules will depend on your specific circumstances. Contact our office to obtain tailored advice that suits your situation before making any decision.