Finance Your Budget The tax exemption owners must understand before renting out their home
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The tax exemption owners must understand before renting out their home

New home buyers
A six-year exemption allows Australians to avoid paying capital gains tax on investment properties. Photo: AAP
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Question 1: Hi, I’m wondering what happens if you have moved out of your principal place of residence, rented it for several years and paid tax on that rent, and then move back into it.

After a period of time, does your principal place of residence ‘re-set’, as if you had never left it, so that you don’t have to pay capital gains of any of the proceeds when it’s eventually sold? Thanks

It’s not an uncommon occurrence to move out of your home, rent it out, and then move back into it later.

You can choose to continue to treat a home as your main residence for CGT-exemption purposes even though you have ceased to use it as your main residence. This allows the CGT exemption to continue to apply.

Note this exemption does not apply to a period before a home first becomes a person’s main residence (e.g. the home is rented out before the person first lives in it). A person must first live in the home and then move out.

Six-year exemption if home is used to produce income

If the home is used for income-producing purposes (i.e. rented out), the CGT exemption can continue to apply for up to six years.

If a person is absent from their main residence at different times during their period of ownership, the six-year period recommences each time.

This means you can live in the home and move out on multiple occasions without affecting the main residency status of the home.

A person who moves out of their main residence and buys another home can elect for the main residence CGT exemption to apply to either property but not to both – i.e. you can only ever have one main residence for CGT-exemption purposes at a time.

This decision does not need to be made until either residence is sold.

As an aside, if a person moves out of their main residence and does not use the home for income-producing purposes, the person can continue to elect that property to be their main residence for an unlimited period.

Prior to renting out your principal place of residence, it would be recommended to speak with your tax accountant in order to understand how the above affects your personal situation.

Question 2: Capital gains on SMSF: How much tax am I liable to pay? 

If your superannuation fund is in the accumulation phase, and if the asset (shares, property, managed fund etc) has been held for more 12 months, then the fund receives a one-third (33.33 per cent) CGT discount.

Normally all super fund earnings are taxed at a maximum of 15 per cent, so after applying the discount (5 percentage points), the maximum rate of CGT is 10 per cent.

This applies for all super funds, including SMSFs.

If your super fund is in pension phase, then no capital gains tax applies.

If you held the same asset outside of super, and held it for more than 12 months, you would receive a 50 per cent discount.

But that is a 50 per cent discount on your marginal tax rate, which in most instances will be a lot higher than the super fund earnings rate of 15 per cent.

Question 3: In your reply to Q1 on September 5, 2021, regarding the taxation on capital gains, you state: “Any capital gain you make from the sale of your investment property, shares or managed funds, is added to your assessable income for that financial year”.

Does this also apply to the proceeds of a surrendered life insurance policy? Thank you. Alan

Most life insurance policies these days are unbundled from any savings component, and the proceeds paid are generally tax free (if the policy is held outside of super).

For instance, a life insurance benefit paid directly to your spouse or child is generally not subject to taxation when the policy is held outside of superannuation.

However, the tax-free status of your death benefit can be affected when your life insurance is bought via a superannuation fund and paid out to a financially non-dependent beneficiary.

But as you have used the term ‘surrendered’, you may be referring to the old-style whole-of-life or endowment insurance policies.

These policies combined a life insurance and a savings component. AMP, as well as some other life and mutual companies, used to sell a lot of these policies many years ago.

There may be a requirement to include some of the proceeds as assessable income, but not as capital gains in your tax return.

Again, if bought via superannuation, these plans fall under normal super tax law and are taxed differently to non-super policies.

According to the AMP product information booklet on whole-of-life and endowment policies, if one of these types of non-super plans is surrendered, forfeited, terminated or matures before the four-year or 10-year period is completed, income tax is due on the investment gain portion of the benefits.

The investment gain portion is the difference between the amount of premiums or contributions paid into a policy and the value of the plan’s benefits when they are paid out.

The policy owner must declare this amount as assessable income in their income tax return.

That said, given these issues can be complex, you should speak to the product provider in relation to your specific product and then seek personalised tax advice.

Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives. 

The New Daily is owned by Industry Super Holdings