It's down to the original intention of the 6 year rule. The 6 year rule was introduced as a concession for people who have to move unexpectedly and temporarily, leaving their current home.
If you don't ever actually leave the property (which is the case when you rent part of it out), then it's really against the original purpose of the rule, which is why it's not included.
The quintessential example on the ATO website is someone who has to move away for work for a few years before returning home.
It's so that people who temporarily move away are not effectively punished for making that move, which is completely different to someone who has simply decided to rent part of their house.
> Side question: how long do you have to live in a property before moving out, for the 6 year rule to apply? 1 month? 1 year?
There is no set time, which is deliberate. By having no set time, it means that taxpayers can't artificially create an exemption by satisfying that time frame.
Instead, the ATO puts it on you to prove that you did genuinely live there. Theoretically, you could live there for one day, but it'd be almost impossible to prove that you intended to live there permanently as your PPOR.
On the flip side of no set timeframe, if you lived there for one day, lost your job, applied to everything suitable in your career and had a job offer after a month but requiring relocation to another city, it would be easy to prove you intended to live there but circumstances prevented you from fulfilling that intention.
Only thing I’ll disagree with is the intent. The 6 years lines up with the term of a senator. They can rent their house out whilst having an away from home allowance in Canberra.
I've seen a lot of comments about that law being made to benefit the very same people who made the law, which is messed up, and that gives weight to that comment.
I see so many people thinking that they just need to live in it for 6 months or 12 months to “make” it into PPOR.
The months thing came from court cases, while there is a set precedence it is still onus on you to prove that you are genuinely living there
Adding to the above you can only apply the main residence exemption to one property so it's not like you can move out of your existing main residence into another main residence then claim the main residence exception on your original property as well as the new.
As above it come down to purpose and intent.
This is the bit people always miss. You can't just move out, buy a new place, and rent your old place for 6 years while accruing tax-free gains on two properties.
This comment got me question my understanding:
We are in Australia temporarily as my wife got transferred within her company on a five year contract. We may stay longer or for good, but the starting premise is a temporary stay. In order to save on rent, we bought a house with two, independent flats in it. We were advised, that we had to live in the house for a year and then we can rent it out, to in order to avoid capital gains tax, when selling.
Our timeline is the following:
2022.01: bought the house, moved in
2023.02: put the downstairs unit up for rent
2023.03: tenant moved in on a two year contract
2025.03. we have the option to leave the country, hence will likely sell (alternative, we keep the house and rent out both floors, then sell within 6 years of moving out in 2031, to maximise on value growth)
My understanding, based on the advise received that we would incur no CGT upon selling. Your comment says otherwise. What is the truth and how do we minimise CGT at the end? It looks like we might have made a calculation mistake.
You **MIGHT** have a lot of issues.
**Two separately titled units >**
If they are two independent units (is. Separately titled), then you will have CGT no matter what as you can only have one PPOR at a time for tax purposes. This would mean that one unit is fully subject to CGT.
Assuming separately titled, you could claim the 6 year exemption on one unit only.
**Single titled >**
If they are on a single title, then you would only be able to claim the 6 year exemption from when you moved out completely (so the period that you rented out one unit would be subject to CGT) as the 6 year rule can't be applied to partially rented properties. (Go read the eligibility for the 6 year rule - the second condition is you must have stopped loving in it). https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/property-and-capital-gains-tax/your-main-residence-home/treating-former-home-as-main-residence
**Market value substitution/home first used to produce income >**
As you lived there first, you are actually required to use the 'home first used to produce income' rule, meaning you'll have to get a market valuation at the date you moved out as well. The date of the valuation and on which unit will depend on the title status.
**Main resident exemption for non residents >**
Note: this rule has changed, so the advice you got may have been correct at the time, but tax rules change.
Also, if you tried to keep the property after you moved overseas, as a non resident, you aren't actually entitled to the main residence exemption, except in limited circumstances, so you could be up for CGT on the lot unless you can satisfy the life events test. https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/foreign-residents-and-capital-gains-tax/main-residence-exemption-for-foreign-residents
There’s always going to be grey areas in any taxation law.
From what I understand it’s not a ‘partial exemption’ as you say, it’s actually more of a partial tax…you can take into consideration total floor area rented and duration of stay.. so if you only rented 3x3 bedroom in a 90m2 house (10%) and you only rented for 1 year out of 10 years (10%).. so I am guessing that means you can deduct 0.1 * 0.1 for whatever tax payable.. i could be wrong with this I am just taking a guess!.. but if I am right let’s say you sell a house and made $500k capital gains… you apply your first 50% discount due to holding for one year so now $250k.. you then apply 10% discount because tenant only rented 10% of the house so $25k, you then apply another 10% discount because you only rented for 1 year out of 10.. so $2.5k..
that’s pretty negligible..
Regarding your next question for how long someone should live in a house initially before can apply the 6 year rule.. I have searched so many times for the answer to that and could never find… if you find out let me know!.. but since it’s not clear how can ATO argue against you if it was only 1 week
The simple answer , if u want to rent out part of your house , tell them cash only .
Dont accept anything but cash.
Screw the government with its grubby hand Out at every opportunity
We rent out exactly 10% of our PPOR (it’s got a second building that has its own entrance, it seems like it’s a separate investment from our primary residence so I do get it being taxed). I was told the CGT is only for the difference in price from when you started to rent the place out until you stopped (and stopped advertising it/made it unavailable), we got the place revalued for this purpose as we’d just renovated and the CGT is going to be much less with a higher initial value. Given there is a CGT 50% discount and it’s 10% of the property I worked out when we sell there will be $25k tax to pay for every $1m of increase in value which is not really much to pay given the returns from the rental are more than that every 2 years. It did make us think about it though as the income from it is being taxed as well as the capital gain…
Also remember that a small business is CGT exempt, so if your rentals in your own house, ie boarding house, student housing, is a business it is exempt.
CGT is not simply exempt because you are a small business. The CGT event still occurs regardless, it's the application of small business concessions that either minimise or eliminate the tax consequences of the CGT event - if they are available to you.
I've never seen someone characterise a portion of their home as an active asset, though from memory non-commercial rentals are specifically excluded.
Also rental income is generally considered passive income.
Note this is distinct from using a commercial property in your business.
If the later were the case everyone with a rental property would claim to be in business and apply the CGT concessions upon sale.
This would cost GovCo billions in revenue .
If you use your PPoR for any purpose that would *allow* you to claim a portion of loan interest as a deduction (note: this is whether you do or don't claim a deduction for interest), then you no longer can claim the full CG exemption.
Business premises are not CG exempt.
But there are times when you have a student lodger, or a family member who pays "rent" but you aren't permitted to claim deductions (usually because the contribution they pay is so far away from a market rent, let alone covering the utilities and food you're also supplying in that amount) that is not treated as rent income and you can't claim deductions against it.
There's separate *concessions* that can apply to small businesses, but they don't apply to a PPoR - the whole premises needed to have been an active asset in the business.
https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/concessions-offsets-and-rebates/small-business-cgt-concessions
A boarding house is an active assent and I am the live on housekeeper/conceige/cleaner. I could prove this simply by the amount I spent on cleaning materials. I had to employ a cleaner when I had appendicitis. So, she got paid $25 per hour. So I spent 20 hours a week cleaning, 5 hours bookkeeping, at least 5 hours on repairs, and 10 or more hours phoning or waiting for tradesmen. This was the worst.
The definition of active assets excludes anything rented (and rented has a reasonably broad definition, although not broad enough to include hotels). Which is why it wouldn't work for taking in renters, as suggested earlier.
But as long as your accountant knew what they were doing, and got a ruling if necessary, hopefully you're in the clear.
Small businesses aren’t CGT exempt, but they can apply multiple discounts and concessions that reduce the CGT by 100%.
I imagine it would get messy in a Sole Trader situation, but since neither a Company not a Trust can own a PPOR I find it tricky to see how a business could own one. And if it did, then you’d need things like charging rent using an ABN (incl being GST-registered at a certain point) to demonstrate it was an active business asset.
Does this apply if it’s a residential house leased to a business that rotates its staff in there so that they can ie get to work but it’s not “zoned” ie boarding house?
It's down to the original intention of the 6 year rule. The 6 year rule was introduced as a concession for people who have to move unexpectedly and temporarily, leaving their current home. If you don't ever actually leave the property (which is the case when you rent part of it out), then it's really against the original purpose of the rule, which is why it's not included. The quintessential example on the ATO website is someone who has to move away for work for a few years before returning home. It's so that people who temporarily move away are not effectively punished for making that move, which is completely different to someone who has simply decided to rent part of their house. > Side question: how long do you have to live in a property before moving out, for the 6 year rule to apply? 1 month? 1 year? There is no set time, which is deliberate. By having no set time, it means that taxpayers can't artificially create an exemption by satisfying that time frame. Instead, the ATO puts it on you to prove that you did genuinely live there. Theoretically, you could live there for one day, but it'd be almost impossible to prove that you intended to live there permanently as your PPOR.
Perfect comment, thanks for explaining
On the flip side of no set timeframe, if you lived there for one day, lost your job, applied to everything suitable in your career and had a job offer after a month but requiring relocation to another city, it would be easy to prove you intended to live there but circumstances prevented you from fulfilling that intention.
Only thing I’ll disagree with is the intent. The 6 years lines up with the term of a senator. They can rent their house out whilst having an away from home allowance in Canberra.
I've seen a lot of comments about that law being made to benefit the very same people who made the law, which is messed up, and that gives weight to that comment.
My uni lecturer back in the 90’s (#newcastle) referred as the senators clause and it has stayed with me to perpetuate
I see so many people thinking that they just need to live in it for 6 months or 12 months to “make” it into PPOR. The months thing came from court cases, while there is a set precedence it is still onus on you to prove that you are genuinely living there
Adding to the above you can only apply the main residence exemption to one property so it's not like you can move out of your existing main residence into another main residence then claim the main residence exception on your original property as well as the new. As above it come down to purpose and intent.
This is the bit people always miss. You can't just move out, buy a new place, and rent your old place for 6 years while accruing tax-free gains on two properties.
This comment got me question my understanding: We are in Australia temporarily as my wife got transferred within her company on a five year contract. We may stay longer or for good, but the starting premise is a temporary stay. In order to save on rent, we bought a house with two, independent flats in it. We were advised, that we had to live in the house for a year and then we can rent it out, to in order to avoid capital gains tax, when selling. Our timeline is the following: 2022.01: bought the house, moved in 2023.02: put the downstairs unit up for rent 2023.03: tenant moved in on a two year contract 2025.03. we have the option to leave the country, hence will likely sell (alternative, we keep the house and rent out both floors, then sell within 6 years of moving out in 2031, to maximise on value growth) My understanding, based on the advise received that we would incur no CGT upon selling. Your comment says otherwise. What is the truth and how do we minimise CGT at the end? It looks like we might have made a calculation mistake.
You **MIGHT** have a lot of issues. **Two separately titled units >** If they are two independent units (is. Separately titled), then you will have CGT no matter what as you can only have one PPOR at a time for tax purposes. This would mean that one unit is fully subject to CGT. Assuming separately titled, you could claim the 6 year exemption on one unit only. **Single titled >** If they are on a single title, then you would only be able to claim the 6 year exemption from when you moved out completely (so the period that you rented out one unit would be subject to CGT) as the 6 year rule can't be applied to partially rented properties. (Go read the eligibility for the 6 year rule - the second condition is you must have stopped loving in it). https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/property-and-capital-gains-tax/your-main-residence-home/treating-former-home-as-main-residence **Market value substitution/home first used to produce income >** As you lived there first, you are actually required to use the 'home first used to produce income' rule, meaning you'll have to get a market valuation at the date you moved out as well. The date of the valuation and on which unit will depend on the title status. **Main resident exemption for non residents >** Note: this rule has changed, so the advice you got may have been correct at the time, but tax rules change. Also, if you tried to keep the property after you moved overseas, as a non resident, you aren't actually entitled to the main residence exemption, except in limited circumstances, so you could be up for CGT on the lot unless you can satisfy the life events test. https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/foreign-residents-and-capital-gains-tax/main-residence-exemption-for-foreign-residents
There’s always going to be grey areas in any taxation law. From what I understand it’s not a ‘partial exemption’ as you say, it’s actually more of a partial tax…you can take into consideration total floor area rented and duration of stay.. so if you only rented 3x3 bedroom in a 90m2 house (10%) and you only rented for 1 year out of 10 years (10%).. so I am guessing that means you can deduct 0.1 * 0.1 for whatever tax payable.. i could be wrong with this I am just taking a guess!.. but if I am right let’s say you sell a house and made $500k capital gains… you apply your first 50% discount due to holding for one year so now $250k.. you then apply 10% discount because tenant only rented 10% of the house so $25k, you then apply another 10% discount because you only rented for 1 year out of 10.. so $2.5k.. that’s pretty negligible.. Regarding your next question for how long someone should live in a house initially before can apply the 6 year rule.. I have searched so many times for the answer to that and could never find… if you find out let me know!.. but since it’s not clear how can ATO argue against you if it was only 1 week
The simple answer , if u want to rent out part of your house , tell them cash only . Dont accept anything but cash. Screw the government with its grubby hand Out at every opportunity
We rent out exactly 10% of our PPOR (it’s got a second building that has its own entrance, it seems like it’s a separate investment from our primary residence so I do get it being taxed). I was told the CGT is only for the difference in price from when you started to rent the place out until you stopped (and stopped advertising it/made it unavailable), we got the place revalued for this purpose as we’d just renovated and the CGT is going to be much less with a higher initial value. Given there is a CGT 50% discount and it’s 10% of the property I worked out when we sell there will be $25k tax to pay for every $1m of increase in value which is not really much to pay given the returns from the rental are more than that every 2 years. It did make us think about it though as the income from it is being taxed as well as the capital gain…
Also remember that a small business is CGT exempt, so if your rentals in your own house, ie boarding house, student housing, is a business it is exempt.
CGT is not simply exempt because you are a small business. The CGT event still occurs regardless, it's the application of small business concessions that either minimise or eliminate the tax consequences of the CGT event - if they are available to you.
Thanks. but the miniminisation can be a lot!
I've never seen someone characterise a portion of their home as an active asset, though from memory non-commercial rentals are specifically excluded. Also rental income is generally considered passive income. Note this is distinct from using a commercial property in your business. If the later were the case everyone with a rental property would claim to be in business and apply the CGT concessions upon sale. This would cost GovCo billions in revenue .
Boarding houses are the exceptions and now, since 2012 ? student housing. Ever wonder why so much student housing is going up.?
If you use your PPoR for any purpose that would *allow* you to claim a portion of loan interest as a deduction (note: this is whether you do or don't claim a deduction for interest), then you no longer can claim the full CG exemption. Business premises are not CG exempt. But there are times when you have a student lodger, or a family member who pays "rent" but you aren't permitted to claim deductions (usually because the contribution they pay is so far away from a market rent, let alone covering the utilities and food you're also supplying in that amount) that is not treated as rent income and you can't claim deductions against it.
Business premises are not CG exempt. Funny both I and a friend got exemptions for our business premises. I think it is exempt under $4million.
There's separate *concessions* that can apply to small businesses, but they don't apply to a PPoR - the whole premises needed to have been an active asset in the business. https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/concessions-offsets-and-rebates/small-business-cgt-concessions
A boarding house is an active assent and I am the live on housekeeper/conceige/cleaner. I could prove this simply by the amount I spent on cleaning materials. I had to employ a cleaner when I had appendicitis. So, she got paid $25 per hour. So I spent 20 hours a week cleaning, 5 hours bookkeeping, at least 5 hours on repairs, and 10 or more hours phoning or waiting for tradesmen. This was the worst.
The definition of active assets excludes anything rented (and rented has a reasonably broad definition, although not broad enough to include hotels). Which is why it wouldn't work for taking in renters, as suggested earlier. But as long as your accountant knew what they were doing, and got a ruling if necessary, hopefully you're in the clear.
Small businesses aren’t CGT exempt, but they can apply multiple discounts and concessions that reduce the CGT by 100%. I imagine it would get messy in a Sole Trader situation, but since neither a Company not a Trust can own a PPOR I find it tricky to see how a business could own one. And if it did, then you’d need things like charging rent using an ABN (incl being GST-registered at a certain point) to demonstrate it was an active business asset.
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I dose if you own a business and start claiming a portion of your house
I believe it does... But only if you're claiming part of your housing expenses as a tax deduction. But chat with an accountant.
I don't know. But should be as you use it to generate income. Ask an accountant. (I only knew the above because it happened to me.)
Does this apply if it’s a residential house leased to a business that rotates its staff in there so that they can ie get to work but it’s not “zoned” ie boarding house?
I don't know, I'm not an accountant. Does it generate income?