When you think of capital gains tax (CGT) and residential properties the two most common situations are the family home (tax free) and an investment property (CGT applies on sale). What is not widely appreciated, however, is that this can be viewed as a spectrum on which lie various other scenarios where the tax treatment can be more complicated.

We have previously discussed some of the more common scenarios and this article addresses two other situations where CGT can arise on the sale of the family home.

1. Carrying on a business verses working from home

With advances in technology coupled with the onset of Covid, many more taxpayers may be carrying on a business from home. This results in a partial loss of main residence exemption on sale, usually calculated based on the period during which the home was used to carry on the business as well as the percentage of the floor area used for business purposes.

This can be contrasted with the more common situation of people working from home where they are not actually carrying on a business, which does not allow a deduction for property holding costs such as rates and interest (only specific working from home deductions such as a portion of heating, lighting and depreciation of furniture and equipment) but importantly has no effect on the taxpayer’s main residence exemption.

The ATO will generally reduce a taxpayer’s CGT exemption where it believes that the dwelling has the character of a place of business, considering factors such as whether a part of the dwelling is set aside exclusively as a place of business, is clearly identifiable as a place of business and is not readily adaptable for private or domestic purposes.

2. Implications for foreign residents

There have always been complexities associated with applying the main residence exemption to individuals were not, or ceased to be, tax residents of Australia. This relatively manageable landscape was, however, turned on its head by changes originally announced in the 2017 Federal Budget and subsequently legislated, subject to certain transitional arrangements that finished on 30 June 2020, to deny the main residence exemption to property disposals by non-resident individuals in quite a dramatic manner.

An exception to the changes was introduced for certain “life events” including the taxpayer, their spouse or child under 18 having a terminal medical condition or passing away during the period of foreign residency occurring within six years of their change in residency.

In the absence of such events, any disposal of the property while the taxpayer remains a non-resident will not be eligible for even a partial application of the main residence exemption.

Even worse, there are no rules allowing a “deemed market value cost base” along the lines of the special rule that applies when selling as a tax resident after the family home has become an investment property, which would seem to have been a simple, equitable measure to include in the amendments and the failure to do so makes the changes grossly unfair.

This leaves the entire capital gain where the property is sold while the taxpayer is a non-resident subject to CGT, taxed at non-resident rates and with a reduced CGT discount calculated with reference to the relative periods of residency and non-residency, which can be contrasted with the situation prior to the changes, when the absence rule allowed them to live outside Australia for a period of up to six years (or indefinitely if not rented out) and sell within this period with the full CGT exemption intact.

The only silver lining is that the changes apply only to sales by non-residents, so the situation has not changed for property sales made after returning to Australia, in which case the absence rule is still available and the sale could still be tax-free after all.

In summary, the CGT treatment of selling residential property can be more complicated than many people think, at times involving partial CGT according to the usage of the property for different purposes and is now even impacted by an individual’s tax residency status.