Practice Update November 2024

6 November 2024

6-year rule

Usually, you do not pay any Capital Gain Tax (CGT) when you sell your Principal Place of Residence (PPR). A property stops being your primary residence when you stop living in it. However, for CGT purposes, you can continue treating this property as your primary residence under the conditions below.

  • If you have used it to produce income for up to 6 years,
  • Indefinitely, if you didn’t use it to produce income.

You can continue to treat the property as your primary residence after you stop living there, and it will continue to be exempt from CGT only if you are not treating any other property as PPR (except for up to 6 months if you are moving house).

Criteria for principal residence exemptions

  1. The 6-year exemption period only applies to the period during which the property stays as your principal residence. If you rented out your home before you lived in it, the principal residence exemption doesn’t apply to the period you rented it out.
  2. The usual rules for the main residence exemption apply if the property is continuously your principal residence. This means that if you use it to produce income, such as rent, you will be entitled to only a partial main residence exemption from CGT.
  3. Generally, if you are a foreign resident when the primary residence is sold, you aren’t entitled to claim the principal residence exemption.

Former home not used for income

If you don’t use your former home to produce income (for example, you leave it vacant or use it as your holiday house), you can treat it as your primary residence for an unlimited period after you stop living there. This only applies if you aren’t treating another property simultaneously as your primary residence.

Example:

Bill bought a unit and lived in it for 3 years. He then moved out to live with a friend while his son occupied the unit rent-free. Bill didn’t treat any other property as his primary residence. He sold the unit twelve years later and claimed the principal residence exemption from CGT.

Multiple absences from the primary residence

If you’re absent more than once when owning the property, the 6-year period applies to each period of absence. A period of absence stops when you either stop renting your home and move back in or leave it vacant.

Example:

James signed a contract to buy a house in Brisbane on 15 September 2012 and moved in as soon as the contract settled. He moved to Perth on 10 October 2014 and rented out his Brisbane house. He signed a contract to buy a new home in Perth on 3 October 2019 and moved in as soon as the contract was settled. The house in Brisbane was sold on 1 March 2024.

When he completed his 2023–24 tax return, James decided to treat the Brisbane house as his main residence for the period after he moved out in October 2014 until he purchased his new primary residence in Perth in October 2019. This is less than six years. James can claim a partial principal residence exemption under the ‘6-year rule’.

James decided not to treat the Brisbane house as his primary residence after he bought the Perth house, so he is subject to CGT for that period. This means James must include a capital gain or loss in the period not covered by the principal residence exemption in his 2024 tax return (from October 2019 until March 2024).

Dwelling used to produce income during multiple absences

Jez signed a contract to purchase a house in 2004 and moved in as soon as the contract settled. He stopped living in the house in 2013 because he had to move for work, so he rented it for five years. Jez:

  • moved back into the house in 2018 and treated it as his primary residence for 2 years.
  • moved out again in 2020 and rented the house for 3 years.
  • entered into a contract to sell the house in 2023.

While Jez lived in the house, he did not use it to produce income.

The 6-year limit applies separately to each period of absence immediately following a period Jez lived in the property. This means Jez can treat the house as his principal residence for both rental periods and disregard his capital gain or loss on the sale. Jez must include the CGT event in his tax return in the year of the contract sale date and claim the ‘Main residence exemption’ in his tax return.

What happens if the 6-year limit is exceeded

If you use your former home to produce income for more than 6 years in one absence, it is subject to CGT for the period after the 6-year limit. To work out your CGT when you dispose of your home:

  • You need to work out your cost base, which is the market value of your home at the time you first used it to produce income, plus any allowable costs since then (this is the home first used to produce income rule)
  • Your capital gain or loss is based on the period after first using your home to produce income, that is, over the 6-year limit.

Former home used for income before you move out.

If you use any part of your home to produce income before you stop living in it, you can’t apply the continuing principal residence exemption to that part. You can’t get the principal residence exemption for that part of your home before or after you stop living there.

Example:

Helen signed a contract to buy a house in 2006 and moved in immediately after the settlement. Helen:

  • used 75% of the house as her primary residence and the remaining 25% as a doctor’s surgery
  • moved out and rented out the house in 2018
  • signed a contract to sell the house in 2024, making a capital gain of $400,000.

Helen chose to treat the house as her main residence for the 6 years it was rented out. As 25% of the house was used to produce income during the period before Helen stopped living in it, the same proportion of the capital gain is assessable:

$400,000 × 25% = $100,000

When does a property stop being your primary residence?

A property usually stops being your primary residence when you stop living in it. There are a number of factors that indicate whether a property is no longer your primary residence:

  • you and your family no longer live in it
  • your personal belongings are not kept in it
  • it is no longer the address your mail is delivered to
  • it is no longer your address on the electoral roll
  • services such as gas and power are no longer connected.

The weight given to each of these factors depends on individual circumstances. The time you are absent from the property and your intention to re-occupy it may also be relevant.

Example:

Duc has lived in his house with his family for 5 years. It has been his primary residence for the whole period he has owned it. Duc accepts a 2-year posting overseas for work. During this period:

  • Duc’s family will travel and live with him overseas
  • Duc cancels his utility connections and places all of his personal belongings in storage
  • His mail has been redirected to his overseas address, and his address has been updated on the electoral roll.

The house ceases to be Duc’s primary residence during his absence. Depending on his other circumstances, he may choose to continue to treat it as his primary residence while he is away.


31 March 2025
A foreign entrepreneur’s guide to starting a business in Australia Starting a business as a foreign entrepreneur can be an exhilarating way to access new markets, diversify investment portfolios, and create fresh opportunities. Many countries around the globe provide pathways for non-residents and foreign nationals to register businesses. However, understanding different countries’ legal requirements, procedures, and opportunities is crucial for success. In this issue, we will navigate the process of establishing a business in Australia to help foreign entrepreneurs looking to register a company in Australia. Key takeaways Foreign entrepreneurs can fully own Australian businesses with no restrictions on ownership. Registered office and resident director requirements are key legal considerations. ABN and ACN are essential for business registration. The application process can be done online, simplifying the process for foreign entrepreneurs. Why register a business as a foreign entrepreneur? There are various reasons why a foreigner may want to register a company in another country. These reasons include expanding into a foreign market, taking advantage of favourable tax laws, leveraging local resources, or benefiting from business-friendly regulatory environments. Before registering, conducting thorough market research to assess whether establishing a business abroad aligns with your objectives is essential. Understanding the country’s political and economic climate, legal framework, and tax system will help ensure the success of your venture. The general process for registering a business as a foreign entrepreneur While the exact requirements may differ from country to country, some common steps apply to most jurisdictions when registering a company as a foreign entrepreneur: Choosing the business structure The first step is deciding on the appropriate business structure. The structure determines liability, taxation, and governance. Common types of business structure include: Sole proprietorship: A single-owner business where the entrepreneur has complete control and entire liability. Limited Liability Company (LLC): Offers liability protection to the owners, meaning their assets are not at risk. Corporation (Inc.): A more complex structure that can issue shares and offers limited liability to its shareholders. Different countries have varying rules regarding foreign ownership, so understanding the options available is essential before registering a company. Registering with local authorities Regardless of the jurisdiction, most countries require you to register your company with the relevant local authorities. This process typically includes submitting documents such as: Company name and business activities: You need to choose a unique company name that adheres to local naming regulations. Articles of incorporation: This document outlines the company’s structure, activities, and bylaws. Proof of identity : As a foreign entrepreneur, you will likely need to provide a passport and other identification documents. Proof of address: Many countries require a physical address for the business, which may be the address of a registered agent or office. Tax Identification Number (TIN) and bank accounts After registering the company, you will typically need to apply for a tax identification number (TIN), employer identification number (EIN), or equivalent, depending on the jurisdiction. This number is used for tax filing and reporting purposes. Opening a business bank account is another critical step. Some countries require a local bank account for business transactions, and you may need to visit the bank in person or appoint a local representative to help with the process. Complying with local regulations Depending on the type of business, specific licenses and permits may be required to operate legally. For example, food service, healthcare, or transportation companies may need specific licenses. Compliance with local labour laws and intellectual property protections may also be necessary. Appoint directors and shareholders To register a company, you’ll need to appoint at least one director who resides in Australia. The director will be responsible for ensuring the company meets its legal obligations. You will also need to appoint shareholders, who can be either individuals or corporations. For foreign entrepreneurs, the requirement for a resident director is one of the key challenges. If you don’t have a trusted individual in Australia to act as the director, you can engage a professional service to fulfil this role. This ensures your business remains compliant with local regulations. Choose a company name Next, you need to choose a company name. The name should reflect your business but must be unique and available for registration. You can check the availability of a name through the Australian Securities & Investments Commission (ASIC) website. Remember that the name must meet legal requirements and cannot be similar to an existing registered company. If you’re unsure, seeking professional advice is always a good move. Apply for an Australian Business Number (ABN) and Australian Company Number (ACN) Once you’ve selected your business structure and appointed your directors, it’s time to apply for an Australian Business Number (ABN) and an Australian Company Number (ACN). These are essential for running your business in Australia. ABN: This unique 11-digit number allows your business to interact with the Australian Taxation Office (ATO) and other government agencies. ACN: This 9-digit number is allocated to your company upon registration with ASIC and serves as your business’s unique identifier. You can easily apply for both numbers online through the Australian Business Register (ABR) and the ASIC websites. Register for Goods and Services Tax (GST) If your business expects to earn more than $75,000 in revenue annually, you must register for GST. This means your business will charge customers an additional 10% on goods and services. The GST registration threshold for non-profit organisations is higher at $150,000 annually. If your company is below these thresholds, registering for GST is optional, but registration becomes mandatory once it exceeds the limit. Set up a registered office Every Australian company must have a registered office in Australia. This is where all official government documents, including legal notices, are sent. You can use your premises or hire a foreign company registration service to provide a virtual office address. Common challenges for foreign entrepreneurs While the process is relatively simple, there are a few hurdles that foreign entrepreneurs may encounter when registering a company in Australia: Resident director requirement: You’ll need a director residing in Australia. If you don’t have one, you’ll need to engage a service provider to fulfil this role. Understanding local tax laws: Australia has a corporate tax rate of 25% for small businesses with annual turnovers of less than $50 million. However, larger companies with turnovers exceeding $50 million are subject to a standard corporate tax rate of 30%. Foreign entrepreneurs must also understand the implications of the Goods and Services Tax (GST) and payroll tax. Compliance with Australian regulations: Navigating Australia’s various regulations and compliance requirements can be time-consuming. An accountant or adviser can help you in this regard. FAQs Can I register a company in Australia as a foreigner? Yes, foreign entrepreneurs can register a company in Australia. The only requirement is to have a resident director. Do I need to be in Australia to register a company? No, you can complete the registration process online. However, you must appoint a resident director. Do I need an Australian bank account to start a business in Australia? You will need an Australian bank account to handle your business’s finances and transactions. Can I operate my Australian company from abroad? Yes, you can operate your company remotely, but you must comply with all local tax laws and regulations.
5 March 2025
Do bucket companies help build wealth at retirement? Bucket companies are familiar with wealth-building strategies, particularly as individuals approach retirement. By distributing profits to a bucket company, individuals can benefit from reduced tax liabilities and enhanced investment growth opportunities. This essay explores how bucket companies influence wealth building at retirement, their impact on age pension eligibility and tax positions, and strategies to maximise economic outcomes. Understanding bucket companies A bucket company is used to receive distributions from a family trust. Instead of distributing profits directly to individuals, which may attract high marginal tax rates, the trust distributes income to the bucket company, which is taxed at the corporate tax rate (currently 30% or 25% for base rate entities). The company can then retain the after-tax profits for reinvestment or distribution. Impact on wealth building at retirement Tax efficiency and compounding growth Using a bucket company can result in significant tax savings compared to personal marginal tax rates, reaching up to 47% (including the Medicare levy). Retained earnings within the bucket company are taxed lower, allowing more capital to compound over time. Example of Tax Efficiency: Income DistributedPersonal Marginal Tax (47%)Bucket Company Tax (25%)Savings $100,000$47,000$25,000$22,000 Over 20 years, if the tax savings of $22,000 per year are reinvested at an annual return of 7%, they would accumulate to approximately $1,012,000. Age pension and means testing The age pension is subject to both an income test and an assets test. Holding wealth in a bucket company can impact these tests: Income Test: Distributions to individuals count as assessable income. Retained profits within the company do not. Assets Test: The value of the bucket company shares is counted as an asset, which may affect pension eligibility. Strategic use of the company can help individuals control their assessable income, potentially increasing their age pension entitlement. Strategies to maximise economic outcomes Timing of Distributions By deferring distributions from the bucket company until retirement, individuals can benefit from lower marginal tax rates or effectively use franking credits. Dividend Streaming Using franking credits from company-paid tax can reduce personal tax liabilities when distributed dividends. Investment within the Company Reinvesting retained earnings within the bucket company in diversified assets can enhance compounding returns. Family Trust Distribution Planning Strategically distributing income to lower-income family members before reaching the bucket company can reduce overall tax. Winding Up or Selling the Company Carefully planning an exit strategy to wind up the b ucket company or sell its assets can minimise capital gains tax liabilities. Example of a retirement strategy with a bucket company Assume that John and Mary, aged 65, have distributed $100,000 annually from their family trust to their bucket company over 20 years. Corporate tax paid: 25% Annual return on reinvestment: 7% After-tax reinvested earnings annually: $75,000 YearAnnual ReinvestmentTotal Accumulated Amount (7% p.a.)5$75,000$435,30010$75,000$1,068,91420$75,000$3,867,854 At retirement, they can distribute dividends with franking credits to minimise personal tax and supplement their income while potentially qualifying for some age pension benefits due to strategic income timing. FAQ What is a bucket company? A bucket company is a corporate entity that receives trust distributions, taxed at the corporate rate rather than personal marginal rates. How does a bucket company impact my age pension eligibility? While retained earnings do not affect the income test, the value of the company shares is considered an asset under the assets test. Can bucket companies help reduce tax during retirement? Yes, by using franking credits and strategic distribution timing, bucket companies can minimise tax liabilities. Are there risks associated with using bucket companies for retirement planning? Yes, risks include changes in tax laws, corporate compliance costs, and potential capital gains tax upon winding up the company. Should I consult a professional before using a bucket company? Absolutely. Professional advice is essential to ensure compliance with tax laws and optimise wealth-building strategies.
11 February 2025
Personal super contribution and deductions
Share by: