Tax Tips for “Idle Capacity” for Property Owners in Sydney

When life takes us down different paths – whether it’s a new job interstate or overseas, an extended holiday, financial difficulties, or a family member needing care – homeowners might want to vacate their principal place of residence (PPR) temporarily. Harnessing a property’s idle capacity is no longer a niche strategy…it has become mainstream.

Understanding Principal Place of Residence (PPR)

Many tax rules hinge on the concept of PPR. Both the Australian Taxation Office (income taxes) and State Governments (land taxes) have definitions of PPR, generally considering a dwelling your main residence if:

• You and your family live there
• Your personal belongings are there (i.e. furniture and cooking amenities)
• Your mail is delivered there
• It’s listed on the electoral roll
• Utilities like gas and power are connected in the owners name

The time spent living there and your intention to occupy it as your primary or principal place of residence are also important. Your property must have a dwelling and be lived in to qualify as your main residence. A vacant block doesn’t count. Typically, when you stop living in a property, it ceases to be your PPR. However, there are exceptions:

• You can maintain your PPR status for up to 6 years if renting it out (the ‘6-year rule’).
• Indefinitely, if it’s not rented out for income.

You can’t treat another property as your main residence during this time, except for up to 6 months if you’re moving.

Financial Implications of Renting Out Your PPR

If you decide to rent out your PPR for a short period, be aware of the financial consequences, which generally fall into four categories:

Income Tax

For income tax purposes, assuming your property is your PPR:

• Rental income is taxable.
• Costs incurred to produce this income can usually be deducted, such as a portion of interest expenses, property management fees, water, rates, land tax, etc., but only for the rented period.
• Costs for renting alternative accommodation are not deductible.
• If relocating for work, your employer may provide a Living Away from Home Allowance (LAFHA).
• Large capital repairs need to be depreciated, claimable only during the rental period.

Capital Gains Tax (CGT)

Regarding CGT:

• If the property is your sole PPR from the start, the ‘6-year rule’ may exempt the gain from selling the property if no other PPR exists during that period.
• Without this rule, CGT applies if income is earned from the main residence.
• The ATO considers your intention for vacating, such as relocating for work or financial distress, not just for financial gain.

Goods and Services Tax (GST)

Residential properties are generally “input taxed” for GST, meaning you don’t have to charge or pay GST to the ATO, nor can you claim GST on property-related costs. Renting a commercial property likely incurs GST obligations, so confirm your situation with us.

Land Tax

Earning income from your property might trigger land tax implications. If exempt under the main residence exemption, vacating could lead to liability. Rules vary by state, so check local regulations. For instance, in NSW, to maintain exemption while away:

• Live in the property for 6 continuous months before moving out.
• Have no other PPR.
• Only earn income to cover basic expenses like rates and water.
• Not lease for more than 6 months annually; exceeding this requires paying land tax the following year unless you move back before December 31.