Tax & the family home

Clarke McEwan Accountants

Everyone knows you don’t pay tax on your family home when you sell it…right? We take a closer look at the main residence exemption that excludes your home from capital gains tax and the triggers that reduce or exclude that exemption.

Capital gains tax (CGT) applies to gains you have made on the sale of capital assets (assets you make money from). Unless an exemption or reduction applies, or you can offset the tax against a capital loss, any gain you made on an asset is taxed at your marginal tax rate.

What is the main residence exemption?

Your main residence is the home you live in. In general, CGT applies to the sale of your home unless you have an exemption, partial exemption, or you are able to offset the tax against a capital loss.

If you are an Australian resident for tax purposes, you can access the full main residence exemption when you sell your home if your home was your main residence for the whole time you owned it, the land your home is on is or is under 2 hectares, and you did not use your home to produce an income – for example running a business from your home or renting it out.

If the home is on more than 2 hectares, if eligible, you can treat the home and up to 2 hectares of the land it is on as one asset and claim the main residence exemption on this asset.

However, if you use your home to produce an income by running a business from home or renting it out, CGT can apply to the portion of the home used to produce income from that time onwards.

What’s a main residence?

For CGT purposes, your home normally qualifies as your main residence from the point you move in and start living there. However, if you move in as soon as practicable after the settlement date of the contract, that home is considered your main residence from the time you acquired it.

If you cannot move in straight away because you are in the process of selling your old home, you can treat both homes as your main residence for up to six months without impacting your eligibility to the main residence exemption. For example, where you have moved into your new home while finalising the sale of your old home. This applies if you were living in your old home for a continuous period of 3 months in the 12 months before you disposed of it, you did not use your old home to produce an income (rented it out or used it as a place of business) in any part of that 12 months when it was not your main residence, and your new property becomes your main residence.

If the sale takes more than six months and if eligible, the main residence exemption could apply to both homes only for the last six months prior to selling the old home. For any period before this it might be possible to choose which home is treated as your main residence (the other becomes subject to CGT).

If your new home is being rented to someone else when you purchase it and you cannot move in, the home is not your main residence until you move in.

If you cannot move in for some unforeseen reason, for example you end up in hospital or are posted overseas for a few months for work, then you still might be able to access the main residence exemption from the time you acquired the home if you move in as soon as practicable once the issue has been resolved. Inconvenience is not a valid reason and you will need to ensure that you have documentation to support your position.

Proof that your property is first established or continues to be your main residence is subjective and if the issue is ever queried, some of the factors the ATO will look at include:

The length of time you have lived in the dwelling:

Where your family live
Whether you moved your personal belongings into the dwelling
The address you have your mail delivered
Your address on the Electoral Roll
Your connection to services such as telephone, gas and electricity, and
Your intention.

Foreign resident or resident?

The main residence rules changed in 2017 to exclude non-residents from accessing the main residence exemption.

The rules focus on your tax residency status at the time of the CGT event (normally the time the contract of sale is entered into). That is, in most cases if you are a non-resident at the time you enter into the contract of sale, you will be unable to access the main residence exemption. This is the case even if you were a resident for part of the ownership period.

Conversely, if you are a resident at the time of the sale, and you meet the other eligibility criteria, the rules should apply as normal even if you were a non-resident for some of the ownership period. For example, an expat who maintains their main residence in Australia could return to Australia, become a resident for tax purposes again, then sell the property and if eligible, access the main residence exemption.

It’s important to recognise that the residency test is your tax residency not your visa status. Australia’s tax residency rules can be complex. If you are uncertain, please contact us and we will work through the rules with you.

The tax rules also contain integrity provisions that can deny the main residence exemption where someone circumvents the rules by deliberately structuring their affairs to access the exemption – for example, transferring the property to a related party prior to becoming a foreign resident to access the main residence exemption.

Can I treat my home as my main residence even if I don’t live there?

Once you have established your home as your main residence, in certain circumstances, you can treat it as your main residence even if you have stopped living there. The absence rule allows you to treat your home as your main residence for tax purposes:

For up to 6 years if it's used to produce income, for example you rent it out while you are away; or
Indefinitely if it is not used to produce income.

By applying the absence rule to your home, this normally prevents you from applying the main residence exemption to any other property you own over the same period. Apart from limited exceptions, the other property is exposed to CGT.

Let’s say you moved overseas in 2019 and rented out your home while you were away. Then, you came back to Australia in 2021 and moved back into your house. Then in early 2022, you decided it is not your forever home and sold it. You elected to apply the absence rule to your home and didn’t treat any other property as your main residence during that same period. In this case, you should be able to access the full main residence exemption assuming you are a resident for tax purposes at the time of sale. The 6 year period also resets if you re-establish the property as your main residence and subsequently stop living there but rent it out in between. So, if the time the home was income producing is limited to six years for each absence, it is likely the full main residence exemption will be available if the other eligibility criteria are met.

What happens if I have been running my business from home?

If your home is also set aside as a dedicated place of business (i.e., you do not have another office or workshop), then you might only be able to claim a partial main residence exemption. This is because income producing assets are excluded from the main residence exemption.

If you are running a business from home, you can usually claim a tax deduction for occupancy expenses such as interest on the mortgage, council rates, and insurance. If you claimed or were eligible to claim these expenses, then you will only be able to access a partial main residence exemption. These rules apply even if you have not claimed these expenses as a deduction; the fact that you are eligible to make a claim is enough to impact your access to the main residence exemption.

In many cases, if your home would have qualified for a full main residence exemption before it is used as a dedicated place of business, the cost base of your home for CGT purposes should also be reset to its market value at that time.

Also, if only a partial main residence exemption is available, you will need to check whether you can access the small business CGT concessions on any remaining capital gain. As these rules are complex, please contact us and we will work through the rules with you.

However, if you have only been working from home out of convenience and there is another office that you normally work from, then your eligibility to access the main residence exemption should be unaffected. The ATO has confirmed that all that time working from home temporarily during the pandemic should not impact your ability to access the main residence exemption.

If I rent out a room on AirBnB, can I still claim the exemption?

If your home has been used to produce income while you are living in it, the portion used to produce income will be excluded from the main residence exemption. The rules might apply differently if you move out of the home completely – see Can I treat my home as my main residence even if I don’t live there?

Before you start renting out a portion of your home, it is a good idea to have it valued. If you would have qualified for the main residence exemption just before it was rented out, there are some rules that can apply in most cases and for CGT purposes, you are taken to have re-acquired your home for its market value at that time. So, if your home has increased in value over and above its cost base, this should reduce any gain when you eventually sell.

Can I have a different main residence to my spouse?

Let’s say you and your spouse each own homes that you have separately established as your main residences for the same period. The rules do not allow you to claim the full CGT exemption on both homes. Instead, you can:

Choose one of the dwellings as the main residence for both of you during the period; or
Nominate different dwellings as your main residence for the period.

If you and your spouse nominate different dwellings, the exemption is split between you:

If you own 50% or less of the residence chosen as your main residence, the dwelling is taken to be your main residence for that period and you will qualify for the main residence exemption for your ownership interest;
If you own greater than 50% of the residence chosen as your main residence, the dwelling is taken to be your main residence for half of the period that you and your spouse had different homes.

The same rule applies to the spouse.

The rule applies to each home that the spouses own regardless of how the homes are held legally, i.e., sole ownership, tenants in common or joint tenants.

Divorce and the main residence rules

The last two years have seen the highest divorce rate in Australia for a decade. When a property settlement occurs between spouses and if the conditions are met, the marriage breakdown rollover rules apply to ignore any CGT gain on the property settlement.

Assuming the home is transferred to one of the spouses (and not to or from a trust or company), both individuals used the home solely as their main residence over their ownership period, and the other eligibility conditions are met, then a full main residence exemption should be available when the property is eventually sold.

If the home qualified for the main residence exemption for only part of the ownership period for either individual, then a partial exemption might be available. That is, the spouse receiving the property may need to pay CGT on the gain on their share of the property received as part of the property settlement when they eventually sell the property.

I have inherited a property, if I sell it, do I have to pay CGT?

Special rules exist that enable some beneficiaries or estates to access a full or partial main residence exemption on the inherited property. Assuming the house was the main residence of the deceased just before they died, they did not then use the home to produce an income, and the other eligibility criteria are met, a full exemption might be available to the executor or beneficiary if either (or both) of the following conditions are met:

The dwelling is disposed of within two years of the deceased’s death; or
The dwelling was the main residence of one or more of the following people from the date of death until the dwelling has been disposed of:
The spouse of the deceased (unless they were separated);
An individual who had a right to occupy the dwelling under the deceased’s will; or
The beneficiary who is disposing of the dwelling.

An extension to the two year period can apply in limited certain circumstances, for example when the will is contested or complex.

If the deceased did not actually live in the property prior to their death and other eligibility criteria are satisfied, it still might be possible to apply the full exemption where the home was treated as their main residence under the absence rule.

If the full exemption is not available, a partial exemption might apply.

If you have any questions about how the main residence rules might apply to you, please drop us a line and we will be happy to work though it with you.

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Discretionary trusts and the proposed 30% minimum tax

By Clarke McEwan • September 8, 2026

Discretionary trusts, often referred to as family trusts, have been a popular structure for Australian families and businesses for many decades. They are commonly used to operate family businesses, hold investments and assist with succession planning. Their flexibility, together with asset protection and estate planning benefits, has made them an attractive option for many groups. In the 2026–27 Federal Budget, the Government announced a significant proposed change. From 1 July 2028, trustees of discretionary trusts would generally be required to pay a minimum tax of 30% on the trust's taxable income. According to the Government, the proposal is intended to better align the tax paid on trust income with that paid by salary and wage earners, while reducing opportunities to split income between family members. However, the announcement has generated considerable debate. Professional bodies, business groups and tax advisers have expressed concerns that the changes could increase complexity and compliance costs for many genuine family businesses and investment structures. How the proposal is expected to work Under the proposal, the trustee would generally pay the minimum 30% tax on the trust's taxable income. Where trust income is distributed to individual beneficiaries or certain other non-corporate beneficiaries, those beneficiaries would generally receive a non-refundable tax offset recognising the tax already paid by the trustee. This is intended to reduce the risk of the same income being taxed twice, but while maintaining the impact of the 30% minimum tax rate. Importantly, the minimum tax would not apply to every trust. The Government has indicated that a number of trusts would be excluded, including fixed trusts, widely held trusts, complying superannuation funds, charitable trusts, deceased estates, special disability trusts and genuine testamentary trusts. Primary production income and certain income relating to vulnerable minors would also be excluded. The Government has also stated that more than 90% of small businesses are not expected to be affected. While that may be reassuring for some taxpayers, there are still some important issues that could affect family groups using discretionary trusts. What could this mean in practice? One area likely to receive close attention is the use of companies as beneficiaries of family trusts. Many family groups have historically distributed some trust income to a company. This can provide flexibility in managing cash flow, retaining profits within the business and funding future growth. Under the proposed rules, however, the corporate beneficiary would not receive a tax offset for the tax already paid by the trustee. In many cases this will mean that income distributed from a discretionary trust to a company would be subject to double taxation. Another practical impact of the proposed change is that some family groups may find it more difficult to fully utilise existing tax losses. While the impact will depend on each group's circumstances, the proposed minimum tax is likely to reduce some of the flexibility that currently exists when managing taxable income across a family structure within many groups. The Government has also proposed a temporary three-year rollover period, commencing from 1 July 2027, to help restructure into alternative business structures, such as companies or fixed trusts, without triggering immediate income tax or capital gains tax consequences. While this may assist some groups, restructuring is rarely straightforward. Depending on the circumstances, it might be necessary to consider things like stamp duty, loan approvals, financing arrangements, contract changes, licensing requirements and professional advice. Even relatively simple restructures can involve significant time and cost, so careful planning will be important. The rules are not yet final At this stage, the proposal remains subject to consultation. Treasury released a consultation paper in July 2026 seeking feedback on a range of design issues, including how the new rules would operate in different situations. Final legislation has not yet been introduced, meaning aspects of the proposal could still change before the rules become law. For this reason, most groups utilising discretionary trust structures should avoid making major structural decisions based solely on the announcement. Instead, it is sensible to monitor developments while considering whether existing structures are likely to remain appropriate if the proposal proceeds. What should you do now? For many families, discretionary trusts are about much more than tax. They can continue to provide valuable asset protection, succession planning and business flexibility. The proposed changes do not remove those benefits, nor do they prevent discretionary trusts from continuing to be used. However, the proposal does have the potential to change the tax outcomes for some family groups, particularly those with more complex structures or those that regularly distribute income to companies. With the proposed start date still some time away, there is an opportunity to pause and carefully understand how the changes may affect your circumstances and consider whether any planning or restructuring might be appropriate. As the legislation develops, we can help you assess the impact on your business or investment structure and determine whether any action is warranted.

New reasonable travel and overtime meal rates

By Clarke McEwan • September 8, 2026

The ATO has released its updated reasonable travel and overtime meal allowance rates for the 2026–27 income year in Taxation Determination TD 2026/4. The overtime meal allowance has increased to $40.00, while the reasonable amounts for domestic and overseas travel have also been updated based on salary levels and travel destinations. Although these figures are widely publicised each year, they are often misunderstood. A common misconception is that employees can automatically claim a tax deduction up to the ATO's published rates. In reality, the rules are much narrower, and applying them incorrectly could lead to deductions being denied as well as interest and penalties. A travel allowance is the starting point The ATO's reasonable amounts only become relevant if an employee receives a genuine travel or overtime meal allowance from their employer. Generally, an allowance should: Be paid specifically to cover work-related travel or overtime meal expenses; Relate to particular work trips or overtime worked, rather than being a general additional payment; Be shown separately from normal salary or wages; and Be intended to help cover expenses the employee is expected to incur. If an amount has simply been built into an employee's normal salary package or is not identified as a separate allowance, the ATO's reasonable rates generally do not apply. Instead, the normal substantiation rules will usually apply to any deduction claimed. The reasonable rates are not an automatic deduction One of the most common misunderstandings is that receiving a travel allowance allows an employee to automatically claim the ATO's published rate as a tax deduction. This is not how the rules operate. Employees can generally only claim the amount they actually spend on deductible work-related travel or overtime meal expenses. The ATO's reasonable amounts simply mean that, in certain circumstances, employees may not need to keep a receipt for every specific expense. Importantly, the expenses must still have been incurred and they must relate to work-related activities. Good records are still essential Even where a genuine travel allowance has been paid, employees should still keep sufficient records to demonstrate that they incurred the expenses and that their claim is reasonable. Useful records may include: A diary recording work trips and overnight travel; Details of meals and incidental expenses incurred while travelling; Bank or credit card statements showing the expenses were personally paid; A representative sample of receipts; and Where travel involves six or more consecutive nights away from home, a travel diary recording the dates, locations and purpose of the travel. While receipts may not always be required, relying solely on the ATO's published rates without any supporting evidence could expose you to unnecessary scrutiny if your return is reviewed. Practical tips for employees and employers If you receive a travel or overtime meal allowance, it is worth checking that the arrangement satisfies the ATO's requirements before claiming a deduction. Some practical steps include: Review your payslip. Check that the allowance is separately identified rather than being included in ordinary salary or wages. Keep records throughout the year. Maintaining a simple travel diary and retaining some supporting documents is much easier than trying to recreate the information months later. Only claim what you actually spend. The ATO's reasonable amounts are not a target or standard deduction. They simply provide a benchmark for when the normal receipt requirements may be relaxed. Take extra care on longer trips. If you are away from home for six or more consecutive nights, additional travel diary requirements will generally apply. A little preparation can avoid problems later The updated reasonable amounts provide a useful guide for employers and employees during the 2026–27 income year, but they should not be viewed as an automatic entitlement to a tax deduction. Understanding how the rules operate, keeping appropriate records and claiming only genuine work-related expenses can significantly reduce the risk of problems if the ATO reviews your tax return. If you or your employees receive travel or overtime meal allowances, now is a good opportunity to review your current arrangements. We can help you confirm whether the allowances meet the ATO's requirements and what records should be kept to support any future claims.

Penalty units increase from 1 July 2026

By Clarke McEwan • September 8, 2026

From 1 July 2026, the value of a Commonwealth penalty unit increased from $330 to $364. While this may sound like a minor administrative change, it has a direct impact on many ATO penalties, increasing the cost of a range of compliance failures. A penalty unit is simply the method used under Commonwealth law to calculate many fines and administrative penalties. Rather than specifying a fixed dollar amount, the legislation often refers to a certain number of penalty units. As the value of a penalty unit increases, so too do the penalties that rely on it. The new value applies to breaches that occur on or after 1 July 2026. Earlier breaches continue to be assessed using the previous rate. Where the increase is likely to be felt Many of the ATO's administrative penalties are based on penalty units, meaning the increase flows directly through to the amount payable. Failure to lodge on time One of the most common penalties applies where tax returns, activity statements or other required documents are lodged late. The base penalty is generally one penalty unit for every 28 days (or part of 28 days) that a document remains outstanding, up to a maximum of five penalty units. For a small entity, this means the maximum base penalty has increased from $1,650 to $1,820. Higher penalties may apply to medium and large entities, while significant global entities are subject to much larger penalty amounts. False or misleading statements Providing incorrect information to the ATO can also result in penalties. Where there is no tax shortfall, the law provides for base penalties of 20, 40 or 60 penalty units, depending on the circumstances and the taxpayer's level of care. At the new penalty unit value, these base penalties have increased to $7,280, $14,560 and $21,840 respectively, before taking into account any reductions or increases that may apply. Self-managed super funds Trustees of self-managed superannuation funds (SMSFs) should also be aware of the higher penalty amounts. A range of SMSF administrative penalties are calculated using penalty units. For example, some breaches that previously attracted a penalty of $19,800 (60 penalty units) now carry a penalty of $21,840. Importantly, these penalties are generally imposed on each individual trustee rather than the fund itself. This means the total cost can increase significantly where a fund has multiple individual trustees, and the penalties cannot usually be paid from the assets of the superannuation fund. Other obligations, such as certain record-keeping requirements, tax invoice obligations and some superannuation guarantee penalties, may also be affected by the higher penalty unit value. Why this matters For most taxpayers, these penalties are entirely avoidable. Late lodgements, poor record keeping and incorrect information remain some of the most common reasons businesses and individuals incur ATO penalties. While the increase in penalty units may not seem substantial on its own, the cost can add up quickly where there are multiple outstanding obligations or repeated compliance issues. It is also worth remembering that ATO penalties are generally not tax deductible, meaning they must be paid from after-tax income. The good news is that the ATO will often consider remitting penalties (in part or full) where there are genuine mitigating circumstances, reasonable care has been taken, or a voluntary disclosure is made before the issue is identified by the ATO. Addressing problems early typically results in a better outcome than waiting until formal compliance action begins. Practical steps to reduce your risk There are several simple steps that can help minimise the risk of penalties: Lodge on time. Providing information to us well before due dates gives enough time to prepare accurate returns and meet lodgement deadlines. Keep good records. Accurate and up-to-date records make it easier to prepare returns correctly and support your tax positions if questions arise. Review your compliance regularly. If you operate a business or manage an SMSF, periodic reviews can identify issues before they become costly. Seek advice early. If you think you've made a mistake or have fallen behind with your tax obligations, speaking with us as soon as possible will generally provide more options than waiting for the ATO to contact you. A timely reminder The increase in penalty units is a timely reminder that the cost of tax non-compliance continues to rise. While the higher penalties are intended to encourage timely and accurate compliance, they also reinforce the value of good record keeping and proactive tax management. If you have any concerns about outstanding lodgements, record-keeping obligations or any other tax compliance matter, please contact us. We can help you address issues early and minimise the risk of unnecessary penalties.

SMSF and property – preparing for a smooth audit

By Clarke McEwan • September 8, 2026

For many SMSF trustees, property is one of the most significant assets held by their SMSF. Unlike personally owned assets, there is a legal requirement that all SMSF assets are valued each 30 June. This can be a simple process for assets that have a ready market like listed shares, however the process for other assets like property can be more onerous. Trustees are responsible for determining the market value of fund assets. After your annual financial statements are prepared your fund auditor will need to see objective and supportable evidence that backs up how you have arrived at the market value. Trustees have the option to use a qualified independent valuer for this and should consider this where an asset represents a significant part of the fund’s value or might be difficult to value. Where trustees choose not to use an independent valuer, they will need to be able to support asset valuations with evidence from multiple sources. Typically, for property this may include: Recent comparable sales – Generally at least 3 and the properties should be genuinely comparable in terms of size and location. A real estate agent appraisal that also includes comparable sales. Net income yields for commercial property (generally not sufficient evidence on its own). The ATO includes some helpful guidance on this in their Guide to valuing SMSF assets. Where an SMSF holds property that meets the business real property (BRP) definition it is possible that this property can be leased to a business that is operated by a member or a related party of the SMSF. However, the fact that an arrangement like this is permitted does not mean the fund trustees can charge a non-market rate of rent. When a rental arrangement is entered into with a related party of the super fund, that arrangement should be on arm’s length (commercial) terms and this should be supported by a rental appraisal. An easy way to think about this is – do all the lease terms reflect an arrangement that would be agreed to if the tenant was an unrelated third party? To evidence that a related party arrangement is on arm’s length (commercial) terms an auditor should be provided with; A properly documented lease; A rent appraisal when the lease was first entered into; Evidence that the arrangement is operating based on the terms of the lease; and Evidence that where a prior lease term has expired the terms have been reset to market value – backed up by a new rent appraisal. Although your financial year 2026 SMSF audit might not be taking place for some months, the process can be much smoother where SMSF trustees are proactive and start to compile this evidence in advance, rather than waiting for the auditor’s request.

Loss carry back rules reintroduced

By Clarke McEwan • September 1, 2026

At the Federal Budget in May 2026, the Government announced that it would reintroduce a loss carry back tax offset for companies, providing a crucial buffer to any business facing difficult trading conditions.