The Government’s Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill was recently passed by Parliament. This bill removes the main residence capital gains tax (CGT) exemption for foreign tax residents of Australia.
The changes impact individuals who sell their Australian main residence while a foreign tax resident of Australia. This applies to both individuals who will be going, or who are already, overseas.
What is the CGT main residence exemption?
A dwelling is exempt from Australian CGT where it is an individual’s main residence throughout their ownership period. A partial CGT exemption is also available if a dwelling is used to produce assessable income (for example, rental income) during the individual’s ownership period.
Additionally, under the "absence rule", an individual can vacate their main residence and reside elsewhere, and still treat a dwelling as their main residence for CGT purposes, providing the individual does not treat any other dwelling as their main residence during this period.
As a result, the CGT exemption can still apply to a dwelling, even while the individual is absent. Further, this exemption is unlimited if the property is not rented out. If the property is rented out, the absence rule can still apply for up to six years.
Who is now entitled to the main residence exemption?
The main residence exemption is now only available to individuals who sell their main residence if the following applies;
• the individual is an Australian tax resident on the sale date (i.e. date of contract, not the date of sale settlement); or
• the individual is an Australian tax non-resident on the sale date; and
- has been an Australian tax non-resident for six years or less, prior to the date of the sale; and
- the property is sold as a result of a “life event”, for example:
- terminal medical condition of the individual, their spouse or their minor children;
- death of the individual’s spouse or the individual’s minor children; or
- divorce or separation of spouse (or former spouse).
How do these changes apply to non-residents?
If none of the above four points can be satisfied, the sale of a main residence will be assessable for CGT purposes, irrespective of the prior use of the dwelling.
The practical effect if this legislation is that CGT could now apply to the sale of a dwelling purchased and used as a main residence as far back as 20 September 1985, being the commencement of the CGT regime. Under this new legislation, the application of the main residence exemption is based on the individual’s tax residency status at the time of the CGT event (the sale), irrespective of the use of the dwelling or the individual’s residency status throughout the ownership period.
An individual, who has always been an Australian tax resident, purchased a dwelling in Australia on 1 July 1990 for $100,000, and commenced to use this dwelling as her main residence.
On 30 June 2016, the individual relocated overseas and became a non-resident for tax purposes.
On 30 June 2021, while still overseas she sells the dwelling for $2 million. Because she is a non-resident at the time of the CGT event, she is not entitled to the main residence exemption. Accordingly, she will have a taxable capital gain of $1.9 million.
The taxpayer cannot:
• claim a partial main residence exemption for the number of days she actually lived in the premises; or
• continue to treat the dwelling as her main residence under the absence rule, which would otherwise allow her to continue to treat the dwelling as her main residence for up to 6 years if she rents it out, or indefinitely if the property is not used for an income-producing purpose.
What if the individual moves back to Australia?
If the individual moves back to Australia and re-establishes herself as an Australian tax resident, then sells the dwelling, she would be an Australian tax-resident at the time of the CGT event and so she would be entitled to the main residence exemption.
Accordingly, she could access at least a partial main residence exemption, the 6 year absence rule, and the 50% CGT discount.
What does this mean for current and future foreign tax residents?
The legislation has a transitional rule to 30 June 2020 for properties held as at 7.30 (AEST) on 9 May 2017. Therefore, for these properties, the main residence exemption will cease to apply after 30 June 2020.
As a result, providing the dwelling was held as at 9 May 2017, foreign tax resident individuals may consider selling their residence before 30 June 2020 to ensure the main residence CGT exemption can be claimed.
Otherwise, taxpayers will be impacted by the changes and may have a capital gain/loss on the sale of their main residence if they:
• sell the property after 30 June 2020 while they are a foreign tax resident, or
• sell within six years of becoming a tax non-resident where no “life event” occurs; or
• sell after six years of becoming a tax non-resident of Australia.
If these changes impact you, or if you would like to discuss the application of the new legislation, please do not hesitate to contact our office.