Denial of CGT main residence exemption for foreign residents

A bill currently before Federal Parliament will deny the capital gains tax (CGT) exemption for the family home for Australians who are no longer Australian tax residents.

Generally speaking, this new law will apply to sales of homes from 1 July 2020.

For Australians living and/or working overseas from 1 July 2020, it will be necessary to carefully consider their tax residency at that point in time if they are selling their Australian home. (To make things even more difficult, the ‘tax residency’ of an individual is based on a variety of factors. This potential loss of the CGT main residence exemption will make a residency test review even more important for affected individuals.)

For the purposes of the bill, a ‘foreign resident’ is defined as being someone who is not a tax resident of Australia. Taxpayers who remain Australian tax residents will not be affected by the bill.

Current law

The current rules can be summarised as follows:

    1. Individuals who are foreign residents are entitled to the CGT main residence exemption in the same way as individuals who are residents of Australia for taxation purposes. Therefore, a taxpayer’s main residence is exempt from CGT where a gain (or loss) is made on the disposal of the property that is occupied as the taxpayer’s main residence throughout the ownership period.
    2. A ‘partial exemption’ may apply where the dwelling was used as the individual’s main residence for part of the ownership period.
    3. The ‘absence rule’ applies where an individual who does not treat any other dwelling as their main residence, can treat their main residence for CGT purposes for up to six years, even if it is used for income producing activities, or for an unlimited period where the dwelling is not rented out.
    4. Beneficiaries who inherit an estate of a deceased person (who used the dwelling as their main residence) may also satisfy the main residence exemption.
Proposed law

Generally speaking, the bill seeks to remove the ability for non-resident individuals to obtain the CGT main residence exemption for sales of homes from 1 July 2020.

As a result, a non-resident individual who sells their Australian main residence while they are a foreign resident, will not be entitled to the CGT main residence exemption where this new law applies.

However, foreign residents may still obtain the CGT main residence exemption in the following two situations:

    1. where the individual is a foreign resident for six continuous years or less, and disposals are made as a result of a ‘life event’; or
    2. the disposal qualifies under the transitional period.
Life events

In order to qualify to gain access to the ‘life events’ exemption, the individual must have been a foreign resident for a period of six years or less.
In addition, the disposal of the dwelling must have been as a result of one of the following:

    1. diagnosis of a medical condition of the individual, spouse or their minor children;
    2. death of the individual’s spouse or the individual’s minor children; or
    3. divorce or separation of spouse.
Transitional provisions

In some cases, the removal of the main residence exemption for foreign residents will be effective from 7.30pm (AEST) on 9 May 2017. (This was when it was first announced in a Budget night speech. Note that it has taken several years for legislation to be enacted.)

For properties held as at 7.30pm (AEST) on 9 May 2017, the proposed rules will not apply to a disposal of the property until after 30 June 2020. Therefore, affected individuals who had owned a dwelling before 9 May 2017 that was used as their main residence, or where the absence rule may apply to treat the dwelling as their main residence, will still be able to obtain the benefit from the CGT main residence exemption on a sale of the home prior to 30 June 2020.

However, note that properties purchased after 9 May 2017 and sold before 30 June 2020 could lose their CGT main residence exemption where the relevant individual has become a foreign resident.

These rules are complicated: please discuss any questions you may have with your Cornwalls contact.

Disclaimer

This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.

The Authors

Dennis Tomaras

PARTNER, MELBOURNE

Ellen Karakoussis

LAWYER, MELBOURNE