Legislative measures are currently before Parliament, which will operate to deny foreign residents the ability to access the capital gains tax (CGT) main residence exemption upon the disposal of their Australian dwelling.
The loss of the main residence exemption will trigger significant tax liabilities for non-residents. This situation is exacerbated by the fact that non-residents cannot apply the CGT 50% discount to capital gains arising upon the disposal of properties acquired after 8 May 2012.
Foreign residents who are intending to sell their Australian residence should seek advice to ascertain whether they are eligible to take advantage of the small window in which the exemption will apply. Under transitional relief, individuals who owned their property before 7.30 pm (AEST) 9 May 2017 and sell their property on or before 30 June 2020 can apply for the exemption.
What is the CGT main residence exemption?
An individual’s main residence (ie their home) is generally exempt from CGT. Accordingly, the capital gain derived from the disposal of an individual’s main residence is disregarded. In order to qualify for the full exemption, the property must have constituted the individual’s main residence throughout their ownership period.
Under current law, foreign residents who have lived in their Australian property prior to residing overseas can continue to nominate that property as their main residence. If the property is used for income-producing purposes during the individual’s absence overseas, the maximum period the property could be treated as the individual’s main residence is six years. If the property is not used to derive rental income during the owner’s absence, the property can be treated as the individual’s main residence indefinitely.
The new measures will prevent foreign residents from accessing the main residence exemption, except in very limited circumstances.
Limited relief under the ‘life events test’
Under the measures, a foreign resident may be able to access the CGT main residence exemption if they satisfy the ‘life events test’.
The first element of this test requires that at the time of the disposal of the property, the person has been a foreign resident for six years or less.
The second element of this test requires that during the person’s period of foreign residency, one of the following circumstances has occurred:
- Terminal medical condition of the individual, their spouse or their child who is under 18 years of age,
- Death of the individual’s spouse or the individual’s child who is under 18 years of age; or
- The disposal of a main residence dwelling between the individual and their spouse in the event of divorce or separation or similar maintenance agreements.
A person who has been a foreign resident for more than six years will not have access to the main residence exemption in any circumstances, even if certain life events occur.
Application and transitional relief
The measures apply to property disposals from 7.30 pm (AEST) on 9 May 2017.
As discussed above, individuals who owned their property before 7.30 pm (AEST) on 9 May 2017 can still access the exemption if they sell their property on or before 30 June 2020.
How can Rigby Cooke help?
The measures will result in foreign residents incurring significant capital gains, due to the inability to apply the full CGT 50% discount to reduce the gain. Further, non-residents will be taxed at the foreign resident marginal tax rates, irrespective of how long the individual was an Australian resident.
Another controversial aspect of the measures is that the gain will be calculated by offsetting the original cost base of the property against the capital proceeds, which may result in a large portion of the taxable gain attributable to when the individual was, in fact, an Australian resident.
The Australian Tax Office has indicated it will apply the anti-avoidance provisions if it considers that an individual has artificially re-established their Australian residency in order to obtain the main residence exemption. However, we note that the question of residency is not straightforward and highly dependent on an individual’s circumstances. We can work with you to review your residency status and advise you as to whether you may continue to be an Australian resident.
Employees may be less willing to accept an overseas assignment due to the potential loss of the main residence exemption. We can work with employers to mitigate these risks.
If you have any questions or would like advice, please contact us.
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