CGT and the family home: Expats and foreign residents beware
If you are a foreign resident living in Australia or an Australian working overseas who owns residential property in Australia, this reform potentially has serious tax implications for you.
Currently, individuals are generally not subject to capital gains tax (CGT) on the sale of the home they treat as their main residence. If the home was your main residence for only part of the ownership period or if the home is used to produce income (for example, you use part of the home as business premises or rent out part of the property), then a partial exemption may be available. In addition, if you move out of your home and you don’t claim any other residence as your main residence, then you can continue to treat the home as your main residence for up to six years if you rent it out or indefinitely if you don’t rent it out (the ‘absence rule’).
The main residence exemption is currently available to individuals who are residents, non-residents, and temporary residents for tax purposes.
Under new laws before Parliament, you will not be able to claim an exemption under the main residence rules if you are a non-resident for tax purposes at the time you sell, even if you were a resident for some (or even most) of the ownership period. The new rules do not allow for partial exemptions. If, however, you are an Australian resident at the time you sell, then the normal main residence exemption rules apply, even if you were a non-resident for some or most of the ownership period.
Someone holding property at 9 May 2017 can apply the current rules if the CGT event occurs on or before 30 June 2019 – for a sale of a property the CGT event date is likely to be the date of contract not the settlement date. This transitional period gives non-residents some time to sell their main residence (or former main residence) if they choose and obtain a level of tax relief under the main residence rules.
Keep in mind that we are talking about tax residency, which has its own set of rules to the immigration, visas and citizenship requirements. It’s different and you need you need to be clear about where you fit.
Australians working overseas
If you are an Australian citizen working overseas but a non-resident for tax purposes, these new rules are likely to affect your main residence in Australia.
If you maintain your main residence in Australia, you can use the absence rule to maintain the exempt status of your property just in case you decide to return to Australia. When you return permanently to Australia and decide to sell, you are likely to be able to access the main residence exemption (or a partial exemption). If you rent out your property while you are away, the absence rule allows you to treat the property as your main residence for up to six years. Be wary of exact dates here. One day the wrong way or a misapplication of the absence rule could make a significant difference to the tax you pay.
If you sell the property while you are a non-resident, once these new laws come into effect, you will not be entitled to the main residence exemption at all. Similarly, if you die while overseas, and your home is sold within two years of the date of your death, it’s likely that your beneficiaries will not be able to claim the main residence exemption.
Example from the legislation
Vicki acquired a dwelling in Australia on 10 September 2010, moving into it and establishing it as her main residence as soon as it was first practicable to do so.
On 1 July 2018 Vicki vacated the dwelling and moved to New York. Vicki rented the dwelling out while she tried to sell it. On 15 October 2019 Vicki finally signs a contract to sell the dwelling with settlement occurring on 13 November 2019. Vicki was a foreign resident for taxation purposes on 15 October 2019.
The time of CGT event A1 for the sale of the dwelling is the time the contract for sale was signed, that is 15 October 2019. As Vicki was a foreign resident at that time she is not entitled to the main residence exemption in respect of her ownership interest in the dwelling.
Foreign residents living in Australia
If you are a foreign citizen currently living in Australia but planning to leave Australia at some stage in the short to medium term then these new rules are likely to impact on you. If you owned your home at or before 9 May 2017, you can access the main residence rules on or before 30 June 2019 if you sell the property.
However, if you leave Australia and cease being a resident of Australia before selling the property and the sale occurs after 30 June 2019 then you will not be able to access the main residence exemption. This will mean that you will pay tax at your marginal tax rate on any gain you make on the sale of the property. You are also likely to have limited access to the general CGT discount.
If you are uncertain of your position or the likely impact of these new rules on you, you should seek advice. Tax residency status is often complex and is not intuitive – it’s important to get it right.