Australia’s CGT main residence exemption removed for foreign residents
Under the current law, all taxpayers (residents and foreign residents) are entitled to the capital gains tax (‘CGT’) main resident exemption, where their property is, or has been their family home or main residence for a period of their ownership. This provision means that any capital gains made in relation to a qualifying main residence are currently exempt from CGT. This is a very generous concession as it allows taxpayers to claim the tax exemption even if they no longer live in the property provided they do not have another property as their main residence and provided they do not use the property for income producing purposes (i.e. rental income). However, if the property is being used for income producing purposes the exemption is capped at six years. This allows individuals who are no longer residents under the "absence rule" to claim this exemption either indefinitely or up to six years depending on whether the property is being used to generate income or not. Consequences of the proposed legislation
On 23 October 2019, the Australian Parliament introduced the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019, which proposes to restrict the application of the CGT main residence exemption for foreign residents. The result of the new legislation is that an individual who is a foreign tax resident and who enters into a contract to sell their property (the ‘CGT event’) after 7.30 pm (AEST) on 9 May 2017, will no longer be entitled to claim the CGT main residence exemption. This includes Australian citizens or permanent residents living overseas who were non-residents at the time of the CGT event.
There is an exemption available to individuals who are foreign residents for tax purposes who may be able to access the CGT main residence exemption if they satisfy a two-part test. To satisfy the first part of the test, the individual must have been a foreign resident for a continuous period of six years or less at the time of the CGT event. The second part of the test requires that the CGT event occurs as a result of one of the following life events:
1) a terminal medical condition of the individual, their spouse or their child under the age of 18 years;
2) death of the individual, their spouse or their child under the age of 18 years; or
3) divorce or separation of a spouse.
Further, unlike the withdrawal of the 50% CGT discount for non-residents in 2012, under this proposed legislation, there is no proportionate method available to foreign residents in circumstances where the owner was a resident for part of the duration of ownership and a non-resident for the remainder. Australian residents who have temporarily become non-residents for tax could be mistakenly caught by these rules and will have to re-establish their Australian tax residency to access the concession.
Property owned before 9 May 2017 and which is sold before 30 June 2020 falls within the transitional provisions and will continue to be eligible for the CGT exemption.
The new legislation, together with the withdrawal of the 50% CGT discount for non-residents in 2012, will significantly impact investment by Australian expatriates in Australian residential property. This will have implications for both employers and individuals. Individuals may no longer be willing to accept temporary assignments outside of Australia if their tax residency status is impacted. Individuals will need to undertake comparative calculations and tax residency analysis before accepting any assignments overseas. Australian citizens who are currently temporarily non-residents and wish to sell their property stand to be the most negatively impacted.
Graig J van Wegen