Foreign residents will no longer have access to the CGT main residence exemption where the individual is a foreign resident at the time of the CGT event.
The changes apply from 7.30pm on 9 May 2017, or from 1 July 2020 if the foreign resident held the property on 9 May 2017.
The main residence exemption is a generous concession as it allows individuals to a full CGT exemption where they live in the property as their main residence, provided it has not been used to produce assessable income (ie. rental income).
A partial CGT exemption is also available if the property was the individual’s main residence for only a part of their ownership period or if it was also used to produce assessable income during their ownership period.
Furthermore, under the ‘six year absence rule’, an individual can move out of their home and continue to treat it as CGT exempt for up to six years even while renting it out, as long as they don’t own another property on which they wish to claim a CGT exemption.
Exemptions from the CGT changes
The legislation provides exemptions that may allow a foreign resident to retain access to the CGT main residence exemption where one of the below applies:
1) The individual has been a foreign resident for a continuous period of six years or less and a specified ‘life event’ occurs during that period.
A life event includes the following situations:
- The individual, their spouse or minor child has a terminal medical condition
- Upon death of the spouse or a minor child, or
- Upon divorce or separation.
2) The disposal qualifies under the ‘transitional period’, that is, the main residence was acquired by the individual before 9 May 2017 and is sold on or before 30 June 2020.
A foreign resident is generally someone who is not a tax resident of Australia and includes Australian citizens and permanent residents who are foreign residents. Thus, Australians who go overseas but have the intention of returning back home may become foreign residents for tax purposes. This means they may be caught out by the changes if they do not satisfy the above exemptions and decide to sell their main residence at the time they are a foreign resident.
Warning – if an individual is a foreign resident at the time they sell their residence and the exemptions do not apply, they will be subject to CGT on the full amount of any capital gain. This means the main residence exemption will still be denied for foreign residents even if:
- The property was previously used as their main residence, and
- The six year absence rule could be used to treat the property as their main residence.
Death and the CGT changes
If the deceased was a tax resident of Australia (or was a foreign resident for six years or less) at the time of death, the main residence exemption accrued by the deceased for the property continues to be available to the trustee or beneficiary or beneficiaries of the deceased estate that are bequeathed the property.
This means the exemption will be available for:
- The period during the deceased person’s lifetime they used the dwelling as their main residence
- The period that occurs within two years of the deceased’s death (or within such longer period allowed by the Commissioner), and
- The period following the deceased’s death where the dwelling was the main residence of an individual who was the spouse of the deceased immediately before their death and/or an individual who had a right to occupy the dwelling under the deceased’s will (regardless of the residency status of that spouse or individual).
However, the CGT main residence exemption will not apply if:
- The deceased person was a foreign resident at the time of their death, and
- The beneficiary that inherits the ownership interest in the dwelling was a foreign resident at the time the CGT event occurs.
What actions are needed?
Advisers with expatriate clients should consider whether their clients will be negatively impacted by the changes, particularly if the client becomes a foreign resident and decides to sell their home whilst on assignment.
For example, a foreign resident client that held their main residence as at 9 May 2017 may wish to consider selling their main residence before 30 June 2020 to obtain the main residence CGT exemption under the transitional rules if the CGT liability will be substantial.
Alternatively, individuals who resume their Australian tax residency would not be adversely affected by the changes provided the contract for sale is entered into after they have resumed Australian tax residency (unless the Commissioner is satisfied that the sole purpose of the arrangement is tax avoidance).
Impacted clients should seek their own tax advice to determine the impact of the changes on their personal tax situation.