Removal of Main Residence Exemption for Foreign and Temporary Residents – It doesn’t look good

Current as of April 2018

Further to our previous articles on this area we now provide an update on where the ATO legislation is up to.

As background, the main residence exemption provides homeowners with an exemption from CGT on their family home. Under the absence rule, the main residence exemption can continue to apply for up to six years if the property is rented out, or indefinitely if they aren’t earning rent from the property.

A Federal Budget measure announcement last year means that this exemption will no longer apply to foreign or temporary residents for properties they purchased after 7.30pm on 9 May 2017. For properties purchased prior to this date there is a transitional arrangement discussed later in this article.

While it is not law yet, the bill has been reviewed by the Senate Economics Legislation Committee. Its report was released on 23 March 2018, recommending that the bill be passed. The following examples from the Explanatory Memorandum explain how the new law will operate:

Example 1.2 – Main residence exemption denied  

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.  

Note: This outcome is not affected by:

  • Vicki previously using the dwelling as her main residence; and
  • the absence rule in section 118-145 that could otherwise have applied to treat the dwelling as Vicki’s main residence from 1 July 2018 to 15 October 2019 (assuming all of the requirements were satisfied). 

Example 1.3 — Main residence exemption applies  

Amita acquired a dwelling in Australia on 20 February 2003, moving into it and establishing it as her main residence as soon as it was first practicable to do so. On 15 August 2020 Amita signs a contract to sell the dwelling and settlement occurs on 12 September 2020. Amita used the dwelling as follows during the period of time for which she owned it:

  • residing in the dwelling from when she acquired it until 1 October 2007;
  • renting it out from 2 October 2007 until 5 March 2011 while she lived in a rented home in Paris as a foreign resident (assume the absence provision applies to treat the dwelling as her main residence);
  • residing in the dwelling and using it as a main residence from 6 March 2011 until 15 April 2012;
  • renting it out from 16 April 2012 until 10 June 2017 while she lived in a rented home in Hong Kong as a foreign resident (assume the absence provision applies to treat the dwelling as her main residence);
  • residing in the dwelling from 11 June 2017 until it was sold.

The time of CGT event A1 for the sale of the dwelling is the time the contract for sale was signed, that is 15 August 2020. As Amita was an Australian resident for taxation purposes at that time (as she had re-established her Australian residency) she is entitled to the full main residence exemption for her ownership interest in the dwelling as it is, or is taken to be, her main residence for the whole of the time that she owned it. 

Any capital gains on properties that were already owned at 7.30pm on 9 May 2017 will continue to be exempt from CGT for these taxpayers until 30 June 2019, so affected taxpayers should carefully consider whether they should sell their property before then.

If you are not currently Australian tax resident but own Australian property that has previously been your family home, you should immediately consider your options in relation to that property. If you continue to hold the property after 1 July 2019 and sell it while you are non-resident, you are likely to incur a substantial CGT liability. Additionally, because non-residents are not entitled to the 50% CGT discount, tax on a $100,000 capital gain will incur a tax liability of up to $47,000.

If the above scenarios match your circumstances there are some significant decisions to be made prior to selling your Australian property.

  1. If you owned property before 10 May 2017 and don’t intend to return to Australia to live, consider selling the property before 30 June 2019.
  2. Re-establishing Australian residency before selling a property could save significant tax. If you have a property that has grown in value by $500,000 and otherwise qualifies for the main residence exemption under the absence rule, you would pay up to $235,000 in capital gains tax if you sell it while you remain a foreign resident. It would be tax free if you are able to become Australian resident prior to the sale (see the above example).

This is still draft legislation but if it goes through as it is currently drafted then it will adversely affect non-residents who sell Australian property. Watch this space and we will update you on the final version of the legislation.

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