The main residence exemption provides homeowners with an exemption from Capital Gains Tax (CGT) on their family home. Under the absence rule, the owner can elect for the main residence exemption to continue to apply to their former home for up to six years after they vacate the property if it is rented out, or indefinitely if they aren’t earning rent from the property.
A Federal Budget measure announcement in 2017 meant that this exemption would 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 was to be a transitional arrangement that required effected homeowners to sell their property before 30 June 2019 in order to retain the exemption.
The bill that was originally introduced to the House of Representatives lapsed when the federal election was called earlier this year, but was reintroduced on 23 October 2019 as the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019.
The new bill is very similar to the original, with the key changes being:
- The transitional period will be extended to 30 June 2020, meaning that properties that meet all the conditions for main residence exemption that were acquired before 9 May 2017 and are sold prior to 30 June 2020 will still qualify for the exemption.
- Some quite limited exceptions to allow a foreign or temporary resident to continue to access the main residence exemption for CGT events concerning certain “life events” (eg terminal medical conditions, death of a spouse or child, or family law matters) if they have been a foreign resident for six years or less at the time of the CGT event.
The following explanations from the Explanatory Memorandum explain the most typical ways 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 2020 Vicki finally signs a contract to sell the dwelling with settlement occurring on 13 November 2020. Vicki was a foreign resident for taxation purposes on 15 October 2020.
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 2020. 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 2020 (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 2021 Amita signs a contract to sell the dwelling and settlement occurs on 12 September 2021. 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 2021. 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.
If you have a client that doesn’t currently live in Australia but still own a property that was their family home prior to 9 May 2017, they should give urgent consideration to their options in relation to the property. If they continue to hold the property when the transitional period ends on 1 July 2020 and sell it while they are non-resident, they are likely to incur a substantial CGT liability.
The key considerations for these clients are:
- For properties owned before 10 May 2017 where your client doesn’t intend to return to Australia to live, they should consider selling the property before the end of the transitional period 30 June 2020.
- 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 Example 1.3 above).
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.