No CGT Main Residence Exemption for Foreign Residents

Legislation before Parliament will totally deny the CGT Main Residence Exemption for Australians who are no longer Australian tax residents.

For the purposes of the bill, a ‘foreign resident’ is defined as being someone who is not a tax resident of Australia. Taxpayers who remain Australian tax residents will not be affected by the bill.

When does it start?

If enacted, this law will apply to:

  • sales of properties acquired after 9 May 2017, or
  • if the property was already held at that date, then properties sold after 1 July 2020.

Current situation

  • Individuals who are foreign residents are entitled to the CGT main residence exemption in the same way as individuals who are residents of Australia for taxation purposes.
  • Where an individual who does not treat any other dwelling as their main residence, can treat their main residence for CGT purposes for up to six years, even if it is used for income producing activities, or for an unlimited period where the dwelling is not rented out.
  • Beneficiaries who inherit an estate of a deceased person (who used the dwelling as their main residence) may also satisfy the main residence exemption.

If the law is passed….

The bill seeks to remove the ability for non-resident individuals to obtain the CGT main residence exemption for sales of their Australian Main Residence from 1 July 2020.

No Apportioning

There is no apportioning of the exemption based on the time it was your Main residence and when you were an Australian Tax resident and the time when you were not.  It’s all or nothing.

Exceptions

Life events

Where the individual is a foreign resident for six continuous years or less, and disposals are made as a result of a ‘life event’, which is defined as:

  1. diagnosis of a medical condition of the individual, spouse or their minor children,
  2. death of the individual’s spouse or the individual’s minor children, or
  3. divorce or separation of spouse.
Transitional provisions

For properties held as at time of the Budget speech on 9th May 2017, the proposed rules will not apply to a disposal of the property until after 30th June 2020.

Therefore, affected individuals who had owned a dwelling before 9th May 2017 that was used as their main residence, or where the absence rule may apply to treat the dwelling as their main residence, will still be able to obtain the benefit from the CGT main residence exemption on a sale of the home prior to 30th June 2020.

For properties purchased after 9th May 2017 and sold before 30th June 2020 could lose their CGT main residence exemption where the relevant individual has become a foreign resident.

Tax Residency

Tax residency is totally different from residency for citizenship and immigration purposes.  

The primary test of tax residency is called the ‘resides test‘. If you reside in Australia, you are considered an Australian resident for tax purposes and you don’t need to apply any of the other residency tests.

Some of the factors that can be used to determine residency status include:

  • physical presence
  • intention and purpose
  • family
  • business or employment ties
  • maintenance and location of assets
  • social and living arrangements.

If you don’t satisfy the ‘resides test’, you’ll still be considered an Australian resident if you satisfy one of three statutory tests.

  1. Domicile test – permanent place of abode is outside Australia. A permanent place of abode should have a degree of permanence and can be contrasted with a temporary or transitory place of abode.
  2. 183-day test – only applies to individuals arriving in Australia. You will be an Australian Tax resident if you’re actually present in Australia for more than half the income year, whether continuously or with breaks.
  3. The Commonwealth superannuation test – restricted to Australia government employees posted overseas.

Exercise care

For Australians living and/or working overseas from 1st July 2020, it will be necessary to carefully consider their tax residency at that point in time if they are selling their Australian home.

This full loss of the CGT main residence exemption could have catastrophic consequences and place in doubt the financial viability of selling your old home.

Advice
If you need advice on the tax law for the main residence exemption or your tax residency, contact Noel May or Amanda Klye on (03) 9585 7555 orenquiries@mktax.com.au

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