The Australian government passed a legislation on 5 December 2019 that stops a foreign resident (being a non-resident for tax purposes) from enjoying the main residence exemption for capital gains tax (CGT) purposes. This applies to Australian citizens and permanent residents who are non-residents for tax purposes.
This article aims to help you understand the significance of the new legislation and prepare for the changes.
Prior to this legislation, foreign residents were entitled to CGT main residence exemption in the same way as Australian tax resident individuals. Broadly the main residence exemption allows the capital gain or loss on the disposal of an individual's main residence to be disregarded if it was the taxpayer's main residence throughout the ownership period.
All individuals who have resided in Australia and retained a main residence but are now non-residents should consider their circumstances with the passing of this legislation.
Meanwhile, individual Australian tax residents at the time of sale of a main residence will not be impacted by this new legislation.
What kind of CGT events will be affected?
The new rules apply to CGT events taking place on or after 9 May 2017. However, as outlined below according to the Australian Taxation Office (ATO), there are transitional provisions for CGT events that occur on or before 30 June 2020:
- For property held prior to 7:30pm
(AEST) on 9 May 2017:
- The CGT main residence exemption will only be able to be claimed for disposals that happen up until 30 June 2020 and only if they meet other existing requirements for the exemption.
- Disposals that happen from 1 July 2020 onwards will no longer be entitled to the CGT main residence exemption unless certain life events (see 'exception' section) occur within a continuous period of six years of the individual becoming a foreign resident for tax purposes.
- For property acquired at or after 7:30pm (AEST) 9 May 2017:
- The CGT main residence exemption will no longer apply to disposals from that date unless certain life events (see 'exception' section) occur within a continuous period of six years of the individual becoming a foreign resident for tax purposes.
What are the impacts?
There are significant impacts for non-residents due to this new legislation:
- If a non-resident sells real property which has been their main residence then they may be subject to CGT on the sale where previously they could access a full or partial main residence exemption.
- An individual who ceases to be an Australian tax resident cannot have the benefit of the absence rule for any period of their ownership period (known as the 6-year absence exemption rule).
- In addition, the special cost base reset rules under s118-192 where the property is first used to produce income do not apply if at the time of the CGT event the owner is a non-resident for tax purposes.
- These changes apply regardless of their residency status during the ownership period. There is no apportionment for periods of residency during the ownership period, rather it is based on the residency status when the CGT event is triggered (eg when the contract for sale is signed).
Are there any exceptions?
Yes, as outlined by the ATO, there are exceptions. The legislation does not apply if:
a) the taxpayer was a non-resident for tax purposes when a CGT event happens to the real property in Australia, and
b) the taxpayer was a non-resident for tax purposes for a continuous period of six years or less, and
c) during that period one of the following life events occurred:
- the taxpayer, his/her spouse, or his/her child who was under 18 years of age, had a terminal medical condition
- the taxpayer, his/her spouse, or his/her child who was under 18 years of age, died
- the CGT event involved the distribution of assets between the taxpayer and his/her spouse as a result of his/her divorce, separation or similar maintenance agreements.
As a non-resident, are there other matters to consider?
Yes, there are a number of related matters to consider:
- The taxpayer will be taxed on the capital gain at non-resident tax rates
- The CGT discount may be less than 50% or in some cases nil
- The foreign resident capital gains withholding tax rules may apply
- Generally, if the taxpayer was a non-resident for tax purposes when they died, the changes will also apply to the executor or beneficiary of a deceased estate.
Non-residents who hold Australian real property that has been their main residence should seek advice before selling their property to understand the CGT implications. There may be planning opportunities for clients to consider including taking advantage of the transitional period until 30 June 2020 for property they held prior to 9 May 2017.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.