For the past few years Australian expats have been waiting to see if the axe will drop on their ability to claim the capital gains tax (CGT) main residence exemption.
The current main residence exemption allows individuals to claim an exemption on paying CGT when they sell the home that they have been living in. Under the normal CGT rules, an individual may continue to claim their former home as their main residence for up to 6 years of absence. This applies unless and until the homeowner purchases and moves into another house that becomes their main residence in Australia.
The new measure has been in the works since the 2017-2018 budget, with non-residents potentially becoming ineligible to claim the main residence exemption since May 9th 2017.
The shortcomings of this bill have been previously highlighted and continue to be of concern. After the Bill lapsed in April 2019, we have waited to see whether it would reappear. The hope was that a new Bill would be rewritten in a way that was fairer to taxpayers.
Unfortunately it was reintroduced on the 23rd of October 2019 in largely the same form. Like the original bill, it applies retroactively and allows no consideration for long term Australian residents who may end up caught out by the changes.
While many concerns with the original bill remain unaddressed, there are a few changes.
These changes have extended the transitional measures and added in some compassionate exceptions. The transitional measures ensures that existing foreign resident home owners have some time to sell their main residence under the existing rules. Previously they had until 30th June 2019. Under the new Bill they now have until 30th June 2020 to sell under the existing CGT rules. The additional exceptions that the revised Bill introduced means that there are now limited situations in which the main residence exemption may still apply for foreign residents.
So, if you’re an expatriate with a former main residence in Australia you should consider now what strategy you wish to take. It’s time to consider if you need to sell while you can access the existing CGT exemption.
Summarised below is an outline of what these new laws could mean for you and what you can do about it.
Once you’re a foreign resident then any Australian property home you own is treated as a CGT asset. You are no longer able to apply the main residence exception that is available to Australian taxpayers.
Basically this means you will be liable for full CGT on any profit from the sale of the property. This applies even if you lived in the home for 20 years before becoming a non-resident. Since the main residence exemption can potentially save you tens of thousands of dollars in CGT this is a big change for temporary residents and Australians looking to move overseas.
As mentioned, there are limited situations where non-residents may still access the main residence exemption. This includes the transitional provision that allows you to sell your main residence under the existing CGT exemption if you sell before June 30th 2020. It also includes concessions that equate to compassionate grounds on the event of death, divorce, or terminal illness.
Normally when you satisfy the criteria for claiming the main residence exemption for CGT then you can apply this exemption (in part or in full). However, if this bill passes into law, foreign residents will no longer be able to access the main residence exemption. Well, in most situations.
Let’s take a look at when the exemption may still apply:
If you purchased your property after May 9th 2017 then you’re out of luck. You will not be able to claim an exemption for your principal residence if you sell it while you are a non-resident. That’s because you purchased your main residence after these new measures were proposed.
However, if you purchased before May 9th 2017 (and post 20 September 1985) then you are covered by the transitional provisions. This means you have until 30th June 2020 to sell under the current CGT rules and access the main residence exemption. Wait any longer and the exemption is no longer available if you sell your main residence while you’re a non-resident.
The big drawback of selling after 30th June 2020 is that the main resident exemption will not even apply for the period of time that you lived in the property. That means you won’t even get access to a partial exemption.
With the new bill being introduced, there are now some situations where a non-resident may continue to access the main residence exemption for CGT. These concessions only apply if you’ve been a non-resident for less than 6 years. As a non-resident you may still be eligible for the main residence exemption if one of the following life events happens:
Basically, if something unexpected happens within several years of becoming a non-resident for Australian tax purposes, then you may still be able to access the same concessions that Australian residents can. While no one can factor these contingencies into a tax strategy it’s good to know that this exists if the worst happens.
If you come back to Australia and become an Australian tax resident, then the main residence exemption is available to you again under the normal rules. This means you will have the opportunity to apply the CGT main residence exemption, either in part (if the property hasn’t exclusively been your main residence) or in full. Keep in mind that this only applies if you sell while you’re an Australian tax resident.
This means that if you’re planning to return to Australia then it might be worth holding onto the property so that you can reduce your CGT liability. That’s great news if there’s a chance of returning to Australia to live in your home (or elsewhere) again. Of course, this should not be the only factor to consider when deciding whether to hold onto or sell your former home under the main residence exemption.
You might decide to hold onto your property because you’re planning to come back to Australia. But what if that doesn’t happen?
If you die within 6 years of becoming a non-resident then your estate may still be able to access your main residence exemption. However, when you pass away more than 6 years after becoming a foreign resident then your estate will be caught by the changes and the main residence exemption will not be applicable. That means your estate will be stuck with the full CGT liability.
The answer to this is very personal. It depends on your ongoing plans, whether you’re concerned about the tax impact of these legislative changes, what the market is like, and what the best decision is for both your immediate and long term needs.
For instance, selling a property now for a $50,000 profit with no CGT to worry about would still net you less than selling it down the road for a $200,000 profit with a $45,000 CGT liability.
Ongoing income or costs also weigh into your decision, as do any plans to return to Australia down the track. Unfortunately, it also depends on unknown factors, including the unpredictable nature of tax law changes that may happen in the future. As always, it’s important to get tailored advice for your unique situation when considering what to do. Individual situations can involve complexities that extend beyond generic information.
As always, it’s important to get tailored advice for your unique situation when considering what to do. Individual situations can involve complexities that extend beyond generic information.