Michael Ferella, Director of Momenta Advisors, provides an overview of the loss of Capital Gains Tax Main Residence Exemption for Foreign Residents.
What are the changes?
There are special capital gains tax (CGT) rules you need to know if you’re a foreign resident for tax purposes. The government had previously announced a measure to remove the CGT main residence exemption from Foreign Residents. That announcement has now been passed taking effect from 7:30pm (AEST) on 9 May 2017.
In summary, an individual who sells their Australian main residence and who is a foreign resident at the time of disposal (referred to as a “CGT event”) will no longer be entitled to the main residence exemption, subject to two limited exceptions:
- where the individual is a foreign resident for six continuous years or less and the disposal occurs because of a “life event”. The ATO defines a life event as follows:
- you, your spouse, or your child under 18, had a terminal medical condition;
- your spouse or your child under 18 passes away;
- the CGT event involved the distribution of assets between you and your spouse as a result of your divorce, separation or similar maintenance agreements.
A person who has been a foreign resident for a continuous period of more than six years will be an “Excluded Foreign Resident”. Excluded Foreign Residents are unable to utilise the CGT main residence exemption.
- the disposal qualifies under the transitional period. The transitional period being dwellings owned before 9 May 2017 can be sold on or before 30 June 2020 and continue to be eligible for the CGT exemption if the normal eligibility criteria is met.
Note: Where you dispose of the main residence under a contract, the disposal time is the time you entered into the contract. Where you do not dispose of the main residence under a contract, the disposal time is the time of settlement. This is important as your residency status will be determined at the time the contract of sale is entered into.
Who is affected by these changes?
- A foreign resident at the time they sell residential property in Australia which they previously used as their main residence.
- New buyers or individuals who come to Australia and purchase a main residence in Australia. This also includes individuals seconded to Australia. The main implications for buyers would differ according to whether they remain foreign residents or become Australian residents. If such individuals become residents, then they may be able to utilise the main residence exemption if they are a resident when they sell their main residence in Australia.
- Employees who may be more reluctant to accept an assignment outside Australia if they have the intention to sell their main residence in the future while they are overseas (under the assumption that will be treated as a foreign resident). This, in turn, can also affect the employers who are limited to their resources.
What are the best courses of action?
Generally, if you are a foreign resident affected by the changes there are a few options:
- Sell the property on or before 30 June 2020 – if you purchased the property before 7:30pm on 9 May 2017 then you will be entitled to the main residence exemption.
- Sell the property at any time after you resume being an Australia resident – this is subject to other criteria however you should be entitled to the main residence exemption.
- Sell the property after 30 June 2020 while a foreign resident – you will not be entitled to the main residence exemption unless you satisfy the life event test mentioned earlier.
Please note: The above options are only general in nature and all individual circumstances should be taken into consideration before determining which option would be best for you.
Challenges at the present time?
Taxpayers have had certainty on this measure only since 12 December 2019 when it became law, only months before the start of COVID19. This has left foreign residents unable to sell their homes by 30 June 2020 in what would have been ‘normal conditions’.
Due to the COVID19 conditions, foreign residents may find it difficult to sell their Australian property prior to the 30 June 2020. Some of these conditions include:
- Travel restrictions for both the seller and the buyer – i.e. returning home to set up their properties for sale.
- Limitations of accessing and viewing the open home – i.e. tenants being tested positive forcing them to quarantine and restricting owners to evict them for sale.
- Buyers being reluctant to outlay substantial funds in these uncertain times.
- The inability to access finance due to stricter lending criteria and the potential reduction of income.
Unfortunately, the Government has been reluctant to extend the transitional period deadline of 30 June 2020 due to the COVID-19 restrictions even with the requests and pressure from other parties.
If you think you may be caught by these new rules, it will be worthwhile to talk to a tax professional to understand how you may be affected. In general, expats are subject to different tax rules than residents, so it’s always a good idea to get expert advice before making any property decisions.
For further information or advice specific to your individual circumstances, please contact either Paul Slaviero (Director) or Michael Ferella (Director) from Momenta Advisors on 02 9606 6749 or via email.
Some further reading:
© Copyright 2020 Good Deeds Property Buyers
Published: 10 June, 2020
DISCLAIMER: Good Deeds buyers tips are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.