Non residents lose Main Residence Exemption

The Capital Gains Tax rules now apply to home ownership if the owner is not a tax resident of Australia the date the contract to sell the home is executed.

The legislative changes are designed to coerce owners to sell their properties prior to leaving Australia by denying apportionment to recognise the time a property was a home or periods of tax residency, even if it be almost the entire period of ownership. Instead, the Capital Gains Tax (CGT) rules will apply as they would to other assets, unless one of the narrow exemptions applies.

The only way for you to avoid this loss of the CGT main residence exemption is to resume Australian tax residency before selling your property, thereby reinstating the main residence exemption as it would have otherwise applied (e.g. properties let for more than 6 years continuously will have a proportionate part of the gain taxed).

This black and white approach to non-residence and home ownership will present some issues, including:

  • increasing the risk of taking long-term international employment opportunities, with the decision to retain or sell your house needing to be made prior to commencing your new job offshore;
  • a lack of records to establish the costs of the property to reduce the gain subjected to tax, particularly for renovation costs on a property for which you thought you did not need to keep cost records; and
  • whether a return to Australia for a period will satisfy residency requirements or be viewed as a tax avoidance scheme to access the Main Residence Exemption.

Opportunity to avoid changes until 30 June 2020

For properties owned since before 7.30pm on 9 May 2017, these changes will not apply contracts to sell properties entered into on or before 30 June 2020, so there is a window of opportunity for non-residents to avoid the introduction of these rules. For all properties with purchase contract dates from 7.30pm on 9 May 2017 (ACT legal time), these changes are effective to sales contracts executed from 19 December 2019 onwards.

Reliefs from these changes

There is relief from these changes in cases of a terminal illness or death of the taxpayer, their spouse or child under 18 years of age, so long as the property is contract to sell is executed within 6 years of becoming non-resident. Properties acquired prior to 20 September 1985 continue to receive exemption from capital gains tax to the extent permitted by the Income Tax Assessment Act 1997.

Need help?

If you need assistance with planning the sale of your home and the tax that may apply, please contact Tax Scope.

Harding and tax residency – High Court dismisses residency appeal

The High Court has refused Special Leave for the ATO to appeal the decision of the Full Federal Court in Harding v Commissioner of Tax [2019] FCAFC 29.

This creates legal certainty that a “permanent place of abode” outside of Australia is by reference to the wider location of a country, and is not narrowly limited to a single unit of accommodation.

For the first time, long-term residents in other countries can organise their accommodation within a country without fear that the ATO will consider successive homes to be an indicator of inpermanence when applying the test of a permanent abode.

As this test is only one of four tests of tax residency, living long-term in another country does not guarantee a person has broken tax residency of Australia. However, the decision in Harding provides clarity for this particular test.

Loss of the main residence exemption for foreign-resident owners? Or not?

The 2017 Australian Federal Budget announced that the exemption from tax on capital gains on a person’s main residence would no longer be available for residences sold after the owner had become a foreign resident. This change, as drafted in Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018, would apply to the whole ownership, without pro-rating an exemption for the period of occupancy. Given the large increases in much Australian residential property, large taxable gains are likely for many.

Under the bill, the exemption remains in place if an expat resumes tax residency prior sale of the property and provides transitional provisions to enable existing foreign-resident owners to sell before 30 June 2019 without losing the exemption. However, whether this change will become law is unknown as the bill has remained before the Senate since March 2018.

Progress of this bill would be welcomed to provide certainty for those currently non-resident who may wish to sell their former homes before mid-2019 but would not do so if this bill does not proceed.