Foreign residents to lose access to main residence exemption
Perhaps guided by the assumption that most foreign residents do not vote, the Government has expanded the raft of measures clawing back tax concessions from those who are not Australian residents for tax purposes (including in many cases Australians who reside overseas). One of these new measures announced in the Federal Budget in May, was the proposed amendment to capital gains tax (CGT) rules to remove access to the main residence exemption from CGT for foreign and temporary residents.
Broadly, your home ceases to be your main residence when you stop living in it, however you may choose to continue treating it as your main residence in the following circumstances:
- For six years while it is being rented out (including on Airbnb type platforms); or
- For an unlimited amount of time if it is left vacant or you allow friends or family to live in it rent-free.
Where does that leave Australians living overseas with property in Australia?
It is common for Australians working overseas to keep their Australian home as an investment property or for when they eventually move back; the property is usually rented out in the meantime, taking advantage of the six year rule mentioned above.
Under the proposed rules, if these people cease to be Australian residents for tax purposes, they will attract CGT on the sale of their Australian home on the gains accrued from the date they became a foreign resident.
However, there are limited grandfathering rules for any gains on properties owned as at 7:30pm on 9 May 2017 and which are currently being treated as the owner’s main residence. These properties will continue to be exempt from CGT until 30 June 2019. However, if the property is sold after 30 June 2019, CGT will apply to the capital gains accruing after that date.
If you are leaving Australia and wish to avoid or mitigate exposure to CGT on the sale of your home, and are not eligible for the above grandfathering rule, there are a few options:
- Subject to confirmation in the legislation, we expect that obtaining a market valuation as at the date of departure will identify any main residence exempt portion of the future capital gains when the property is eventually sold;
(UPDATE 24/05/2018: draft legislation has taken this option off the table as it is drafted such that no partial exemption will be available for properties sold by foreign tax residents).
- Sell your former Australian residence before your permanently depart Australia;
- Consider if you are able to remain a resident of Australia for tax purposes, however, this would have other tax implications such as being assessed in Australia on your worldwide income.
This announcement has not yet been legislated and the details on how the new rules are expected to apply are sparse. We will keep you updated once more guidance becomes available.
UPDATE 24/05/2018: Draft legislation has since been released and is before Parliament. Contrary to expectations it does not provide for a partial main residence exemption where the property is sold by a foreign tax resident who has previously been an Australian tax resident and used the property as their home. In other words, there is no recognition of the past use of the property and it is the vendor's residency status at the time of signing of the contract for sale that will determine whether any main residence exemption will be available in relation to the past use of the premises.
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The content of this newsletter is general in nature. It does not constitute specific advice and readers are encouraged to consult their Ruddicks adviser on any matters of interest. Ruddicks accepts no liability for errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice. This information is current as at 24 May 2018. Ruddicks particularly accepts no obligation or responsibility for updating this publication for events, including changes to the law, the Australian Taxation Office’s interpretation of the law, or Government announcements arising after that time.
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