Capital Gains Tax Main Residence Exemption removed for Foreign Residents
Foreign residents with an Australian residence need to be aware of the Treasury Laws Amendment Bill 2019. On October 23rd 2019, the Federal Government introduced a Bill which will remove the Capital Gains Tax main residence exemption for foreign residents.
Australian tax residents will not be affected. It is important to understand who is considered a foreign resident. A foreign resident is an individual who is not a tax resident of Australia including Australian citizens and permanent residents who are foreign residents.
To understand the impact of the Treasury Laws Amendment Bill 2019, let’s consider the current capital gains tax main residence exemption. Currently, if the dwelling is the individual’s main residence throughout their ownership period then the residence is exempt from capital gain tax on the disposal gain(loss). If the residence was used to produce rental income and thus was only their main residence for a fraction of the ownership period, individuals can apply for a partial exemption. The absence rule allows an individual to treat a dwelling as their main residence for capital gains tax purposes for up to six years even if it is rented out.
As a result of the changes, if an individual sells their Australian main residence whilst they are classified a foreign resident, they will no longer be entitled to the main residence exemption.
This is subject to two exceptions:
The individual is a foreign resident for six continuous years or less and for certain residence sales which occur as a result of a life event (terminal medical condition, death of a spouse or child, or divorce/separation)
The disposal qualifies under the transitional period.
The “Absence Rule” is no longer taken into consideration, thus individuals cannot continue to treat a dwelling as their main residence for capital gains tax purposes.
The date of residence disposal is the date a contract for sale is entered to. This is the key date which is relevant in determining whether an individual is a foreign resident subject to the new law or not. If at the time the sale contract is entered the individual is a foreign resident the capital gain/loss on the disposal will not be exempt for Australian tax purposes.
Let’s consider the following example: Jane acquired a residence on 10 September 2010. She moved in and established it as her main residence. On 1 July 2018, Jane vacated the house and moved to Los Angeles. On 15 October 2020 Jane signed the contract to sell the residence. Jane is a foreign resident on 15 October 2020 and thus she is not entitled to the main residence exemption. The outcome described above is not affected by Jane previously using the house as her main residence and the absence rule that could otherwise have been applied.
One important point to highlight is if an individual resumes Australian tax residency before selling their residence, they may still be able to claim the exemption!
There is an exception. If a foreign resident satisfies the “life events test” they may still be able to claim the capital gains tax main residence exemption. To satisfy this test, the individual must:
Have been a foreign resident for a period of six years or less; and
Have one of the following events occur: terminal medication condition of the individual, spouse or children, death of the individual’s spouse or children, or divorce or separation of spouse.
When are these changes coming into place?
Capital gain tax events happening from 7:30pm on the 9th of May 2017 will no longer have the exemption applied. Individuals who owned a dwelling before 9 May 2017 will still be able to benefit from the main residence exemption for a disposal on or prior to 30 June 2020. After the 30 June 2020, foreign residents will no longer be able to apply for the main residence exemption for capital gains tax purposes.
Employers need to be aware of this Bill and its implications:
Employees may become reluctant to accept a job outside of Australia if know they will lose their ability to claim the main residence exemption.
Employers should consider whether they will tax equalize any capital gains tax imposed on the sale of an employee’s home while they are a foreign resident.
What should individuals do about this proposed Bill?
Current and future foreign residents can begin to consider selling their Australian residence before 30 June 2020 to obtain the capital gains tax exemption.
Comparative calculations will be required before accepting overseas work.
It is important that impacted individuals seek taxation advice in order to evaluate the impact of this Bill on their personal situation and to take relevant actions where required. If you believe you will be affected by the Federal Government’s proposed Bill and are unsure how to proceed, contact The Great Bean Counters for some helpful advice.