We reported in May, that as a result of the 2017 Australian federal budget, there would be some pending changes to capital gains tax on the main residence for foreign residents and Australian expats (Australians living abroad). At the time, it wasn’t quite clear from the budget papers exactly how it would work, and who would be impacted.
Well, the Australian Treasury office has released its draft legislation and explanatory memorandum and the changes have massive implications for any Australian Expat that has a main residence in Australia.
Changes to the CGT Main Residence Exemption
As we discussed previously, people who are foreign residents were entitled to the main / primary residence exemption in the same way as individuals who are residents of Australia for taxation purposes. We described this in some detail in our article Australian tax implications when renting out your primary residence, whereby it was possible for Australian expats to rent out their home for up to six years and still be entitled to full CGT exemption on the ultimate sale of the family home.
The proposed change to the law implies that anyone who sells their main residence whilst being a non-resident for Australian tax purposes will lose ALL entitlements to the CGT main residence exemption, and will be subject to capital gains tax on the full amount of any capital gain. This is irrespective of how long you have owned your home, and how long you have lived overseas. Sell your main residence whilst being a non-resident for tax purposes and you will lose all your entitlements to the CGT main residence exemption.
If this draft legislation becomes law, then it will become even more important for Australian expats to obtain tax advice before disposing of any assets. Based on the draft legislation, someone who has made, say, $500k capital gains on their main residence and sells it, could pay up to an additional circa $200k in capital gains tax if they sell the property before returning to Australia, rather than waiting until they return to Australia.
Obviously, this is a significant change in tax policy and will impact many Australians living abroad. The government has grandfathered the changes such that properties held on 9 May 2017 that classify as a main residence will not be impacted if they are sold before 30 June 2019.
Draft Legislation and Explanatory Memorandum
You can find more about the proposed draft legislation in full for capital gains tax changes for foreign residents (including Australian expats) on the Australian Government’s Treasury website. As there is a lot of legal mumbo jumbo included, I’ve endeavoured to capture the key issues below, and repeat the examples the government provides.
The Australian government announced as part of the 2017-2018 budget, that the government would make changes to capital gains tax for foreign residents. “From 9 May 2017 the Government will remove the entitlement to the CGT main residence exemption for foreign residents that have dwellings that qualify as their main residence. Therefore any such capital gain or loss arising upon disposal of a foreign resident’s main residence will need to be recognised.’
The explanatory memorandum states : “The amendments to the main residence exemption are contained in Part 1 of Schedule 3 to the exposure draft of this Bill. Individuals who are foreign residents at the time a CGT event occurs to a dwelling in which they have an ownership interest are not entitled to the main residence exemption for any part of the exemption that arises from their use of the dwelling. The CGT event that generally applies is CGT event A1 disposals (see section 104-10), however other CGT events can also apply to a dwelling.”
The easiest way to understand this is to look at the examples provided by the Government in their explanatory memorandum (Source : TREASURY LAWS AMENDMENT (HOUSING TAX INTEGRITY) BILL 2017 EXPOSURE DRAFT EXPLANATORY MATERIAL).
Example : Main Residence Sold Whilst Non Resident For Australian Tax Purposes
Outcome : Full capital gains tax on main residence for Australian Expats
The first relevant example is the following
“Example 1.2: Main residence exemption denied
Vicki acquired a dwelling on 10 September 2010, moving into it and establishing it as her main residence as soon as it was first practicable to do so. On 1 July 2018 Vicki vacated the dwelling and moved to New York. Vicki rented the dwelling out while she tried to sell it. On 15 October 2019 Vicki finally signs a contract to sell the dwelling with settlement Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 occurring on 13 November 2019. Vicki was a foreign resident for taxation purposes on 15 October 2019.
The time of the CGT event A1 for the sale of the dwelling is the time the contract for sale was signed, that is 15 October 2019. As Vicki was a foreign resident at that time she is not entitled to the main residence exemption in respect of her ownership interest in the dwelling.
Note: This outcome is not affected by:
• Vicki previously using the dwelling as her main residence; and
• the absence rule in section 118-145 that could otherwise have applied to treat the dwelling as Vicki’s main residence from 1 July 2018 to 15 October 2019 (assuming all of the requirements were satisfied).”
This example indicates that if Vicky were to sell her main residence whilst living overseas as a non-resident for Australian tax purposes, Vicki would pay full capital gains tax on the entire capital gain on the property. There would be no recognition that part of the capital gain was attributed to the period she was living in the house as her primary residence.
Example : Main Residence Sold Whilst Resident For Australian Tax Purposes (After returning from overseas)
Outcome : Relevant capital gains tax exemption on main residence still applies
The second relevant example provided by Australian Treasury is as follows.
“Example 1.3: Main residence exemption applies
Amita acquired a dwelling on 20 February 2003, moving into it and establishing it as her main residence as soon as it was first practicable to do so. On 15 August 2020 Amita signs a contract to sell the dwelling and settlement occurs on 12 September 2020.
Amita used the dwelling as follows during the period of time for which she owned it:
• residing in the dwelling from when she acquired it until 1 October 2007;
• renting it out from 2 October 2007 until 5 March 2011 while she lived in a rented home in Paris as a foreign resident (assume the absence provision applies to treat the dwelling as her main residence);
• residing in the dwelling and using it as a main residence from 6 March 2011 until 15 April 2012;
• renting it out from 16 April 2012 until 10 June 2017 while she lived in a rented home in Hong Kong as a foreign resident (assume the absence provision applies to treat the dwelling as her main residence);
• residing in the dwelling from 11 June 2017 until it was sold.
The time of CGT event A1 for the sale of the dwelling is the time the contract for sale was signed, that is 15 August 2020. As Amita was an Australian resident for taxation purposes at that time (as she had re-established her Australian residency) she is entitled to the full main residence exemption for her ownership interest in the dwelling as it is, Capital gains tax changes for foreign residents or is taken to be, her main residence for the whole of the time that she owned it.”
This example shows that although Amita lived overseas for a period of time, she was still entitled to the main residence CGT exemption when she sold it, as she was an Australian resident for tax purposes at the time of sale. Presumably, based on example 1.2 earlier, had Amita sold the property before returning to Australia, then she would not be entitled to any CGT exemption, and would have paid full CGT on the sale of the property.
Public Submissions on Proposed Changes to CGT Main Residence Exemption
At the time of writing, these changes are in draft form and open for public consultation. These changes heavily penalise Australians who choose (or need) to work or live overseas for a period of time, and I encourage everyone to contact their local MP or email firstname.lastname@example.org. More details on making a submission are found here, and submissions close on 15 August 2017.
Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions. To the extent permitted by law, we exclude all liability for any loss or damage arising in any way.
Need Tax Planning Advice?
If you need to file a non-resident Australian tax return, or need tax planning advice as an Australian expat, contact GM Expat Tax using the form below. GM Expat Tax is a firm of accountants specialising in assisting Australian expats living and working around the world.