In 2017 on Budget night, the Government announced changes to deny foreign residents access to the Capital Gains Tax (CGT) main residence exemption. Treasury released draft legislation to implement these measures in mid-2017 and if enacted, it is proposed to have effect from 9 May 2017 and will restrict foreign residents accessing this CGT concession subject to 30 June 2019 transitional rules.
Although legislation has passed the House of Representatives, it has not passed the Senate. It is understood that there maybe changes to the legislation before it is passed. This delay in passing the legislation, provides uncertainty for taxpayers particularly given the potential for this to be back-dated to cover all contracts signed after 9 May 2017 and the transitional period ending on 30 June 2019.
Under the current law all taxpayers (resident and foreign resident) are entitled to a CGT exemption where they live in the property as their principle place of residence.
This is a very generous concession and can extend to a period where the taxpayer is no longer living in the property provided they do not have another property as their main residence. If they don’t use the property for income producing purposes they can be absent indefinitely, however if using the property to derive rent this is capped at six years. For the exemption to apply, the taxpayer must have first lived in the property and established it as their main residence.
Generally, the CGT main residence exemption will only apply to individuals, however, this also applies to deceased estates (where the deceased used the property as their principle place of residence) and special disability trusts.
Consequences of proposed new law
The impact for individuals is that (subject to the transitional provisions discussed below) where an individual who is a foreign tax resident enters into a contract to sell their property after 9 May 2017 they will not be entitled to the CGT main residence exemption.
There may be circumstances where an Australian citizen leaves Australia for a short period with the intention of returning, however, would be considered a foreign resident for tax purposes. In this situation they could be mistakenly caught by these rules.
Unlike the access to the 50% discount for foreign residents, there is no grandfathering to increase the CGT cost base at the time that the individual ceased to be an Australian resident. This means that the entire gain would be subject to CGT, there is no apportionment for the period that the property was the main residence. It is thought that this may be one of the point being reconsidered by the Senate.
If the individual returns to Australia prior to selling the property, they may still be able to access the concession, however, they would need ensure that they have re-established their Australian tax residency, which may take time to ensure that they would be considered to once again reside in Australia.
The proposed changes to the CGT main residence exemption, together with the removal of the 50% CGT discount for foreign residents several years ago as well as the non-resident CGT withholding tax, reflect the strong stance by the government to curb concessions provided to foreign residents in respect of housing in Australia.
However, as the current draft legislation stands there may be some negative tax outcome for Australian citizens who temporarily become non-residents for tax. The exposure draft was subject to consultation, and may well change prior to being legislated, particularly in relation to the lack of grandfathering of properties held prior to 9 May 2017.
The extensive delay in passing this legislation including the pending federal election and all the rumoured tax changes, creates great uncertainty for non-resident tax payers. To qualify for the proposed transitional rules, they will need to make a decision in coming months to sell their properties by the 30 June 2019 deadline.
This article was co-authored by Amy Wark, HLB Mann Judd Melbourne