CGT main residence exemption to disappear for non residents

A person’s tax residency status is about to become a lot more complicated. Currently both residents and non-residents are able to qualify for a full or partial exemption from Capital Gains Tax (CGT) when they sell a property that they consider their principal place of residence.

If a Bill currently before parliament passes into legislation, from 1 July 2019 non-residents will not be able to claim a full or partial exemption from CGT for the sale of their principal place of residence.

The disposal of a non-residents Australian main residence will attract capital gains tax which will apply to the full amount of the capital gain and be taxed at the foreign resident marginal tax rates regardless of how long a person was an Australian tax resident. This is further impacted by the removal of CGT discount of 50% which is no longer available to non-residents on Australian property as of 8 May 2012.

The changes for foreign residents and their main residence will apply as follows:

  • Properties held prior to 7:30pm (AEST) on 9 May 2017, the exemption can only be claimed for disposals that occur up to 30 June 2019;
  • Properties acquired after 7:30pm (AEST) on 9 May 2017, the exemption will no longer apply from that date.

This rule has previously been of great benefit to tax non-residents who were able to take up opportunities to live and work overseas while still qualifying for the full or partial main residence exemption on the sale of their Australian property for up to a six-year period.

Interestingly, if an individual who has been determined to be a tax non-resident returns to Australia and qualifies as an Australian tax resident again, then they will also be able to sell their main residence and qualify for the full or partial exemption CGT exemption even though they were considered a tax non-resident for a period of time.

If an individual does not intend on returning to Australia in the foreseeable future then the potential tax implications of selling the property after the 30 June 2019 deadline needs to be determined versus entering into a contract for sale of the property prior to this deadline or just continuing to hold the property indefinitely. These options need to be considered in conjunction with the person’s current and future financial goals and cash flow requirements.

Individuals who are living and working overseas while still maintaining their main residence in Australia will need to determine their future intentions to return to Australia, advisors will then be able to provide clarity around their current and future tax residency status. From those discussions, advisors can then provide guidance on the tax implications of the various scenarios in relation to the property.

Individuals who fall into the category of living and working overseas while still holding a main residence in Australia need to carefully assess their situation such that there are no unintended tax consequences.

This article was co-authored by Tristan Harmstorf, HLB Mann Judd Melbourne.