Overview

On 12 December 2019, Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019  received Royal Assent and implements the Government’s 2017-18 Budget measure to remove the capital gains tax (“CGT”) main residence exemption for individuals who are foreign residents.

The measure is effective from 7.30pm legal time in the ACT on 9 May 2017.

Who is a Foreign Resident?

An individual is a “foreign resident” if they are not a resident of Australia for Australian tax purposes.  For those individuals who have left Australia and are working overseas for a duration, the Full Federal Court’s decision in Harding v Commissioner of Taxation [2019] FCAFC 29 will be a relevant authority for determining whether they are a foreign resident.

Main Residence Exemption

As you will be aware, the main residence exemption applies to disregard a capital gain or capital loss made by an individual on the disposal of their dwelling (or an interest in the dwelling) where that is the individual’s main residence.

Removal of the Main Residence Exemption for Foreign Residents

Broadly, the amendments provide that individuals who are foreign residents at the time a CGT event occurs to their dwelling (generally the date of contract for the sale) will not be entitled to the main residence exemption subject to the following:

Property held prior to 7.30pm on 9 May 2017
  • The main residence exemption can be claimed for disposals that occur up until 30 June 2020 and meet all the exemption requirements; and
  • Disposals from 1 July 2020 are not entitled to the main residence exemption unless certain life events occur within a continuous period of 6 years of the individual becoming a foreign resident.
Property acquired on or after 7.30pm on 9 May 2017
  • The main residence exemption no longer applies unless certain life events occur within a continuous period of 6 years of the individual becoming a foreign resident.

What are the Relevant Life Events?

These events are:

  • The individual, their spouse or child under 18 died or had a terminal medical condition; or
  • The CGT event involved the distribution of assets between the individual and their spouse as a result of divorce, separation or similar maintenance agreements.

Other Considerations

On the death of a foreign resident, the changes will also apply to:

  • Legal personal representatives, trustees and beneficiaries of deceased estates;
  • Surviving joint tenants; and
  • Special disability trusts.

Comment

For those foreign residents caught by the measure, those looking to sell should (given their individual circumstances) consider the tax and other outcomes of selling before or after 30 June 2020.  Importantly, it is the date of contract for sale that will be the relevant date for the application of these measures.