If you have left Australia and kept your home as an investment, you may now be hit with Capital Gains Tax.
The recent announcement of the Federal Budget has delivered another blow to foreign residents with the Removal of the Main Residence Exemption for foreign and temporary residents of Australia, which will take effect from 7:30pm (AEST) on 9 May 2017.
As a general rule, your home will cease to be your main residence when you stop living in it. There are however, circumstances where you can choose for it to continue to be treated as your main residence for Capital Gains Tax (‘CGT’) purposes.
More specifically, if you do not use the dwelling to produce income, it can be treated as your main residence for an unlimited amount of time, for example, where it is left empty or a relative is living there rent free. If you use the dwelling to produce income (e.g. lease the home or list the home on Airbnb), the dwelling can continue to be treated as your main residence for a period of up to six years from the date the property begins to derive income.
What this means from a tax perspective is that when you decide to sell the dwelling, the sale may not attract CGT i.e. you will not pay tax on any gains made on the property in relation to the period that the dwelling is taken to be your main residence.
The new measure introduced in the 2017 budget will disallow a main residence CGT exemption for foreign and temporary residents of Australia. It is common for Australians working overseas to keep their home in Australia for when they eventually move back from assignment or as an investment, often renting the property out in the meantime for additional income and taking advantage of the 6 year rule mentioned above. Now, where these taxpayers cease to be Australian residents, they will attract CGT on the sale of their Australian real property on the gains made from the date they became a non-resident.
However, there are grandfathering rules for any gains on properties that were already owned as at 7:30pm 9 May 2017 and were currently being treated as the owner’s main residence, will continue to be exempt from CGT under the existing provisions until 30 June 2019. However, if the dwelling is sold after 30 June 2019 CGT will be apply in relation to the capital gains accruing after that date, so there is only limited grandfathering relief available.
What we expect to see from individuals who are becoming non-residents of Australia is either disposal of their former Australian residence before they permanently depart Australia, or obtain a market valuation as at the date of departure to help identify any main residence exempt portion of any future capital gains on disposal of the dwelling.
Alternatively, we may see an increase in Australians who have departed the country, exploring ways to remain a resident of Australia for tax purposes, however, this may have other, negative tax implications as they may then become taxable on their non-Australian sourced income.
If you have any concerns or questions regarding the CGT changes for foreign and temporary residence, we strongly suggest contacting the BDO Global Expatriate Services Team to discuss your situation.