Loss of main residence exemption for foreign residents

02 December 2019

Eddie Chung, Partner, Business Services |

The Government previously announced a Federal Budget measure to remove the main residence exemption from foreign residents for Australian capital gains tax (CGT) purposes. The Bill for the measure was introduced before the last election but lapsed.

However, a new Bill was introduced on 23 October 2019, which will revive the rules if passed, as follows:

  1. If the home was acquired before 9 May 2017, the main residence exemption will apply if the sale happens on or before 30 June 2020 and the normal eligibility criteria under the current main residence exemption have been satisfied; if the sale happens on or after 1 July 2020, the new rules detailed below will apply; or
  2. If the property was acquired on or after 9 May 2017, the new rules detailed below will also apply regardless of when the property is sold.

Under the new rules, if you are a foreign resident for Australian tax purposes when you sign the contract to sell your home, you will no longer be entitled to claim the main residence exemption unless you have been a foreign resident for a continuous period of no more than six years and, during that time, one of the following exceptions applies:

  1. You, your spouse, or your child under 18 years old, had a terminal medical condition
  2. Your spouse or child under 18 years old passed away
  3. The sale of the home involved the distribution of assets between you and your spouse as a result of divorce, separation, or similar maintenance agreements.

If you are caught by these rules, you will also no longer be able to vary your withholding tax rate if the sale of your home is subject to the CGT withholding rules. However, the withholding tax can be used to offset any CGT on the sale of your home.

It should be noted that if you were not an Australian tax resident while you were living in the property, it may be difficult to satisfy the current main residence exemption requirements in any event.

On the other hand, if the property was acquired before 20 September 1985, it will still be a pre-CGT asset, which will not entail any CGT upon its sale.

As a practical consideration, if you are caught by the above rules and have to pay CGT on the sale of your home, apart from the purchase price of the property and the incidental costs (e.g. stamp duty, legal costs, etc) on its acquisition and sale, if you are not deriving income from the property, you are also allowed to include any non-deductible holding costs (e.g. interest on loan drawn down to acquire the property, land tax, insurance, repairs, rates, etc) associated with the property in calculating the capital gain on the property.

However, you need to be able to substantiate those costs, which may be difficult especially if you have owned the property for a long time.

If you think you may be caught by these new rules, for example, if you have been an Australian expatriate who is working overseas and still owns a home in Australia, it will be worthwhile to talk to a tax professional to understand how you may be affected.

For more information, please contact Eddie Chung or a BDO tax specialist

Important disclaimer: No person should rely on the contents of this article without first obtaining advice from a qualified professional person.  This article is provided on the terms and understanding that the author and BDO (QLD) Pty Ltd are not responsible for the results of any actions taken on the basis of information in this article, nor for any error in or omission from this article.  The article is provided for general information only and the author and BDO (QLD) Pty Ltd are not engaged to render professional advice or services through this article.  The author and BDO (QLD) Pty Ltd expressly disclaim all and any liability and responsibility to any person in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this article.