If you have left Australia and kept your home as an investment, you may now be hit with Capital Gains Tax.
The changes that were first announced in the 2017 Federal Budget delivered a blow to foreign residents with the removal of the Main Residence Exemption for foreign and temporary residents of Australia, which, once it passes into law, would 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 announced in the 2017 budget proposed to 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.
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. These properties 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 there will be no relief available.
The Bill for the non-resident CGT changes has now passed the House of Representatives, and contains some significant changes from the Budget announcement.
As a response to the significant consultation period following the original announcement, there was a small win for temporary residents, who will now not be subject to the new changes.
However, where it was first thought that property owner individuals who are becoming non-residents of Australia might be able to obtain a market valuation as at their date of departure to help identify a main residence exempt portion of any future capital gains on disposal of the dwelling, this is not the case.
The examples (below) contained in the Explanatory Memorandum of the Bill clearly state that if you a non-resident on the date your contract of sale is signed (as opposed to settlement date), you will be subject to CGT on 100% of the capital gain.
Vicki acquired a dwelling on 10 September 2010, moving into it and establishing it as her main residence as soon as it was first practicable to do so.
On 1 July 2018 Vicki vacated the dwelling and moved to New York. Vicki rented the dwelling out while she tried to sell it. On 15 October 2019 Vicki finally signs a contract to sell the dwelling with settlement occurring on 13 November 2019. Vicki was a foreign resident for taxation purposes on 15 October 2019.
The time of the CGT event A1 for the sale of the dwelling is the time the contract for sale was signed, that is 15 October 2019. As Vicki was a foreign resident at that time she is not entitled to the main residence exemption in respect of her ownership interest in the dwelling.
Note: This outcome is not affected by
- Vicki previously using the dwelling as her main residence; and
- the absence rule in section 118 - 145 that could otherwise have applied to treat the dwelling as Vicki’s main residence from 1 July 2018 to 15 October 2019 (assuming all of the requirements were satisfied).
Note that if Vicki returned to Australia and re-established her Australian residency status for tax purposes before 15 October 2019, she would be entitled to the full main residence exemption (assuming all of the requirements were satisfied).
Given the lack of any kind of concessional treatment for former Australian tax residents beyond
30 June 2019, we expect to see individuals who are becoming non-residents of Australia seriously consider whether they should enter into a contract to dispose of their former Australian residence before they permanently depart Australia.
Additionally, there may be 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 residents, we strongly recommend contacting the BDO Global Expatriate Services Team to discuss your situation.