Technical Update:

Proposed removal of main residence Capital Gains Tax exemption changes for foreign residents

12 March 2018

Legislation has been introduced to remove the Capital Gains Tax (CGT) exemption for the sale of a main residence by a foreign resident as part of the Government’s range of reforms to reduce pressure on housing affordability.

Proposed New legislation

Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 2) Bill 2018, which proposes to remove the CGT exemption for the sale of a main residence by a foreign resident, was passed without amendment by the House of Representatives on 1 March 2018 and now proceeds to the Senate. The Australian main residence exemption provides an exemption from CGT where a gain is made on the disposal of an individual’s main residence.

Currently individuals who are foreign residents are entitled to the main residence exemption in the same way as individuals who are residents of Australia for taxation purposes.

However, from 7:30pm (AEST) 9 May 2017, individuals who are foreign residents at the time they enter into contracts to sell their main residence will not get the exemption, subject to transitional rules.

The proposed transitional rules will apply to main residences held before 9 May 2017 and sold by 30 June 2019, in which case the main residence exemption will continue to apply.

This change was first announced in the 2017-18 Federal Budget on 9 May 2017 and was then the subject of consultation.

Employees can still benefit from the main residence exemption provided they sell their home before becoming a non-resident, so whilst still resident, or they wait until they return to Australia and re-establish residence.

There are currently no proposed plans to apportion the capital gain on selling a main residence between resident and non-resident periods.  If an owner is non-resident at the date of sale (entering into contracts), the proposed legislation removes all of the exemption, leaving the owner to rely on the CGT provisions regarding cost base and any access to the 50% discount (which does not apply to gains accrued whilst non-resident).

BDO Comment

These new rules need to be carefully considered by Australian employees who are either currently non-residents or plan to be so.

The changes indicate that the Government does not support international mobility as they are lumping in Australians working overseas with foreign investors, because the property owner's tax residency status on disposal is the determining factor with no reference to the property owner's previous residency status.

The changes may lead to a surge in sales in the lead-up to the mid-2019 transitional cut-off.