In late 2019, legislative changes were made that exclude non-residents from accessing the main residence exemption. The retrospective changes directly impact foreigners and expats whose main residence is in Australia or overseas.
- Non-residents for tax purposes excluded from the main residence exemption from 9 May 2017
- Transitional rules allow non-residents to sell their property and access the main residence exemption under the previous rules (if they held the property continuously from 9 May 2017).
- An exclusion applies where the taxpayer has been a non-resident for 6 years or less and a ‘life event’ occurs, such as death.
CGT and the main residence exemption
Capital gains tax (CGT) applies to gains you have made on the sale of capital assets. Unless an exemption or exclusion applies, or you can offset the tax against a capital loss, any gain you made on an asset is taxed at your marginal tax rate. The tax triggers when a ‘CGT event’ occurs. For residential property, the ‘CGT event’ is generally the date the contract is signed.
The main residence exemption prevents CGT applying to your family home (the home you treat as your main residence). If the home was your main residence for only part of the time you owned it, or if you use your home to produce income (for example, you use part of the home as business premises or rent out part of the property), then a partial exemption may be available. In addition, if you move out of your home and you don’t claim any other residence as your main residence, then you can continue to treat the home as your main residence for up to six years if you rent it out, or indefinitely if you don’t rent it out (the ‘absence rule’).
Previously, the main residence exemption was available to individuals who were residents, non-residents, and temporary residents for tax purposes.
The new rules
The new rules exclude foreign residents from accessing the main residence exemption and apply to CGT events that occur from 9 May 2017 onwards.
Under the new rules, if you are a non-resident for tax purposes at the time you sell your main residence, you will no longer be able to access the main residence exemption and you will need to pay CGT on any gain you make (subject to transitional rules and an exclusion). These new rules apply regardless of whether you were an Australian resident for part of the time you owned the property and no apportionment applies – the exemption simply does or does not apply depending on your residency status for tax purposes at the time the CGT event is triggered.
However, if you are a resident of Australia at the time of the CGT event, then you may be able to access the main residence exemption, even if you have been a non-resident for some or most of the ownership period. For example, an expat who maintains their main residence in Australia could return to Australia, become a resident for tax purposes again, then sell the property and if applicable, access the main residence exemption (the new rules contain provisions that will deny the exemption where someone attempts to avoid the new rules by deliberately structuring their affairs to access the exemption – for example, transferring the property to a related party).
The new rules do not affect Australian tax residents.
The transitional rules until 30 June 2020
Transitional rules are in place for non-resident taxpayers who would have been able to access the main residence exemption prior to the changes. The transitional rules enable someone who held property continuously from 9 May 2017 to apply the existing rules if the CGT event occurs on or before 30 June 2020. This gives non-residents a limited period of time to sell their property and obtain some tax relief under the main residence rules.
Exclusions to the new rules
If you would have been able to access the main residence exemption under the prior rules and have been a foreign resident for six years or less, there is a limited exclusion to the new rules where certain ‘life events’ occur.
A ‘life event’ is generally:
- Your death or the death of your spouse or child (under 18 years)
- Terminal illness of you, your spouse or your child
- Marriage breakdown and divorce
Under these circumstances, the taxpayer is able to access the main residence exemption. For example, if you or your spouse dies while living overseas, it has been six years or less since you became a non-resident, and the property is treated as your main residence.
After six years however, the main residence exemption will not apply. That is, if you have been a foreign resident for tax purposes for more than six years, you or your beneficiaries cannot access the main residence exemption once the transitional period has ended unless you move back to Australia and become a resident again before the CGT event occurs.
Who is an Australian resident for tax purposes?
Working out whether or not you are a resident of Australia for tax purposes can be difficult as it requires the exercise of judgement rather than applying a single ‘black and white’ test. The four tests that are used to work out your residency status can be confusing, and we recommend you seek advice to clarify your position.
To ask any questions and discuss this matter further, please call us on (07) 3217 5700 or email [email protected]
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