Foreign residents and the main residence capital gains tax exemption

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Mar 8, 2018 | Posted in Tax
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Foreign residents to lose access to the main residence Capital Gains Tax exemption

 A new law removing a Foreign Residents’ access to the Capital Gains Tax (CGT) exemption on the sale of a 'main residence' was introduced into the House of Representatives on 8th February 2018. Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No.2) Bill 2018 proposes to enact the changes announced by the government on 9th May 2017.

Currently as the law stands, the main residence exemption from tax on any capital gain is available for all taxpayers who dispose of a qualifying main residence, irrespective of which country they reside in for tax purposes at the time of the disposal. This Bill is attempting to remove this exemption for those who are foreign residents for tax purposes at the time of the sale of their property.

Upon introduction to the House, the Bill was referred to the Senate economics sub-committee; a report from which is due 23rdMarch 2018. The Bill has since passed the House of Reps and must now get through the Senate.

The date of impact will be the date of announcement – 9thMay 2017.

New residency requirement to access main residence exemption to Capital Gain.

Should the Bill pass into law, foreign residents who dispose of a property that would otherwise have access to the exemption (generally unlimited access if not rented out or by use of the 6 year absence rule starting from first date of being rented) will instead be taxable on 100% of the capital gain generated upon sale. Since the 8th May 2012 Foreign Residents have also been denied access to the 50% general CGT discount on the gain accrued since that date.

Coupled with this, since 1st July 2016 (with a broadening on 1st July 2017) purchasers of property have been required to withhold an amount  - 12.5% - from the purchase price and pay this to the ATO when purchasing from foreign resident vendors. This amount is not lost but is available to be set against any tax payable upon lodgement by the foreign resident of an Australian income tax return. Generally, foreign residents who derive untaxed Australian source taxable income (including a capital gain) are required to lodge an Australian income tax return.

Deceased estates and access to the main residence exemption

A beneficiary of a deceased estate will also not be able to apply the main residence exemption if the deceased was a foreign resident at the time of death. Conversely, should the deceased be a resident and the beneficiary a foreign resident and all other criteria are met, the beneficiary will be entitled to the main residence exemption.

However, the beneficiary will not be able to apply any additional main residence exemption (say by using the 6 year absence election) for any time they remain a foreign resident, with the exception that they will still have two years from the date of death to dispose of the inherited property and apply the full exemption in this case.

Should a beneficiary inherit a property and then return to Australia to reside in the property then they will be able to access the main residence exemption for the new period of main residence as normal.

The key difference to the current rule is that death of the original owner severs access to the main residence exemption (but for the 2 year rule mentioned above) for gains prior to death and no apportionment for the deceased’s period of main residence is available if the deceased died as a foreign resident.

Special disability trusts and the main residence exemption

The trustee of a special disability trust will also not be able to apply the main residence exemption if the principal of the trust (the person with special needs whom the trust was established for) was a foreign resident at the time of their death. Additionally, a beneficiary who receives a bequest of property from such a trust will be denied the exemption if the principal was a foreign resident at the time of their death.

Capital Gains Tax events which occur when ceasing Australian residency – CGT Event I1 and I2 – and the main residence exemption

Necessary changes have been made to ensure mobile homes and other units of accommodation that aren’t Australian Real Property are caught by the new rules. That is upon becoming a foreign resident – triggering I1 or I2 - the Main Residence exemption will no longer be able to be applied to non Real Property homes.

When does this new rule apply?

Upon passage of the legislation, the new rules will apply after 9th May 2017. The grandfather provisions allow the Main Residence exemption to be applied to property held on or before the 9th May 2017 which is disposed of up until 30 June 2019.

Property acquired after 9th May 2017 and subsequently disposed while a foreign resident will be automatically caught.

Residency and capital gains have always been areas of difficulty and litigation. If you think you may have any of the issues discussed above or they are likely to be part of your horizon please get in touch with your Ulton advisor.

 

DarylCorpe
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