On 5 December 2019, the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 passed the senate in a late night session on the final sitting day before the break. One of the most controversial aspects of the legislation is the removal of the Main Residence Exemption from Capital Gains Tax for home owners who become non-residents of Australia.

This change was originally announced as part of the 2017-2018 federal budget but had lapsed when the 2019 federal election was called in May 2019. Once the bill receives royal assent it will apply to CGT events that occur from 7.30pm (AEST) on 9 May 2017 – the date of original announcement.

Under the new law, individuals who are foreign residents when the CGT event occurs to a home that would qualify for the main residence exemption will not be entitled unless they satisfy one of the two conditions below:

  1. They satisfy the transitional rules – that they acquired the property before 9 May 2017 and sold the property before 30 June 2020, or;
  2. Where the individual is a foreign resident for six continuous years or less and certain life events occur during that period of foreign residency. These life events being:
  • Terminal Medical Condition: you, your spouse, or your child who was under 18 years of age, had a terminal medical condition;
  • Death: of your spouse, or your child who was under 18 years of age;
  • Divorce or Separation: the CGT event involved the distribution of assets between you and your spouse as a result of your divorce, separation or similar maintenance agreements.

This is a very distinct list of things outside of the taxpayer’s control.

Importantly, taxable Australian real property is not caught by the Australian tax system upon change of residency but is taxed upon change of ownership.

Generally, an individual taxpayer’s main residence is fully exempt from CGT on its disposal when the property has been the individual’s main residence during the ownership period of the dwelling. Partial exemptions are also available when the dwelling is only used as the individual’s main residence for part of the ownership period or the dwelling has been used to produce assessable income during the ownership period.

In addition to the above exemptions there is also the absentee rule where an individual can treat a dwelling as their main residence for up to 6 years (while renting it out) so long as they do not treat any other dwelling as their main residence during the period. The absentee rule will not operate together with the new legislation. As a result if you are a foreign residence on the day of the CGT event the tax payable will be on the full capital gain unless the taxpayers satisfies one on the above exclusions.

The key objection to this piece of legislation is that it amounts to retrospective taxation. Putting the May 2017 start date and transitional provisions to one side, it is clear that some people will pay tax on the entire gain made on a property simply because they became a non-resident. It appears to resemble the levying of tax on an 'ability to pay' basis. The additional retrospectivity is an abnormally harsh outcome for those who can’t, for whatever reason, sell their homes within the next six months. 

More equitable outcomes suggested by the professional bodies were, for example, that the absentee six year rule should remain unconditionally while overseas or that there should be an apportionment of the exemption such that only the amount of gain accruing since becoming a non-resident should be exposed to tax. These suggestions essentially fell on deaf ears, and upon royal assent, property owning Aussie expats should seriously consider their options before 30 June 2020.

As the new legislation is based on being a foreign resident on the date of disposal if the individual was to come back to Australia and resume their Australian residency then in this instance, we would expect the absentee rule will then be available. They could then sell the property at a later date while they are still an Australian resident and have access to a full or partial main residence exemption depending on their particular circumstances.

Should this article raise any planning concerns for you or your family please don’t hesitate to contact your trusted Ulton advisor.

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