Expatriates who own property in Australia that is, or was, their main residence may now be subject to tax when the property is sold. This follows royal assent on 12 December 2019 of legislation to remove the main residence capital gains tax (CGT) exemption for individuals who are foreign residents for Australian tax purposes.
The changes apply to property sold on or after 7.30pm on 9 May 2017 (the Federal Budget announcement). Exceptions and transitional arrangements apply.
The following is a summary of the changes for financial services professionals.
1. Main residence CGT exemption
Broadly, an individual’s main residence may be fully or partially exempt from CGT, depending on whether the property was used as their main residence for all or part of the ownership period. A partial exemption may apply if the individual uses their main residence to produce income.
Prior to this legislative amendment, the exemption was available to both residents and foreign residents for Australian tax purposes.
1.1 What has changed?
The amendments remove the exemption for individuals who are foreign residents at the time they dispose of a property that is, or was, their main residence. An exception applies for individuals who experience certain ‘life events’, provided they have been foreign residents continuously for six years or less. Note also that property acquired prior to 20 September 1985 will not be impacted by this change.
[based on Example 1.2 in the Explanatory Memorandum (EM) to Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019]
Vicki acquired a property in Australia on 10 September 2010 and immediately established it as her main residence.
On 1 July 2018 Vicki vacated the property, rented it out and moved to New York. On 15 October 2020 Vicki, who is now a foreign resident for tax purposes, signs a contract to sell the property with settlement occurring on 13 November 2020.
For CGT purposes, Vicki is treated as disposing of the property on 15 October 2020 ie when the contract is signed. As she is a foreign resident at this time, she is not entitled to the main residence CGT exemption.
The exemption has also been removed for the trustee of a special disability trust (SDT) where it disposes of a property that is, or was, the principal beneficiary’s main residence and they are a foreign resident at the time of disposal. In addition, an individual who inherits a property from a deceased estate or SDT may not be eligible for the exemption if they are a foreign resident or if the deceased/SDT principal beneficiary was a foreign resident at the time of death.
1.2 What are the transitional arrangements?
A foreign resident who owns property in Australia that was acquired prior to 9 May 2017 may still be eligible for the exemption, provided the property is sold before 1 July 2020. Existing eligibility conditions for either the full or partial main residence CGT exemption must still be satisfied.
[based on Example 1.10 in the EM]
Samantha acquired a property in Australia on 13 April 2013 and immediately established it as her main residence.
Samantha resided in the property until 15 September 2016. The following day she rented out the property and moved to Bahrain, becoming a foreign resident for tax purposes.
On 10 January 2019, Samantha signed a contract to sell the property, with settlement occurring on 7 February 2019. As Samantha owned the property before 9 May 2017 and she sold it before 1 July 2020, she is still entitled to the main residence exemption under the transitional rule.
1.3 What is the ‘life events’ test?
Foreign residents can still access the main residence CGT exemption in relation to the disposal of a property if certain conditions are met. To be eligible, the individual must have been a foreign resident continuously for six years or less at the time of disposal and have experienced certain ‘life events’ during that period. The life events include:
- the individual, their spouse or child under age 18 is diagnosed with a terminal medical condition
- the death of the individual’s spouse or child under age 18
- the individual is required to transfer ownership of the property to their spouse (or former spouse) because of marriage or relationship breakdown
[based on Example 1.8 in the EM]
Joan acquired a property on 7 February 2015, which she moved into with her spouse John, establishing it as their main residence.
In July 2020 they retire and move to the Bahamas, acquiring a new main residence there. They become foreign residents at this time. They rent out their former residence in Australia and it is not maintained as their main residence during the rental period. Sadly, John dies in March 2021 and Joan decides to sell their former residence in Australia.
As Joan has been a foreign resident for less than six years and her spouse passed away during her foreign residency, she is entitled to a partial main residence exemption based on the period that the property was her main residence.
2. Tax implications
The removal of the main residence CGT exemption may have significant tax implications for some individuals. However, the impact may be reduced where the individual is eligible for the CGT discount.
However, eligibility for the CGT discount was modified in 2012 for foreign residents. The discount is reduced for gains accrued during periods of foreign residency that occur after 8 May 2012. Whilst foreign residents are unlikely to be eligible for the full 50 per cent CGT discount, a partial discount may still apply, depending on when the property was acquired and how long the individual has been a foreign resident.
Where the CGT discount does not apply, the full gain will be included in the individual’s assessable income, taxable at foreign resident tax rates.
Example: Vicki (cont.)
Returning to the earlier example of Vicki, assume she acquired the property for $1 million on 10 September 2010 and disposes of it on 15 October 2020 for $1.5 million, realising a capital gain of $500,000.
As noted above, Vicki is not eligible for the main residence CGT exemption. She is also ineligible for the full 50 per cent CGT discount as she was a foreign resident for part of the ownership period. However, she may be eligible for a reduced discount percentage, reflecting the period she was a resident for tax purposes.
In determining Vicki’s discount percentage, note that she was a resident on 8 May 2012 and a foreign resident from 1 July 2018 to 15 October 2020 when she disposed of the property. Applying the statutory formula in the tax law, Vicki has a discount percentage is 38.64 per cent. This means $306,800 of the capital gain will be included in Vicki’s assessable income in the 2020-21 financial year.
Assuming Vicki has no other assessable income for Australian taxation purposes, her tax liability would be $119,610.
However, if Vicki sold the property for $1.5 million prior to 1 July 2020, the main residence CGT exemption would apply, with no tax liability resulting.
For individuals who are foreign residents and own property in Australia that is, or was, their main residence, careful consideration should be given to the timing of disposal. Where the property is sold prior to 1 July 2020, a full or partial main residence CGT exemption may still apply, providing the property was acquired before 9 May 2017. However, sales that occur on or after 1 July 2020 may result in a significant tax liability, unless one of the life events exemptions apply.
Alternatively, if the client is planning to return to Australia in the future, it may be beneficial to delay selling the property until tax residency is resumed.