Amendments to the availability of the Capital Gains Tax (CGT) main residence exemption for foreign tax residents were passed by the Senate on 5 December 2019, imposing new restrictions on the main residence exemption for CGT events happening on or after 9 May 2017.
The incoming amendments were a re-introduction of ‘housing affordability’ reforms that were initially announced in the 2017-18 Federal Budget. While this initial Bill was withdrawn prior to the election in May 2019, the new Bill contains substantially the same proposed changes, with some key concessions.
The changes will restrict access to the CGT main residence exemption to individuals that are Australian tax residents at the time of the sale. Importantly, the restriction of the main residence exemption takes into account only the individual’s residency status upon a CGT event occurring, with no ability to apportion the exemption for any time of Australian residency throughout the ownership period.
The major concession allowed under this Bill when compared to its previous version is the allowance for access to the main residence exemption by individuals that have been a foreign resident for a period of 6 years or less where certain life events occur. Such life events include a terminal medical condition for the individual, their spouse or child under 18 years of age, the death of a spouse or child or a transaction resulting from a family law matter such as divorce or separation.
In all other cases, the following rules will apply:
| Time Period |
Proposed Law |
| Properties purchased on or before 9 May 2017 |
Full main residence exemption is available for properties sold prior to 1 July 2020 provided that they have been maintained as the main residence of the owner throughout the entire ownership period.
No main residence exemption will be available for properties sold on or after 1 July 2020.
|
| Properties purchased after 9 May 2017 |
No main residence exemption applies, regardless of sale date.
|
It should be noted that the relevant sale date for the above purposes is the date of contract. Where a property is sold prior to 1 July 2020 but settlement occurs after this date, access to the main residence exemption may still be available.
Issues to consider
Establishing main residency and tax implications
The current CGT exemption applies to all properties that have been held as a main residence throughout the ownership period. As this exemption continues to apply to properties owned by foreign residents until 1 July 2020, it is important to maintain evidence showing that the owner established the property as their main residence.
In order to determine whether a property is considered a main residence, the ATO considers the below as some key indicators:
- Whether the owner and their family are living in the property and their personal belongings are kept there;
- The address listed for the owner on the electoral roll;
- Whether mail for the owner is addressed to the property; or
- Whether services such as gas and power are connected to the property.
Provided that the property was established as a main residence throughout the entire ownership period, the capital gain will be reduced to nil where properties are sold prior to 1 July 2020. Where a property was an individual’s main residence for only a portion of the ownership period, or if the property was used for income producing purposes, a partial exemption may still apply.
For any portion of a capital gain that is subject to CGT, a 50% discount is available when calculating the taxable capital gain where the property was owned for at least 12 months. However it should be noted that foreign residents may only access the 50% discount on gains relating to the ownership period prior to 8 May 2012.
Valuations
Obtaining a market valuation from a qualified valuer can be of assistance when there is any change in use of a property or a change in residency of the owner. It would be useful to obtain a valuation on a property when any of the following occurs:
- When the property is first used as a main residence, if this is after the initial purchase date;
- When the property is first used for income producing purposes; and
- At 8 May 2012 for foreign residents owning Australian property at this date.
Based on the incoming legislation, it does not appear that foreign residents may rely on valuations at the time their Australian tax residency ceased to reduce their taxable gain only to the period of foreign residency, meaning that any individual who is a foreign resident at the time of selling a property will be taxed on the gain made for the entire ownership period.
Withholding for foreign residents
Purchasers of property from foreign residents are required to withhold and remit 12.5% of the purchase price on properties valued at $750,000 or more. This withholding rate may be reduced in cases where it is expected that the actual Australian tax liability on the gain will be less than 12.5% of the sale price, for example, if the main residence exemption applies or if the vendor has carried forward tax or capital losses.
Please contact your local Moore Stephens Australia advisor to find out more.