Treasury has released the Exposure Draft for Treasury Laws Amendment (Housing Tax Integrity) Bill 2017: Capital gains tax changes for foreign residents (“Exposure Draft”).
The Exposure Draft is aimed at implementing the Federal Government’s 2017-2018 Budget measures in this regard to specifically deny the availability of the main residence exemption where, at the time the CGT event happens, you are a foreign resident.
In the ordinary course, the relevant CGT event will be CGT event A1 – disposal of a CGT asset and the timing is either:
- when the relevant contract for disposal was entered into; or, in the absence of any contract;
- when the change of ownership occurs.
The absence rule
Traditionally, Australian ex pats living and working overseas were able to take advantage of the absence rule, that is, where a dwelling was initially established as their main residence, they could subsequently vacate the dwelling but continue to treat it as their main residence for CGT purposes:
- if the dwelling was used to derive income (e.g. was rented out in their absence) – for up to 6 years; and
- if the dwelling was not used to derive income – indefinitely.
Impact of the proposed legislation
Assuming that the Exposure Draft is introduced in its current form, if an individual is a foreign resident at the time their main residence (or former main residence) is sold, they will not be entitled to the main residence exemption. Critically, the main residence exemption is not even available on a proportionate basis for the period of time the individual was both:
- Australian resident; and
- living in the dwelling as their main residence.
Worst still, foreign residents are not entitled to the benefit of the 50% CGT discount and therefore, individuals will pay capital gains tax at up to 45% (depending on when they acquired the property and their residence status over the ownership period).
Based on the above, Australian ex pats living and working overseas will have to be careful in deciding if and when to sell their main residence as if they are foreign resident at the time of the relevant CGT event (generally contract date), the entire gain will be ineligible for the main residence exemption and without the benefit (or at least the full benefit) of, the 50% CGT discount.
Is there anything ex-pats can do?
The proposed legislation will not apply to individuals who held a dwelling as at 7:30pm on 9 May 2017 (when the Budget proposal was announced) and the relevant CGT event happens on or before 30 June 2019.
No one has a crystal ball and therefore, it is difficult to determine whether ex pats in these circumstances should:
- consider selling their main residence to take advantage of the transitional reprieve;
- rely on returning to Australia and re-establishing Australian residence prior to the relevant disposal at some stage in the future; or
- simply accept that they will be subject to capital gains tax without the benefit of (or at least the full benefit of) the 50% CGT discount on eventual disposal.
Whatever the outcome, Australians living and working overseas in these circumstances should carefully consider their options and plan accordingly.
If you need any assistance on how the proposed legislation could affect you, feel free to get in touch.
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