Removal of the Main Residence Exemption for Foreign Residents
On 9th May 2017, the Australian Government announced a series of reforms to reduce pressure on housing affordability. The main change introduced was the removal of the main residence exemption for Australian Captain Gains Tax (CGT) purposes for foreign residents (both current and future). Please note that this definition covers foreign residents for tax purposes so can include Australian citizens and permanent residents if they are considered a non-resident of Australia for tax purposes.
This has been introduced by the Australian Government as a Bill on February 8, 2018, and does not differ from the exposure draft.
For properties acquired on or before 9th May 2017, the new rules will not apply to disposals if the property is sold prior to 30th June 2019.
RULES FOR FOREIGN RESIDENTS EXPLAINED
Determining residency at the time of disposal
The date of disposal in an ownership interest of a dwelling is generally at the time that a contact of sale is entered. Individual taxpayers will need to determine at that point in time if they are an Australian resident or foreign resident for tax purposes. If it is determined that at the disposal date, the individual is a foreign resident, then they will not be eligible for the main residence exemption for any of their ownership period. As a result, any capital gain on the disposal of the dwelling is not exempt for Australian tax purposes, and will need to be taxed at the relevant foreign resident tax rates. The Bill does not provide any apportionment of the main residence exemption, meaning that the days that the dwelling has been owned as an Australian tax resident is irrelevant. In addition, foreign residents are not entitled to the general 50% CGT discount, so this will also need to be considered.
Under the Bill, the amendments will apply to foreign residents who have ownership in Australian dwellings that have been acquired on or after 7.30pm (AEST) on 9th May 2017. However, for dwellings that have been acquired on or before 9th May 2017, the new rules will not take effect for disposals of the dwellings until after 30th June 2019. Individuals that purchased properties before 9th May 2017 and utilise it as their main residence (or benefit from the absence rule provision), will still be able to take advantage of the main residence exemption for disposals occurring on or prior to 30th June 2019.
HOW THIS WORKS
The Bill provides the following example:
Vicki acquired a dwelling on September 10, 2010, moved into it, and established it as her main residence. On July 1, 2018 Vicki vacated the dwelling and moved to New York. On October 15, 2019 Vicki signs a contract to sell the dwelling. As Vicki is a foreign resident on October 15, 2019, she is not entitled to the main residence exemption. This outcome is not affected by Vicki previously using the dwelling as her main residence. However, where an individual returns to Australia and resumes Australian tax residency before entering into a contract of sale, they may still be able to claim the main residence exemption.
IMPORTANT THINGS TO NOTE:
- It is crucial to determine your tax residency at the time the contract for sale is entered into. Advice should be obtained in relation to tax residency.
- Employees that have accepted a project overseas may be adversely impacted by the introduction of these rules.
- If you are or it is likely that you will become a foreign resident, it may be worthwhile considering selling you main residence before 30th June 2019 to benefit from the main residence exemption.
Contact PKF if you are unsure of your tax residency and are looking to dispose of your main residence.