Significant changes to the Capital Gains Tax Main Residence exemption affecting foreign tax residents (including Australian citizen ex-pats) passed Parliament in December 2019. As a result, Australians who move overseas and decide to keep their home in Australia may have to pay Capital Gains Tax if they sell whilst they are a foreign resident. Taxable gains will be calculated based on the original cost of the property and across the whole period of ownership, even if the owner had lived in the property for a number of years previously.
This is a substantial change in policy and has major implications on Australians that have moved, or are planning to move overseas but are uncertain of whether they may return to Australia. Existing homeowners have a short window to sell and access the exemption under transitional rules.
Many Australians can sell their family homes without having to pay tax on capital gains because of the main residence exemption. Under the exemption, if an Australian-resident homeowner sells a property that was used wholly as their main residence, any capital gains will be tax free. In a case where the residence was only the owner’s main residence for part of their ownership period, or where part of the property was used to produce income, a partial exemption is generally available.
The changes to the capital gains tax main residence exemption were first announced in the May 2017 Federal Budget and were eventually passed by Parliament on 5December 2019. Importantly, the changes apply from the date they were originally announced – 9 May 2017, subject to transitional rules for homes already owned at that time and sold by 30 June 2020.
The changes deny the main residence exemption, including a partial exemption, to anyone who is a foreign resident for tax purposes at the time they enter into the contract of sale. However, there are some limited exceptions.
The exceptions apply when, at the time of entering into a contract for sale, the homeowner has been a foreign resident for no more than 6 years continuously and has suffered a specified ‘life event’, being one of the following:
Transitional rules provide a short window for existing property owners to sell their property and access the main residence exemption (in part or in full) under the pre-existing rules. To qualify, the property must have been owned continuously prior to 9 May 2017, and the contract for sale must be entered into before 30 June 2020.
These new provisions operate on a ‘point in time’ basis and don’t allow a pro-rata exemption. There is also no cost base reset at the time of becoming a foreign resident. This means that if person who has lived in their Australian property for 30 years, then moves overseas and becomes a foreign resident, and sells their property after only a short period of time, they will be subject to tax on the full gains based on their original purchase cost.
This raises a number of practical issues, including where records (e.g. holding costs) have not been kept because they were not expected to be needed. Many Australians that rely on the main residence exemption do not keep accurate records of their main residence because, until now, these haven’t been required.
It is also difficult to determine whether you will return to Australia at the point in time you move overseas – so many people retain their Australian property until it becomes clear whether they will be returning. However, under the new rules, if a person sells at that point in time, they will likely be subject to capital gains tax.
Employees of multinationals will need to give additional consideration to selling their property before accepting ‘permanent’ assignments overseas.
Conversely, multinational employers should consider their ‘tax equalisation’ clauses in contracts for overseas assignees as the employer may be adversely impacted if the clause extends to tax on capital gains.
Homeowners who have moved overseas and owned a property prior to 9 May 2017 should consider whether they should sell prior to 30 June 2020, and owners planning to leave Australia may need to re-evaluate plans to retain their Australian property in light of the changes. Many owners will likely be encouraged to sell, however this will depend on individual circumstances.
For more information, please visit: https://www.ato.gov.au/general/capital-gains-tax/international-issues/Foreign-residents-and-main-residence-exemption/