Main Resident Exemption for Foreign Residents has changed, and Capital Gains Tax will apply.
Recently the Australian Government passed new legislation restricting access to foreign residents utilising the main residence exemption. This means if you are a foreign resident, your ability to maintain your residence in Australia tax free has now been restricted; subject to some rules and transitional arrangements.
To assist in your understanding of this new legislation, and how it may affect you, we’ve provided the latest information below.
A comparison between the old legislation, the new legislation and how it may impact you:
OLD CGT Main Residence Exemption:
Previously, your main residence would be exempt from Capital Gains Tax (CGT) for up to six years if it was rented out, or an unlimited period where it was not rented out. Therefore, if you elected to depart Australia and maintain your residence in Australia to utilise in future years when you return, you were able to disregard any capital gain made from that property dependant on the terms above. If you were to maintain this property whilst a foreign resident in excess of the six year terms above, there was a partial exemption available for up to the six year ownership period (alongside the period you utilised the property as your main residence). Long story short, this was a very lenient tax concession, and a window the government have decided to close.
NEW CGT Implications for Foreign Residents:
The ‘Treasury Laws Amendment Bill 2019’ officially passed senate, removing access to the above concessions for foreign residents (an individual who is not a resident of Australia for taxation purposes). As a result, an individual who sells their Australian main residence and who is a foreign resident at the time of signing the sale contract, will no longer be entitled to the main residence exemption. This is subject to two limited
exceptions (see ATO for further details), however, these are very particular requirements and will be
The largest implication from this new legislation is the loss of ability to apportion your gain for the period you utilised this property as your main residence. This means you will pay tax on the gains made for this property even whilst this property was your main residence prior to your departure from Australia.
What does this mean for you?
Thankfully, the Australian government have provided some leniency with this new legislation, and there are some concessions still available to you. But you need to act fast.
There is a transitional provision the Australian government have allowed, to provide those impacted by this legislation the ability to still access their previous concessions.
The key date related to this transitional provision is 7:30pm on 9th May 2017.
– If you purchased a property prior to this date, the above legislation changes do not apply until 30th June 2020.
– If you purchased a property after this date, the above legislation is retrospective, and no concessions
Effectively, this means if you purchased the property prior to 9th May 2017, you can still access the main residence exemption by entering into a contract to sell the property prior to 30th June 2020. However, if you purchased after 9th May 2017, your options have become restricted.
Ensuring your Australian Tax residency status at the time of disposal:
Reviewing the legislation above, you may note it only applies to ‘foreign residents at the time of disposal’.
The legislation allows a foreign resident to re-establish Australian Tax Residency and potentially be able to claim the main residence exemption and also benefit from the absence rule (the six year rule described previously).
To achieve this, you are required to fully establish Australian Tax Residency status prior to entering into a contract to sell a property.
REAL LIFE EXAMPLE
Amita acquired a dwelling in Australia on 20 February 2003, moving into it and establishing it as her main residence as soon as it was first practicable to do so.
On 15 August 2021 Amita signs a contract to sell the dwelling and settlement occurs on 12 September 2021.
Amita used the dwelling as follows during the period of time for which she owned it:
– Residing in the dwelling from when she acquired it until 1 October 2007;
– Renting it out from 2 October 2007 until 5 March 2011 while she lived in a rented home in Paris as a foreign resident (assume the absense provision applies to treat the dwelling as her main residence);
– Renting it out from 16 April 2012 until 10 June 2017 while she lived in a rented home in Hong Kong as a foreign resident (assume the absense provision applies to treat the dwelling as her main residence); and
– Residing in the dwelling from 11 June 2017 until it was sold.
Amita was an Australian resident for taxation purposes as at the date of signing the contract.
As she had re-established her Australian residency she is entitled to the full main residence exemption as it is, or is taken to be, her main residence for the whole of the time that she owned it.
Please be aware this is general information, and individuals’ circumstances may vary. To gain tailored advice to your particular circumstances, please speak with your Highview Accountant.
Cranbourne: 03 5990 1000
Prahran: 03 9529 1566
Mornington: 03 5911 2100
Ringwood: 03 8899 9797
Article written by Adam Pasquill, Client Services Manager/Accountant, Highview Accounting & Financial.