New legislation introduced into Parliament today will prevent foreign residents accessing the capital gains tax (CGT) exemption on a main residence.
If the legislation is enacted, a taxpayer will not generally be able to claim any exemption under the main residence rules if they are a non-resident at the time of the CGT event, even if they were a resident for some (or even most) of the ownership period. No apportionment applies – the exemption simply doesn’t apply at all if the individual is a foreign resident when the CGT event is triggered.
On the other hand, if the taxpayer is a resident of Australia at the time of the CGT event then the normal main residence exemption rules apply, even if they have been a non-resident for some or most of the ownership period.
In most cases the CGT event is triggered when a contract is entered into between the parties.
While the original Budget announcement indicated that the exemption would no longer be available to temporary residents, the Government has decided to exclude temporary residents from these changes. This means that an individual who is classified as a temporary resident at the time of the CGT event can still access the main residence exemption as long as they are a resident of Australia at that time.
Special amendments are also being introduced to deal with deceased estate scenarios and special disability trusts. Under these rules the executor or beneficiary of a deceased estate is not generally entitled to the main residence exemption if the deceased individual was a foreign resident at the time of death (although there are some exceptions to this). The rules for special disability trusts are similar.
Someone holding property at 9 May 2017 can apply the current rules if the CGT event occurs on or before 30 June 2019. This gives non-residents some time to sell their main residence (or former main residence) and obtain some tax relief under the main residence rules.
Interestingly, the explanatory materials accompanying the legislation indicate that the general anti-avoidance rules could potentially apply to remove access to the exemption if the Commissioner determines that the parties have entered into an arrangement with the sole or dominant purpose of accessing the exemption. Presumably the Government is concerned about taxpayers transferring their main residence to a related party prior to becoming a foreign resident.
What is the main residence exemption?
Generally, you do not pay CGT on the sale of your private home.
A full exemption should be available if the following conditions are met:
- You are an individual who is selling a dwelling or an ownership interest in a dwelling;
- The dwelling has been your home for the entire ownership period;
- The dwelling has not been used to produce assessable income (i.e., rented out); and
- The dwelling is situated on land that is 2 hectares or less.
In some situations it is possible to apply a full exemption even if you have not lived in the property for the entire ownership period or where the property has been rented out for a period of time. However, the rules can be complex and need to be analysed in detail to confirm the position.
If a full exemption is not available, it may still be possible to apply a partial exemption. The general 50% CGT discount can also be applied if you have owned the dwelling for more than 12 months (subject to your residency status).
Whether a dwelling is your main residence is a question of fact. The following factors are often taken into account to help determine the issue:
- The length of time you have lived in the dwelling;
- The place of residence of your family;
- Whether you have moved your personal belongings into the dwelling;
- The address you have your mail delivered;
- Your address on the Electoral Roll;
- The connection of services such as telephone, gas and electricity; and
- Your intention in occupying the dwelling.