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Abolition of main home CGT exemption for foreign residents imminent

Monday, 22 June, 2020

On 1 July, foreign-resident individuals lose the main residence exemption from capital gains tax (CGT) on their Australian homes.

The only exception is for foreign residents who meet the 'life events' test. This applies where the individual, their spouse, or their minor child (under 18-years-old), had a terminal illness or died during that period, or the sale is as a result of divorce or separation. Only those who have been foreign-resident for less than six years at the time of sale can qualify for the exemption. There is also relief where an executor is administering an estate of an individual who has been a foreign resident continuously for less than six years.

The existing CGT exemption rules still apply if the owner returns to Australia and is an Australian tax resident on the sale date. However, the new rules apply to sales after 9 May 2017 for homes acquired after that date; homes owned before that date will be affected only if sold after 30 June 2020.

The CGT liabilities at stake in these circumstances could be material given the significant increase in house prices in Australia over recent years, particularly in Sydney and Melbourne, so foreign tax residents who own Australian residential property need to consider these new rules carefully, says law firm Deloitte Australia. 'The rules are essentially retrospective, as they can operate to deny the tax exemption on the increase in value of properties acquired since 20 September 1985, and not only on gains related to the period the owner is a foreign resident', it says.

No apportionment of CGT relief will be granted based on the number of days of non-residency or the value of the property at the time of non-residency. Moreover, earlier this year Australia's CGT regime for foreign residents was retrospectively changed to apply the principal asset test on an associate inclusive basis from 9 May 2017, to prevent foreign tax residents avoiding a CGT liability by disaggregating their indirect interests in Australian real property.

Although the sale of an Australian home might already be taxable in the foreign country where the owner is residing, the foreign tax in some countries is likely to be less than the new Australian tax, or zero, so the Australian tax will be a significant additional tax impost, says Deloitte. However, taxpayers not entitled to the main residence exemption can include incidental ownership costs in the CGT cost base, in order to reduce the taxable gain.