CGT main residence exemption fixed for temporary residents

Treasurer Scott Morrison recently announced that foreign and temporary tax residents will lose access to the CGT main residence exemption. The removal applies from 9 May 2017.

In the MYEFO report released on 18 December 2017, the government announced that temporary residents will be removed from this amendment.

The draft legislation was introduced into parliament on 8 January 2018.

The change is significant for some. The amendment brings about a change in the way that new entrants to the country deal with their property planning.


What is a temporary resident?
You a temporary resident if:

• You hold a temporary visa granted under the Migration Act 1958

• You are not an Australian resident within the meaning of the Social Security Act 1991, and

• Your spouse is not an Australian resident within the meaning of Social Security Act 1991.

The second and third tests ensures that temporary visa holders who have a significant connection with Australia are not treated as temporary residents for tax purposes.


Foreign residents
The terms “resident”, “resident of Australia” and “non-resident” are defined in ITAA 1936 s 6, while the definitions of “foreign resident” is contained in ITAA 1997 s 995-1 (makes sense?).

A “foreign resident” means a person who is not a resident of Australia for the purposes of ITAA 1936. Section 6 of that Act defines a resident of Australia as someone whose domicile, or permanent place of abode, is in Australia. Also, individuals who have actually resided in Australia, continuously or intermittently, for more than half of the income year are determined to be residents.

The main residence exemption will no longer apply after 30 June 2019 for owners who are foreign residents at the date the property is sold.


Risk mitigation steps
Typically, a question surrounding an individual’s residency for tax purposes relate to the entire income year in question. However, in this instance, the CGT exemption will only apply where the individual is a resident at the time of the CGT event (ie the date of contract).

In situations where a couple’s main residence is in joint names, the exemption may not be fully available where one member of the couple is a resident and the other is a non-resident. Such instances may be that one partner may move for work or business purposes first and the spouse would stay back to finalise the financial matters. The specific date where residency changes is vital in these instances.


Transitional rules and other exemptions
The removal of the main residence exemption applies from 9 May 2017. However, grandfathering applies for owners that held property at this time and are foreign residents at the date of sale.

In these circumstances, the sale of the property by a foreign resident is entitled to the main residence when sold prior to 30 June 2019.

 

Anyone who is or was a tax resident who left the country in the past or who plans to leave the country for a unforeseen period of time who owns local property needs to get tax advice. This simple law change has very broad application and citizenship is no protection. A ticking time bomb that will shock many if they choose to sell while absent from the country.

The sole exception is those who own pre-CGT property assets (incl a former home or investment). They remain unaffected. Important too that they dont trigger costly additions to the property which may be seen as a separate CGT asset and that part subjected to tax.

And as Ross says for those who migrate here on a temp basis need to carefully consider what their property plans are. If they buy a property here while they are resident and later leave it may be critical that the property is sold before any of the owners departs or full CGT may be payable.

 

Just trying to assess my own options here...

I am currently a foreign resident, own a property which was my main residence for three before leaving Australia two years ago and renting it out.

To skip CGT altogether:
1) sell before 30/06/2019 - no CGT will apply as I am in the 6 year period.
2) move back to Australia, wait six months, sell the property in the next 4 years (plus whatever period the property is not producing an income) - no CGT will apply as I am Aussie resident and within 6 years of main residence exemption.

If I sell after 1/7/2019, say 1/7/2020, and I am a foreign resident I will get a CGT discount of about 20% (3 years resident / 7 years owned * 2) and will get a 32.5% tax hit (no main residence discount or exemption applies). Therefore I pay the ATO 32.5% * 80% = 26 cents for every dollar of capital gain since I left Australia.

If I move back to Australia wait 6 months to become resident, but let the 6 year period lapse before selling in, say 2023, I still scale my CGT down by the proportion of years it was my main residence (something like 3 / 10 so I pay 70%), then I apply the CGT 50% discount and I get the lower tax brackets up to the first $87k. ATO gets 70% * 50% * <32.5% = 11 cents for every dollar of capital gain since I left Australia originally.

Does this sound right?

In particular the point about CGT being always applicable from the point in time I left Australia and started renting the property and never from the point in time of original purchase? This is important given the market has softened in the last year or two compared to the two years prior.

Given I have not obtained a valuation at that point in time two years back, is there any action now that can make up for that? Is there such a thing as a retrospective valuation?

 

You can get a retrospective valuation provided it was from a reliable source and based upon objective data.

Personal tax advice would be prudent. The specific dates and issues need assessment. eg Are you a non-resident ? Do you have a spouse (incl same sex, defacto (perhaps?) etc who also owns property ? Assuming a 100% exemption isnt always correct.

This statement is incorrect
If I sell after 1/7/2019, say 1/7/2020, and I am a foreign resident I will get a CGT discount of about 20% (3 years resident / 7 years owned * 2) and will get a 32.5% tax hit (no main residence discount or exemption applies). Therefore I pay the ATO 32.5% * 80% = 26 cents for every dollar of capital gain since I left Australia

If you sell after 2019 you lose ALL PAST CGT concessions, exemptions etc. Its not taxed from the date you depart. Basically take the cost of the property and pay 100% non-discount CGT on all profit at non-resident tax rates

 

i raised this very issue with a tax lawyer.

When i look at the first used to produce income rule it might be ok.

Section 118-192 ITAA 1997 says this rules applies where (b) you would have got a full exemption under this Subdivision if the CGT event had happened just before the first time (the income time ) it was used for that purpose during your ownership period.

Now if an expat had a main residence and then rented it before they became non resident i.e. during their residency of Australia i think the cost base would be market value when first used to produce income.

When they then sell as a foreign resident yes they pay CGT with no discount but based on market value when first rented.

Tax planning opportunity is to make sure you rent BEFORE you become non resident.

i cant see why this wouldnt apply to the poster. Big caveat that very question hasnt been answered as yet for me so I havent reviewed every part of the legislation.

 

Thanks Paul and Mike. Very useful feedback.

So I have a few things to consider and some areas open to interpretation. Is the ATO's private ruling process appropriate to try to establish what facts I can rely on?

 

Rent 100% - Those who used the home as a place of business or earned partial rent or who did not have a 100% exempt use (eg choice of main residence exemption elsewhere) may be unable to use s118-192.

I was waiting for clarity on the application of s118-192 and its impact. That good to hear it may still apply. Yes...Earn rent before you depart. A very important difference. Staying in rented accom for a few days could save a massive amount.