Main Residence Exemption Changes

The proposed changes to the Main Residence Exemption (MRE) for persons who are no longer tax residents was withdrawn and then reintroduced recently. Despite some hope and wishes by many who may become affected the very reason why the previusly approved Bill was withdrawn so that Treasury could review other issues surrounding the MRE had some advisers puzzled.

Why was the Bill withdrawn and what was the reasoning of Treasury to unexpectedly review MRE laws ? This is a question that wasnt addressed at that time. However a recent March 2018 Tax Institute Convention may hold the secret. And its not great news.

The Commissioner of Taxation at the Tax Institute Convention presented and discussed tax practitioner conduct. He clearly identified:

• Exploitation of the MRE occurs for those who flip and
• Those who exploit the 4 year construction rule in s118-145
• Those who construct and use the 4 year rule, MRE and absence provisions to excape and avoid GST and income tax by describing CGT events to profit making
• Exploit absence provisions so that multiple properties access the MRE and in some cases claim multiple exemptions
• Some taxpayers shop advisers to exploit weakness in advice (ie non-property savvy advisers)
• Some advisory practice coach and mentor avoidance strategies

This is probably not news to advisers. Its not to me. I see all of the above at times.

But here is where the Commissioner seems to have shared insights into what Treasury may be thinking and advising Governments on.

The cost of the MRE is now $73BILLION PER YEAR in tax revenue that doesnt occur. Thats twice what we spend on defence. And thTrasury have modelled who really benefits. It doesnt really benefit 70% of Australians. The 30% it really benefits live in capital cities AND those who exploit it. The Commissioner singled out past tax residents and is why the exemption will be curtailed for past tax residents. (That seems to confirm bad news)

However the Commissioner may also have overshared some ideas in Government (Treasury ?). Signs of future law changes perhaps ?? Chris Wallis CTA, of the Australasian Tax Teachers Assoc has some views:

• A bright line occupancy test could be considered. So Peter Public who occupies a home for 60 days before departing for 5-6 years would NOT access the MRE. A 2, 3, 4 or 5 year test of residence could apply to each property before the MRE is confirmed. This would severely curtail the use of the absence rule for many.
• A tighter view of the MRE and capital gains. The bright line test could hold that profit earned in a shorter period of time is NOT eligible for any discount so that alternating between CGT discounts and ordinary income is unnecessary as the tax discount would impose a taxpayer to a marginal tax rate issue.
• Perhaps an annual nomination of a MRE could be adopted. This would enhance detection.
• Perhaps a requirement that ALL property owners must lodge a schedule for all property that is owned. This would declare any income, exemptions or the way the property is used ie vacant. This process would also capture the obligations is s118-192 however that has some concerns since not all taxpayers are obliged to use s118-192 if the past use of the property was not wholly CGT exempt.
• Perhaps a compulsory obligation that all property sales are disclosed AND reported. MRE would be claimed at that time.
• s121-20 requires a taxpayer to retain a record of each act, transaction, event or circumstance relevant to working out a CGT event.(You havent heard of this law??? Perhaps see our free checklist attached) ...This is why we are one of the ONLY tax practices that provide a free CGT record keeping tool. Perhaps it could become a matter to report annually in a tax return ? A further consideration is that each taxpayer would report this information annually IF they wanted the CGT benefits to accrue. ie report it or lose it.

The ALP could already be watching this space. Its a easy sell to tell the taxpayers of Australia that exploitation of the main residence rules are costing them billions.

 

Doh

 

There is an article on this in the latest Taxation In Australia magazine.

 

Chris Wallis was a great presenter at the convention too.

 

So basically you are saying the current status is....

- LNP are going to try and get it in for expats 'if' they win the next election (unlikely).
- Labor are going to implement it for both expats AND tax residents (eg everyone) 'when not if' they get voted in?

Did anyone at the conference mention how they are going to offset inflation when calculating profits? Are they going to use the BS inflation numbers eg CPI or is there going to be something "city by city" based on how much to offset taxes on PPOR for inflation?

 

Tax law doesnt address what an expat is.

Non resident owners of Australian real property are going to get smacked with loss of the CGT concessions and the law does retrospectively eliminate past concessions. Their only hope is if the Morrison Govt calls a election asap and the bill is canned cause it seems certain to get passed. ALP never opposed it. Hansons for it as are other indies.

Their are other ways beyond use of the former indexing method to reduce CGT. One of the best strategies that can be considered is NOT selling until after returning and re-establishing tax residency for the minimum period of 6 months. In which case the changes are disregarded. Not selling has always been the best way to avoid CGT

I see a soft winding back of the main residence exemptions even for tax residents in the near future - eg ALP Govt. They will call it integrity measures. The 6 year absence especially, the construction 4 year backdated, better integrity over new spouse interests, perhaps a statutory brightline minimum period of residency and a few other issues would be likely be tightened.

One option that was doing rounds of Treasury a while back was a CGT event for some changed USE of main residence property.. Rather than a costbase apportionment there could be a defined CGT event (like CGT event K4- Trading stock) that triggers at that time rather than later.
Who knows.