Modified Proposed Non Resident Loss of Main Residence

In May 2017 the Treasurer announced changes to the main residence exemption that would impact a non-resident taxpayer so that the MRE may be effectively lost if a CGT events occurred while the owner/s were a non-resident. That Bill was read by BOTH houses without amendment. However it never received assent or a final reading by the House of Reps.

This Bill lapsed when the recent election was called and decided.

On 23rd October 2019 a modified Bill called the Treasury Law Amendment (Reducing Pressure of Housing Affordability Measures) was introduced and read for the first and second times without amendment. That Bill is VERY different to the proposed original law although it has the same intended outcome. It does contain some exceptions

The proposed new law as tabled will:

• Remove the CGT exemptions (Sub 118-B) which apply to a former main residence if a CGT events occurs while the owner is non-resident except for
  • A non-resident owner who has CONTINUALLY been non-resident at the time of the CGT event and who can satisfy a "life event" test
• Remove the past and available CGT exemptions available to a trustee in respect of a dwelling the deceased owns at the deceased was non-resident at the time of death
• Deny a non-resident beneficiary any further CGT exemptions (ie the 2 year rule) where the deceased is a tax resident at that time of their death
• Allow the Commissioner to use Part IVA to apply to arrangements that attempt to modify the intentions of these provisions. These powers likely already apply but specific mention is contained in the EM about the avoidance concern
• Remove the capacity to use s118-192 to reset the costbase for a person who departs Australia and rents their former home. The reason is that a person who sells a former home while non-resident is not eligible for use of s118-192 as their exemption is lost. s118-192 applies to a partial CGT event. If a life event occurs this will act as a exemption and the requirements of s118-192 cannot be met.
• Remove the capacity for a owner who is non-resident at the time of a CGT event arising from a compulsory acquisition to use a main residence exemption excepting where a life event occurs. The reason is that the main residence requirement cannot be met for a part of the property.

What are these life events ?

Life events are exceptions to the loss of the main residence exemption. They ONLY apply where the owner has NOT been a CONTINUOUS non-resident for tax purposes for at least 6 years.
In the same manner that a taxpayer can "reset" a 6 year absence for the MRE they can also reset their tax residency. However caution must be given. Merely relocating to Australia may not reset the tax residency. Once a taxpayer has been continually absent for 6 years, life events cannot be used.

What are life events ?
1. Terminal medical condition of the owner, spouse or child who was aged under 18 years at the date of the CGT event;
2. Death of the spouse or child aged under 18 (NOT THE OWNER);
3. A CGT event that arises because of a family law matter where it involves a distribution of the assets BETWEEN THE PERSON AND SPOUSE under Australian or foreign law. Note clearly.... This does not allow a property sale arising from a divorce or separation.

Summary of key issues:

• determining the date and timing of a change of tax residency is important to these laws. eg it may be a prudent strategy to ensure the nature of departure is initially short term until such time as property has been sold.
• The date of the CGT event is subject to this measure. If a CGT event is deferred until after the taxpayer/s return to Australian tax residency the laws will not apply
• The 6 year test requires a continuous period. The 6 year period can be prolonged and reset however care must be taken that tax residency recommences. Not just physical presence.
• Affected taxpayers must consider their projected timeframes before departure
  • Sell asset prior to departure ?
  • Retain asset permanently until after return.
  • Consider a sale if a life event occurs WITHIN 6 years or
  • Fall subject to the tax impacts
• A taxpayer who departs Australia should also consider the impact this tax issue will have if they die. After 6 years their main residence exemptions are stripped on death impacting a beneficiary. Time may be of essence as the two year rule may not operate. Transfer of title to a spouse may not trigger CGT but a larger CGT issue may impact the portion inherited.
• A taxpayer who is a non-resident who becomes a beneficiary of real Australian property that was a tax residents home at the time of death will need to seek Australian tax advice
• Taxpayers who are non-resident sneed to consider a CGT event to sell their interest in affected property to realise any CGT benefit PRIOR to 30 June 2020. Disposal to a trust needs to be given caution as this may be a wash sale and fall foul of Part IVA.

The apparent start date for this measure is being backdated to 9th May 2017 however a transitional rule will provide a operative start date of 1 July 2020 to many CGT events provided the ownership interest existed at 9th May 2017.

 

Not only will this make things more complicated the transitional rule will add another level of complexity.

 

Yeah. Its another one of those complex date things.

Pre-99 units trusts, pre-CGT, pre-Div40, pre-non-residency......Layers of complexity. And throw in continuous......I can smell a tax ruling on what that word means.

Does a temporary absence as a non-resident impact continuous ? After all a person can be a temporary resident.

You know I have never seen anyone challenge the high court to the issue of whether a person can be a dual tax resident. But some recent case law suggests they feel it can. Just being allowed to reside and work in Qatar (or was it Dubai?) for 15 years doesnt make you non-resident. Taxpayer met the resides test as it would apply to that country and all...Seems it depends

Some other curious examples

Examples of residents and foreign residents

 

So anyone who leaves Australia and sells their PPOR even a few days after leaving gets hit with the full CGT including all the years the home was their PPOR. Grossly unfair!
Stupidly complex legislation - even the examples in the legislation don't make sense. Take example 1.6: Australian resident dies, and their daughter lives abroad. Daughter inherits the PPOR of the deceased. She has to pay CGT based on the date of death to the date of sale. But then the example says if she had sold it before or on the date of death, no CGT would be payable. How does this work, that you can sell a property that you have not yet inherited and thus do not own?

 

No.

Only for non residents for tax purposes

 

Sorry I should have been more specific and written: "anyone who leave Australia and becomes a non-resident for tax purposes".

As Paul points out this whole resident/non-resident for tax purposes is a very grey and ill-defined area. There are a number of cases where the ATO has pursued Australians living abroad for years and claimed that they are still tax residents of Australia. Interestingly these cases seem to always involve those who have moved to low tax jurisdictions like the middle east. No point in the ATO chasing those who go to high tax places like Germany or northern Europe. But could we see a change of thinking: the ATO will now chase those who claim to be tax residents of Australia while abroad and make them non-residents, as there is some juicy CGT to be collected from those who sell their former PPOR in Australia?

 

Just to clarify parliamentary process: The first reading means that the bill has been placed on the notice paper, and the clerk reads out the title of the bill. The bill is then given to the members and made available to the public. The second reading means that the minister responsible then makes a speech explaining what the bill is about and why it is necessary. The bill is then adjourned so that the members of the house can read the bill, consult and understand what it means. This is the stage this bill is currently at. No amendments are made at this stage. When debate on the bill resumes, the opposition responds and any other members can speak and propose amendments. The amendments are voted on. When this process finishes and the bill takes its' final form there is the third reading which means that the bill has passed the house. There are variations on this where a bill can be passed to a committee, however the point is that this bill is now at the stage where action by those who wish to comment is necessary: so if you are affected by this, either now or possibly in the future, or are concerned by the negative and unfair aspects of this bill, now is the time to be contacting your local member.

 

The Bill sailed through previously. Not a single motion to amend in either house. I wouldnt be assuming it will be different this time. If anything its slightly softer with the life tests a parachute in some cases.