Tax Tip 333: Spousal Transfers While Non-Residents and CGT

The 6 year rule for CGT (s118-145 ITAA97) can no longer be used by a non-resident to avoid CGT on a transfer of property. This includes transfers between spouses.

Therefore, if you want to do a spousal transfer while a non-resident watch out!

Example

Ned and Maude are living in Smith St Sydney. It is 100% owned by Maude.

Ned gets a job in Hollywood and they leave Australia and start living in Amercia. They rent out the Sydney property and have some other income in Australia so Ned suggests that he buy 50% of the property from Maude so they can save tax. In NSW it could have been transferred without stamp duty, but they have left it too late to qualify for that now.

But even worse than stamp duty is the CGT consequences.

Maude bought the house for $600,000 and it was worth $1,000,000 when they moved out. Now it is worth $1.2mil

They enter into a contract of sale and Ned borrows $600,000 to buy 50% from Maude.

Maude indicates she will claim the main residence CGT exemption on the transfer because it was done less than 6 years after renting the property out.

But

As a non-resident for tax purposes Maude cannot qualify to use the 6 year rule any more.

She has disposed on 50% of the property with a cost base of $300,000. The market value of the property isn’t reset either and no 50% discount.

The proceeds of her sale are $600,000

So Maude will be taxed on the profit of $300,000 (less a few minor costs).

She will have to pay this tax at the non-resident tax rates too. If she had no other income her tax would have been $115,200 in 2020-21.

Ouch!



To make it worse, since Homer hasn’t lived in the property after buying 50% he could not treat it as his main residence either – even if he was still a tax resident of Australia.



Note that if Maude moved back to Australia and then sold, she could potentially use the main residence exemption on half of the property.