Parliament has passed a controversial bill that removes the entitlement to the main residence capital gains tax exemption for foreign residents and, arguably, denies expatriates a legitimate tax exemption
Despite taking the bill off the table last year to review it, the Government has ignored expert advice that could have made it a fairer outcome.
There were strong objections to the original bill from Australian expatriates, who said the change to the law would lump them in as foreign residents and deny them a tax concession that is available to every other Australian.
The Tax Institute is one of a number of industry groups that has criticised the new law, saying there is no legitimate reason for denying Australian citizens the exemption if they are living overseas.
And the Australian Chamber of Commerce in Hong Kong and Macau (AustCham) has been highly critical of the new law, saying it “undermines the nation’s engagement with Asia and potentially cripples those of us working in the region.”
The updated bill, Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019, which was passed on December 5, includes one important change from the original bill – a measure that allows a foreign resident to access the CGT main residence exemption if they satisfy a “life events test”.
The first element of the test requires that at the time of the CGT event, the person has been a foreign resident for six years or less.
The second element is that during the period of foreign residency, one of a number of specified circumstances occurred:
- Either they, their spouse or their child (under 18) had a terminal medical condition.
- Their spouse or a child under 18 dies.
- The CGT event occurs because of a divorce or separation involving the person and their spouse.
The definition of a main residence includes a building (such as a house) or part of a building (a unit) that is mainly used for accommodation; a caravan, houseboat or other mobile home; any land immediately under the unit of accommodation; and any adjacent structures to the extent that they are used mainly for domestic purposes.
The Tax Institute’s senior tax counsel Bob Deutsch says: “The solution to this problem lies in apportionment. It is the fairest, simplest and the most consistent way to implement the original policy intent. No one envisaged that policy would catch an Australian citizen and tax resident of decades and entirely deny them the main residence exemption.
“Apportionment would be consistent with the current tax treatment of a property that ceases to be a main residence and is used as a rental property.”