A new law that removes the capital gains tax exemption on the sale of a main residence, when the owner is a foreign resident, could affect Australians working overseas and not just foreign investors in the local housing market.
Last week, the Government released a draft of the legislation that will give effect to the change it announced in the Budget. The explanatory memorandum accompanying the draft provides a number of examples of the sorts of situations people may find themselves in.
Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 removes the entitlement to the capital gains tax main residence exemption for foreign residents.
- James, a New Zealander, comes to work in Australia, purchases a dwelling and establishes it as his main residence. He is a resident of Australia for tax purposes while he lives here.
James lives in the house for several years. Then he signs a contract to sell the house and leaves Australia several months later to return to New Zealand.
James was an Australian resident for tax purposes at the time the CGT event occurred. He is entitled to the main dwelling exemption.
- Vicki bought a unit in 2010, moving into it and establishes it as her main residence. In 2018 she moves to New York and rents the unit while she tries to sell it. A year later she signs a contract to sell the unit.
Vicki is a foreign resident at the time the sale contact was signed, so she is not entitled to the main residence exemption.
- Amita bought a house in 2003 and used it as her main residence. Between 2007 and 2011 she rented it out while she worked in Paris. She returned in 2011 and lived in the house for a year.
Amita then rented the house from 2012 to 2017 while she worked in Hong Kong. In 2017 she returned to Australia and lives in the house until it is sold in 2020. She is a tax resident at the time of the sales and entitled to the exemption.
- Terry bought a unit in 2010. In 2019 he signs a contract to sell the unit and settlement occurs that year. At this time Terry is a foreign resident.
During the period of ownership Terry lived in the unit from 2011 to early 2019. He left for London six months before the sale was completed. Terry is a foreign resident at the time the CGT event occurs and is not entitled to the main residence exemption, even though it was used as his main residence for much of the time he owned it.
The new law also modifies the foreign resident CGT regime to clarify that, for the purpose of determining whether an entity’s underlying value is principally derived from taxable Australian real property, the principal asset test is applied on an associate inclusive basis.
This is to determine whether a foreign resident has sufficient interest in another entity. The test is satisfied if interest held by a foreign resident and its associates is 10 per cent or more.
The main residence exemption may also apply to an individual who is a beneficiary of a deceased person who used the dwelling as a main residence.
The exemption also applies to the trustee of a special disability trust, where the dwelling was the main residence of an individual who is the principal beneficiary of the trust.