Legislative changes have been made to Capital Gains Tax (CGT) which impacts non-residents. Expats and those with a main residence in Australia, but who live overseas, will find that they can no longer access the main residence exemption from CGT. There are some exemptions to this change, and we will explore further the rule changes, its impacts, and the exemptions.
CGT and the main residence exemption
CGT is a tax that often applies to the sale of residential or commercial property. It applies to the gains you have made when selling the property. If you are unable to gain an exemption, exclusion, or offset the tax with a capital loss, gains you made will be taxed at your marginal tax rate.
For residential property sales, there is an exemption if the property was the family home. If for part of the time you owned the home it was not your main residence, or you ran your business from your home, or you rented out the property, then you can receive a partial exemption. For those who move out of their home but don’t claim any other residence as their main residence, they can continue to treat the house as their main residence for up to six years, when renting it out, or indefinitely if they do not rent it.
Before these changes, the exemption was available on the sale of residential properties for residents, non-residents, and temporary residents.
What has changed
Under the new rules, foreign residents will be unable to access the main residence exemption, and CGT will be applied to the sale of their residential property. If you are a non-resident for tax purposes when you sell your main residence you will be unable to access the main residence exemption. These rules will apply even if you were an Australian resident for part of the time you owned the property.
If you are a resident at the time of sales of the property you could still access the main residence exemption. So, an expat could return to Australia, become a resident for tax purposes, then claim the exemption. This could apply even if you were a non-resident for some of the ownership period.
The transition rules
To help non-residents who would have been able to access the exemption prior to the changes, there are transitional rules that end on June 30 2020. Anyone who held property from 9 May 2017 can apply the existing rules as long as the sale happens before the June deadline. This provides non-residents with a limited time in which they can still access the old rules to obtain some tax relief.
Exclusions to the rules
There are some exclusions to the new rules, however, they are very limited and only apply under extreme circumstances. In the case where you would have had access to the main residence exemption under previous rules and have been a foreign resident for six years or less, there are exclusions to the new rules for “life events”. This refers to:
- Your death, or the death of your spouse, or child under 18.
- Terminal illness for you, your spouse, or child
- Marriage breakdown or divorce
It is important to note that after six years of being a foreign resident the main resident exemption will no longer apply. This means that if you have been a foreign resident for more than six years you or your beneficiaries cannot access the main residence exemption after the transitional period. If you do become a resident for tax purposes before you sell the home, then you may be able to access the exemptions again.
What is the definition of an Australian resident for tax purposes?
To determine whether you are considered a resident of Australia for tax purposes there are a series of four tests you can use. Unfortunately, determining whether you are a resident for tax purposes is not a single “black and white” test, it requires some judgment and can be difficult to determine. The tests include:
- Resides test – This test looks at whether you reside in Australia. It compares whether you are moving away permanently or just for a little while. Some of the actions you take can determine this test. These actions could be whether you are cutting off ties to Australia, like selling all your furniture over storing it.
- Domicile test – This test looks at where you are living and where you have your permanent home. Often, migrants or those born in Australia will retain their Australian domicile unless they are leaving permanently. Those with an Australian domicile will continue to be treated as a resident for tax purposes unless they show that their permanent home is overseas.
- 183-day test – The 183-day test looks at how long you are physically present in Australia in a year.
- Superannuation test – Current members of certain super funds covering Commonwealth Government employees are generally considered residents for tax purposes regardless of the length of time they live overseas.
If you are unsure about your residency you should seek advice in order to clarify your position.
While these CGT rule changes will not affect those permanently residing in Australia, expats and foreign residents will need to take note. Now they cannot gain an exemption to CGT for their family home in Australia while living permanently overseas. Fortunately, there are exemptions to the new rule changes, but they are for very specific situations. To figure out the best way you can reduce the CGT on your home you should talk to an accountant. Talk to Link Advisors today.