Denial of CGT main residence exemption for foreign residents – major amendment

The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018 which lapsed on the calling of the Federal election, was reintroduced into the House of Reps on 23 October 2019 (with slightly changed name) – with one major amendment.

The original bill contained measures to deny the CGT main residence exemption to foreign residents which, controversially, also captured “Australian expats”.

For example, Jack and Jill purchase a home in Perth in 1998. They live there until they leave Australia in 2019 to live in Singapore. They become foreign residents for tax purposes. In 2022, they sell their Australian home. The proposed law will include the full capital gain, subject to the extent of the availability of the 50% discount, made on the sale in their Australian tax returns.

Proposed amendment
The proposed amendment will provide an exception to the original “denial” measures where a “life event” occurs during the period that a person is a foreign resident — provided the person has only been a foreign resident for a continuous period of six years or less.  

These defined “life events” are:

  • Terminal medical condition — which requires that during the period of a person’s foreign residency, either they, their spouse or their child who was under 18 years of age is certified with a “terminal medical condition” (in terms of the relevant requirements in the Income Tax Assessment Regulations 1997).
  • Death — which covers the death of a person who is a foreign resident, their spouse or a child under 18 years of age during the period of the person’s foreign residency.
  • Divorce or separation — which requires a disposal or dealing in the main residence between the foreign resident and their spouse  in the event of divorce or separation or similar maintenance agreements (but only where such dealing would be entitled to CGT marriage or breakdown roll-over relief under Subdiv 126-A).

However, the original measures will continue to apply to a person who has been a foreign resident for more than six years (that is, an “excluded foreign resident”), even if such a “life event” happens to that person during their period of foreign residency.

Date of effect: The measures apply to CGT events happening at or after their announcement at 7.30 pm, by legal time in the ACT, on 9 May 2017. However, under grandfathering provisions, properties held prior to this date will only be affected by the measures if subject to a CGT event after 30 June 2020.

Principal asset test and TARP
The bill also contains measures to address an integrity issue in relation to a foreign resident’s CGT liability on “taxable Australian real property” in terms of the “principal asset” test. The measures will require a foreign resident to consider interests held by its associates, if it disposes of an indirect interest in Australian real property. The measure is aimed at preventing circumvention of the principal asset test by any disaggregation of holdings of membership interests.

Date of effect: The measures apply to foreign residents that hold indirect interests in Australian real property from 7.30 pm Australian EST on 9 May 2017.

CGT incentives for affordable housing
The bill contains measures to allow resident investors in “eligible affordable rental housing” to obtain an additional 10% CGT discount (on top of the existing 50% discount). The additional CGT discount will be available to resident investors who hold affordable housing directly or through certain trusts.

However, to qualify for the additional discount, the affordable housing must be held for a period of at least three years from the start date of the measure and be managed through a registered community housing provider in accordance with state and territory housing policies and registration requirements.

Date of effect: This measure applies to capital gains realised by investors from CGT events occurring from 1 January 2018 for affordable housing tenancies that start before, on or after 1 January 2018.

Near new dwelling interests
The bill also contains a technical amendment that enables a reconciliation payment to be made by developers who sell dwellings to foreign persons under a “near new dwelling exemption certificate”.

Note that this amendment operates in conjunction with measures contained in the Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near new Dwelling Interests) Bill 2019 (which was also introduced into the House of Reps on 23 October 2019) to create a reconciliation mechanism to ensure that where a near-new dwelling is sold by a developer to a foreign person, the developer provides a reconciliation payment in respect of that sale.

Date of effect: This amendment applies from 1 July 2017.

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