As most readers will know, prior to 1985 Australia had no general tax on capital gains. But after the capital gains tax (CGT) regime was introduced in that year (September 19 specifically), the main residence exemption has been a feature ever since.
While there have been a number of changes and clarifications to the specifics of the exemption, the high-level principle has largely remained the same—namely that a dwelling used as a principal place of residence is ignored for CGT purposes.
But a measure was announced in the 2017-18 Federal Budget that will make a significant change to the CGT regime. The government announced that foreign residents will no longer be entitled to claim the exemption when they sell a property in Australia (this change however is not yet law at the time of writing, and is subject to the usual parliamentary processes).
If or when passed, the change will apply to foreign owners of property as follows:
- for property held before 7:30pm (AEST) on 9 May 2017, the exemption will only be able to be claimed for disposals that happen up until 30 June 2019 and only if they meet the requirements for the exemption. For disposals that happen from 1 July 2019 they will no longer be entitled to the exemption
- for property acquired at or after 7:30pm (AEST) 9 May 2017, the exemption will no longer apply to disposals from that date.
This change will only apply if you are not an Australian resident at the time of the disposal (contract date).
The government’s intent on introducing this measure, as stated in Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018, was to “… stop foreign tax residents from claiming the main residence capital gains tax (CGT) exemption when they sell property in Australia from Budget night 2017,” then Treasurer Scott Morrison said. “Foreign tax residents who hold property on Budget night can continue to claim the exemption until 30 June 2019. The legislation will also modify the CGT principal asset test to apply on an associate inclusive basis. This will ensure that foreign tax residents cannot avoid a CGT liability by disaggregating indirect interests in Australian real property.”
Administratively, the ATO has stated that it will accept tax returns as lodged during the period up until the proposed law change is passed by parliament. It has also committed to not reviewing past year assessments until the outcome of the proposed amendment is known.
No tax shortfall penalties will be applied and any interest accrued will be remitted to the base interest rate up to the date of enactment of the law change. In addition, any interest in excess of the base rate accruing after the date of enactment will be remitted where taxpayers actively seek to amend assessments within a reasonable timeframe after enactment.
A number of outcomes have been flagged since the measure was announced and subsequently digested. Among them is the possibility that an Australian residing overseas may inadvertently overstay and be therefore deemed to be a foreign resident for tax purposes. They would therefore find that a quite significant tax obligation accrues from the sale of their main Australian residence.
Also there is a possible implication with the interaction of the absence rule, with foreign residents potentially being put in a position of no longer having access. However previous Australian residents who resume residency will hopefully have access to the absence rule even over the time they were not residents. If you have a client in this position, applying for an ATO ruling may be prudent.
Another implication is that employees offered an extended offshore assignment by their employer may need to consider if their tax obligations may be negatively affected by the new rules. Either their main residence may need to be sold before they become non-residents for tax purposes, or the sale may need to be delayed until they return (assuming the absence rule, mentioned above, will still have relevance). Indeed the subsequent tax position may be an important factor in their decision to take up the offer of an offshore assignment or not.
Another outcome in the above situation could involve cost reimbursement implications for an employer, should an employee find themselves with greatly increased tax obligations brought about by selling a property while assigned overseas.