As part of the May Budget, the Government announced reforms to the operation of the CGT rules for foreign residents. One of these reforms is to remove the entitlement to the CGT main residence exemption for foreign residents that have dwellings that qualify as their main residence.
We now have draft legislation implementing this change and it is not what we expected. Read this carefully…
Individuals who are foreign residents at the time a CGT event occurs to a dwelling in which they have an ownership interest are not entitled to the main residence exemption.
Notice that whether or not an individual can claim the main residence exemption will depend on whether they are a foreign resident on one specific day – the day the CGT event occurs. It does not matter if for every other day the individual was a resident.
Have a look at this example from the draft EM…
Vicki acquired a dwelling on 10 September 2010, moving into it and establishing it as her main residence as soon as it was first practicable to do so.
On 1 July 2018 Vicki vacated the dwelling and moved to New York. Vicki rented the dwelling out while she tried to sell it. On 15 October 2019 Vicki finally signs a contract to sell the dwelling with settlement occurring on 13 November 2019. Vicki was a foreign resident for taxation purposes on 15 October 2019.
The time of the CGT event A1 for the sale of the dwelling is the time the contract for sale was signed, that is 15 October 2019. As Vicki was a foreign resident at that time she is not entitled to the main residence exemption in respect of her ownership interest in the dwelling.
Note: This outcome is not affected by either the fact that Vicki previously used the dwelling as her main residence or the absence rule in section 118-145 that could otherwise have applied to treat the dwelling as Vicki’s main residence from
1 July 2018 to 15 October 2019 (assuming all of the requirements were satisfied).
Vicki was a resident for 8 of the nine years she owned the property, and it was her “main residence” for the whole 9 years, but as she was a non resident at the CGT event she get no main residence exemption at all. No apportionment at all.
Of course it works the other way around as well. There is a second example in the EM of a resident who buys a main residence, travels overseas becoming a foreign resident, and then returns to become resident and sells the property. Even though for most of the ownership period the individual was a foreign resident, as on the day of the CGT event they were a resident, they get the full main resident exemption.
The draft law also states that:
The main residence exemption no longer applies if, at the time a CGT event occurs to part of an individual’s ownership interest in a dwelling as a result of a compulsory acquisition, they are a foreign resident.If the deceased person was a foreign resident at the time of their death then the portion of the main residence exemption accrued by the deceased in respect of the dwelling is not available to the beneficiary. If the deceased was a resident but the beneficiary in a foreign resident, the beneficiary can claim the main residence exemption for the period of the deceased ownership, but not their ownership period.The main residence exemption will not applies if at the time a CGT event occurs to the ownership interest in a dwelling of a special disability trust, the primary beneficiary of that trust was a foreign resident or a CGT event occurs to a dwelling while it is held by the trustee of the special disability trust after the death of the principal beneficiary and at the time of death the principal beneficiary was a foreign resident.
If the gain on the property is large, will we consider becoming a resident to avoid CGT?
These rules apply to all properties purchased after 9 May 2017, but even if the property was purchased before this date, from 1 July 2019 these rules will apply.
Hi Ken. Great website, I have spent some time going through past archives. What I am really concerned about is capital gain tax and our residency status. We have been living in NZ since December 16 and we now HAVE to sell a house in Brisbane that we had previously lived in but then rented it out. I think we may now be considered foreign residents.. 😦
I am unclear about whether the new rules for foreign residents have come into force yet. Two different people at the ATO have given conflicting info and reading your blog post, it would seem that it is still draft?? Also your last line suggests that people may become a resident on the date of the CGT event just to avoid the penalties. I would do this, but how long do you need to be living in Australia before you are considered an Australian resident? thanks for any help!
If you owned the place before 9 May 2017 and you sell it before 1 July 2019, even if you are a foreign resident you will not have a problem. And yes, the law is currently a draft so we don’t have anything passed by the parliament yet.
thanks that is great news. Is there any indication of when it might be passed by parliament? If comments are still being sought (i think the closing date is the 15th of August), how likely is it that it will be enacted before the end of the year do you think? So just to confirm, even though we are living in NZ and the ATO told me that they would consider us as foreign residents (not an Australian resident for tax purposes) we will still be able to claim the discount because this house was our principal place of residence? So that means any capital gain is reduced by 50%? thank you very, very much
No indication of when the Bill will be introduced into Parliament and passed. And if the house is your main residence you don’t get a 50% discount but rather you get a 100% exemption. But remember, a non resident must have purchased the property before 9May 2017 and have sold it by 1 July 2019 to get this exemption.