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Main Residence Exemption and Foreigners

Individuals who are foreign residents at the time a CGT event occurs to a dwelling (or for a compulsory acquisition a part of a dwelling) in which they have an ownership interest are not entitled to the CGT main residence exemption.

The Bill making this change is before the Parliament (Treasury Laws Amendment (Reducing Pressure on Housing Affordability No. 2) Bill 2018).

Not much has changes…

Vicki acquired a dwelling in Australia 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 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:

  • Vicki previously using the dwelling as her main residence; and
  • 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).

The grandfathering is still the same. If you owned the property before 10 May 2017 and sell it before 30 June 2019 you still get the MRE. It looks like there will be lots of properties on the market in early 2019.

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New Residential Property and the prepayment of GST (10% or 7%)

The Bill introducing the “GST withholding” on new residential property is here. You can find it in Schedule 5 of the Treasury Laws Amendment (2018 Measures No. 1) Bill 2018. In summary…

Where an entity (the supplier) makes a taxable supply of new residential premises or a subdivision of potential residential land by way of sale or long term lease, the recipient of the supply (the purchaser) is required to make a payment of part of the consideration to the ATO directly, prior to or at the time consideration is first provided for the supply (other than as a deposit).

This is not exactly the same as the draft law released last year.

For example, it now only applies to new residential premises, other than those created through a substantial renovation and commercial residential premises; or subdivisions of potential residential land (This includes land that has been zoned for use for residential premises under a law of a State or Territory but that does not currently contain any residential premises).

Also, a withholding obligation does not apply if the recipient of the taxable supply is registered for GST, and acquires the potential residential land for a creditable purpose.

Where a purchaser receives a taxable supply to which the withholding obligation applies, they are required to pay to the Commissioner an amount on or before the day that consideration for the supply (other than consideration provided as a deposit) is first provided, or if the parties are associates and no consideration is provided, on the day the supply is made.

AND HERE IS THE BIG CHANGE…

The proportion of the contract price that must be withheld differs based on whether the margin scheme applies to the supply.

If the margin scheme does not apply, the purchaser must withhold 1/11th of the contract price or price.

If the margin scheme applies to the taxable supply, the purchaser must withhold 7 per cent of the contract price or price, or a greater amount that has been determined by the Minister in a legislative instrument. However, any determination by the Minister cannot require more than 9 per cent of the contract price or price to be withheld, which prevents an amount being set in excess of the GST payable on the supply.

If the amount is not at arms length it is 10% of the market value. And if there is one amount covering residential property and other stuff that cannot be separated it is 10% on the entire amount.

There is still a notification requirement such that the seller has to inform the purchaser of the obligation to withhold, but the time frame for this is now at the discretion of the Commissioner (not 14 days as it was in the draft).

And apart from where the withholding was made by mistake, there is no way for a developer to get any amount fo Get back except through the normal Activity Statement process – the withheld GST is treated as a credit on the next BAS.

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SBCGT changes…

In the May budget there were some changes announced that relate to our favourite CGT concession, the Small Business CGT Concessions in Division 152. At the time I had no idea what these changes would be but now we know.

The Government has released draft legislation to make these changes and they are designed to ensure that taxpayers cannot sell interests in either large businesses or passive entities and get these concessions.

First, the amendments only apply where the capital gain we want to reduce is as the result of selling a CGT asset that is a share in a company or an interest in a trust.

Where this is the case the taxpayer selling the share or the unit must own 20% of the shares or the units in the object entity, or be the spouse of someone who owns such a 20%, or be owned by these to people at least at 90%. This is the current rules

But there are are now four additional rules the Government wants to apply to avoid taxpayers inappropriately claiming the Small Business CGT Concessions when they sell a share or a unit.

The four additional test are:

  • If the taxpayer does not satisfy the maximum net asset value test, meaning they must be a small business entity with turnover of less than $2 million, the relevant CGT small business entity must have carried on a business just prior to the CGT event. This means if the business has stopped, then they should not be able to get the Small BUSINESS CGT Concessions;
  • The object entity, being the entity that the shares or the units are in, must have carried on a business just prior to the CGT event. Therefore if a taxpayer that is carrying on a business sells shares or units in an entity that is not carrying on a business, then they should not be able to get the Small BUSINESS CGT Concessions;
  • The object entity must either be a CGT small business entity or satisfy the maximum net asset value test. If the object entity is massive and I sell my interest in it I should not be able to get the SMALL Business CGT Concessions
  • The share or interest must satisfy a modified active asset test that looks through shares and interests in trusts to the activities and assets of the underlying entities to ensure the underlying assets at at least 80% active. If the underlying assets are passive, then they should not be able to get the Small BUSINESS CGT Concessions.