Foreign residents not eligible for main residence tax exemption on sale of home back in Australia

If you own property in Australia, it is likely that you will have to pay Capital Gains Tax (“CGT”) when you sell it.

That is, unless it’s your home.

The “Main Residence Exemption”, being the exemption for property in which you live, is the most common exemption from CGT. 

But what about if you take a job overseas and sell your home in Australia while you’re not an Australian tax resident?

A Retrospective Change to the Law

On 9 May 2017 the Government announced changes to be made to the main residence exemption from CGT, which were finally enacted on 12 December 2019, with effect from the announcement date. The key change applies to limit the circumstances in which a foreign resident (namely, a resident of a country other than Australia for tax purposes) can access the main residence exemption for their home owned back in Australia.

Essentially a foreign resident is now excluded from eligibility for the main residence exemption, if they are a foreign resident at the time of the sale of their home (or other CGT event).

Importantly, if you are a foreign resident when you die, this change applies to your executors and beneficiaries, surviving joint proprietors and to special disability trusts.

Example

You bought your home in January 1990.  You lived in it as your home until you accepted a job overseas in 2016.

In October 2020, you decide to sell it, while you’re still working overseas and not an Australian tax resident.

Even though the property was your home for 26 years, you will not have access to the main residence exemption.

Exception to the new rule

If, however, during your period of non-residency:

  • you experience a significant life event; and
  • you have been a foreign resident for a continuous period of less than six years

you will still be eligible to access the main residence exemption. 

The significant life events are limited to:

  • a death of the owner, their spouse, or their child under 18 years of age;
  • a terminal medical condition of the owner, their spouse or child under 18 years of age; or
  • a divorce or separation, which causes the property to be transferred.

Transition to change

There is a short window during which foreign residents who owned property prior to 9 May 2017 may still access the main residence exemption. 

The catch? They need to sell it prior to 30 June 2020.

Any other relief?

Foreign residents also need to consider their ability (or lack thereof) to access the 50% CGT discount, which ordinarily applies to asset owned by an individual or trust for longer than 12 months. 

If the owner became non-resident after 8 May 2012 there may be applicable apportioning rules based on the period of time that the current foreign resident was a resident of Australia during the period of ownership.  

What about the cost base?

A practical problem with the new measures will be the matter of compiling the cost base information for the property. This is likely to be extremely challenging given the owner would have previously believed such information was never going to be required, thereby the likely result will be an even larger capital gain than the owner would otherwise have had.

Are you currently (or planning to be) a tax resident of a country other than Australia?

Moores’ expert team can discuss how these changes may affect your tax position in relation to property ownership in Australia. For more information, please do not hesitate to contact us.