Australia: Proposed changes to CGT main residence exemption for foreign residents
The Treasurer has recently released exposure draft legislation (Treasury Laws Amendment (Housing Tax Integrity) Bill 2017) in relation to removal of the CGT main residence exemption for foreign residents. The changes are part of the Commonwealth Government’s ‘housing affordability’ reforms announced in the 2017-18 Budget.
This will affect both Australian tax residents who resided in an Australian property and then became expat, as well as foreigners who never became Australian tax residents as defined, but established a main residence in an Australian property as a question of fact.
If the changes are implemented, then there will be limited opportunities for foreign residents to access the CGT main residence exemption after May 2017, however careful and timely planning may result in significant CGT savings. The same applies for Australian tax residents, who intend to become expats.
Currently, individuals are entitled to a full or partial CGT main residence exemption, regardless of their tax residency at the time a CGT event occurs in relation to the property. The exemption is most commonly applied when the main residence is sold and triggers a capital gain.
It is worthy of note that once a property is established as a main residence as a question of fact, while no other property is claimed as a main residence, the owner can be absent during some or all of the ownership period, and the full gain can continue to be exempt if the property is not used to produce any assessable income.
If the property is used to produce assessable income while the owner is absent (e.g. by being let out), then the exemption will continue to apply as long as occupation by the owner is resumed within 6 years or the activity producing assessable income ceases within 6 years.
Where the property is owned and occupied, but used to derive some assessable income (e.g. taking in an arm’s length boarder on commercial terms or operating a home office), the gain on the main residence will be entitled to a partial exemption.
Subject to the transitional measure mentioned below, the proposed legislation would remove this entitlement for foreign tax resident individuals with effect from 9 May 2017. Therefore, individuals who are foreign residents for tax purposes, who enter into a contract of sale after that date will be liable for CGT on any capital gain arising from the sale.
Unlike the withdrawal of the 50% CGT exemption for non-residents, there is no “grandfathering” of the increase in value on the main residence up to 9 May 2017.
There is an opportunity for foreign resident individuals to apply the CGT main residence exemption, if a contract of sale is entered into prior to 30 June 2019 and the individual owned the property (or a part of it) from 9 May 2017 to the date of the contract of sale. Hence, foreign resident individuals should consider selling their Australian main residence, if the other requirements for a full or partial exemption are met, prior to 30 June 2019.
Otherwise, in order to access the CGT main residence exemption after 9 May 2017, a foreign resident individual would need to become an Australian tax resident prior to entering into the contract of sale. However, becoming an Australian tax resident will take time, in order to establish the requisite connection with Australia, which will also depend on any applicable Double Tax Agreement, and will have other usually significant tax issues for them in Australia and the country they are leaving.
Deceased estates and beneficiaries
Currently, trustees of deceased estates, and beneficiaries of deceased estates, are entitled to the CGT main residence exemption, regardless of the tax residency of the deceased or the beneficiaries.
The proposed legislation would remove this entitlement for trustees of deceased estates and beneficiaries in relation to the deceased’s period of ownership, if the deceased was a foreign tax resident at the time of death. If the beneficiary is an Australian tax resident, then the beneficiary will be entitled to a partial exemption in relation to their period of ownership, and subject to the other requirements for the main residence exemption.
In relation to a deceased who was an Australian tax resident at the date of death, the main residence exemption accrued by the deceased will continue to be available to the beneficiary, regardless of the beneficiary’s tax residency. This includes a two year period following the deceased’s death, within which the main residence may be sold. Therefore, a beneficiary, who is a foreign tax resident, may be attributed with the deceased’s entitlement to the main residence exemption following the deceased’s death.
These changes, if enacted, may require wills and succession plans to be reviewed, to confirm that unintended CGT consequences are not triggered by moving or remaining offshore.
The above is a brief summary of proposed changes to a complex area of the tax law. It is possible that the proposed law may be changed prior to enactment, or that it never becomes law. If the above issues are being considered, then professional legal and tax advice should be sought prior to implementing any new strategy.