Expats And Foreign Residents Excluded From Tax Exemption
Foreign residents and expats are now excluded from accessing the main residence exemption. The retrospective changes directly impact people whose main residence is in Australia or overseas.
Key points:
- Non-residents (foreign residents and expats) for tax purposes excluded from the main residence exemption from 9 May 2017.
- Transitional rules allow non-residents to sell their property and access the main residence exemption under the previous rules. This is if they held the property continuously from 9 May 2017.
- An exclusion applies where the taxpayer has been a non-resident for six years or less and a ‘life event’ occurs, such as death.
CGT and the main residence exemption:
Capital Gains Tax (CGT) applies to gains you have made on the sale of capital assets. Unless an exemption or exclusion applies, or you can offset the tax against a capital loss, any gain you made on an asset is taxed at your marginal tax rate. The tax triggers when a ‘CGT event’ occurs. For residential property, the ‘CGT event’ is generally the date the contract is signed.
The main residence exemption prevents CGT applying to your family home (the home you treat as your main residence). If the home was your main residence for only part of the time you owned it, or if you use your home to produce income, then a partial exemption may be available. For example, you use part of the home as business premises or rent out part of the property. In addition, if you move out of your home and you don’t claim any other residence as your main residence, then you can continue to treat the home as your main residence for up to six years if you rent it out, or indefinitely if you don’t rent it out (the ‘absence rule’).
Previously, the main residence exemption was available to individuals who were residents, non-residents, and temporary residents for tax purposes.
The new rules for foreign residents:
The new rules exclude foreign residents from accessing the main residence exemption and apply to CGT events that occur from 9 May 2017 onwards.
Under the new rules, if you’re a non-resident for tax purposes when you sell your main residence, you can’t access the main residence exemption. You must pay CGT on any gain (unless transitional rules or an exclusion applies). Your residency at the time of sale determines eligibility. Being an Australian resident for part of the ownership period doesn’t count, and no partial exemption applies.
If you’re an Australian resident at the time of the CGT event, you may still access the main residence exemption. Even if you were a non-resident during part of the ownership. For example, an expat who kept their main residence in Australia could return. They could become a tax resident again, and then sell the property to access the exemption. However, the new rules deny the exemption if you structure your affairs to avoid the rules, such as transferring the property to a related party.
The new rules do not impact on Australian tax residents.
The transitional rules until 30 June 2020:
Transitional rules are in place for non-resident taxpayers who would have been able to access the main residence exemption prior to the changes. The transitional rules enable someone who held property continuously from 9 May 2017 to apply the existing rules if the CGT event occurs on or before 30 June 2020. This gives non-residents a limited period of time to sell their property and obtain some tax relief under the main residence rules.
Exclusions to the new rules:
If you would have been able to access the main residence exemption under the prior rules, and have been a foreign resident for six years or less, there is a limited exclusion to the new rules where certain ‘life events’ occur.
A ‘life event’ is generally:
- Your death or the death of your spouse or child (under 18 years).
- Terminal illness of you, your spouse or your child.
- Marriage breakdown and divorce.
Under these circumstances, the taxpayer is able to access the main residence exemption. For example, imagine if you or your spouse dies while living overseas. It has been six years or less since you became a non-resident, and the property is treated as your main residence.
After six years however, the main residence exemption will not apply. That is, if you have been a foreign resident for tax purposes for more than six years. Also, you or your beneficiaries cannot access the main residence exemption once the transitional period has ended unless you move back to Australia and become a resident again before the CGT event occurs.
Click here to contact us and book an appointment if you’re a foreign resident and want to discuss how these changes could impact you.
Click here to read more on being an Australian resident for tax purposes.
This is general advice only and has not been prepared with your situation and needs in mind. For individual and personalised advice, we highly recommend that you seek out proper professional advice from your accountant.
