Australian Expats and Main Residence Capital Gains Tax Changes

A reminder to all Australian expat non-residents overseas that the retrospective and controversial changes to the Australian Capital Gains Tax (CGT) main residence exemption will impact expats from 30 June 2020.  Accordingly, it is important that appropriate planning be done before 30 June.

1. New CGT Main Residence Rules for Non-Residents

The new rules introduced by the Australian Government now deny non-residents of Australia access to the CGT main residence exemption. In respect of a property acquired before May 2017, non-residents will only have until 30 June 2020 to dispose of a property and access the main residence exemption. A disposal of a main residence after 30 June 2020 as a non-resident will mean that the main residence CGT exemption will not be available. Further details can be found on the ATO website here: https://www.ato.gov.au/general/capital-gains-tax/international-issues/foreign-residents-and-main-residence-exemption/

This example comes from the Explanatory Memorandum issued by the Australian Treasury, illustrating how the CGT main residence exemption is denied.

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 2020 Vicki finally signs a contract to sell the dwelling with settlement occurring on 13 November 2020. Vicki was a foreign resident for taxation purposes on 15 October 2020.

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 2020. 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 2020 (assuming all of the requirements were satisfied).

2. Inheriting a Property from a Non-Resident

Additionally, if a beneficiary inherits a primary residence from a deceased individual who qualified as an ‘excluded foreign resident’ for six years or longer at the time of their death, they will not have access to the main residence exemption that the deceased had accumulated for the property until their passing.

3. 50% CGT Discount

Non-residents should be aware that, despite losing the 50% CGT discount, they can still claim gains on the property that accumulated before May 8, 2012. A valuation will be necessary for that date.

If you’re a non-resident of Australia and intend to sell your Australian property, it’s crucial to plan ahead to prevent full CGT liability and to consider stamp duty prior to any property transfer.

4. Anti-Avoidance Rules

The general anti-avoidance rules may also apply to certain arrangements involving the CGT main residence exemption, as we’ve observed. This may occur where the Commissioner determines that the sole or dominant purposes of entering into the arrangement was for that person to obtain the main residence CGT exemption.

Please do not hesitate to get in touch with us to discuss your circumstances further and we would be happy to assist you further.