For the last 35 years Australians living overseas have been entitled to claim the Capital Gains Tax (CGT) exemption when they sell their previous (eligible) main residence in Australia.
This all ended in May 2017 when the government announced changes to deny foreign residents access to the Capital Gains Tax main residence exemption.
Due to intense criticism from the tax professionals since the proposals first announcement, it took parliament over two years to pass this as law. Receiving Royal Assent on 12 December 2019, it became official…If you are a non-resident, selling your previous family home in Australia, there is no longer a CGT exemption.
The New Rules
Under the new rules, if you are a foreign resident for Australian tax purposes at the time you sign the contract of sale of your home, you will no longer be entitled to claim the main residence exemption. The only exception will be if you have been a non-resident for less than 6 years and certain “life events” occurred within that period. The relevant events include where the taxpayer, a spouse or child:
- Has a terminal medical condition during the non-residency period,
- Dies during the non-residency period, or
- Divorces or separates from their spouse and would qualify for the marriage breakdown rollover relief for a CGT event.
The changes also impact on deceased estate situations where either the deceased or a beneficiary of the estate was a non-resident.
CGT can still be disregarded if:
- The main residence property was acquired prior to 9th May 2017 and sold before 30 June 2020. This allows affected taxpayers, until 30 June 2020, to sell their former homes without being subject to the new measures. Taking into consideration average listing time, the property should be on the market by March to make sure the sale is complete by the deadline.
- You come back to Australia and re-establish Australian residence. Realistically, it would be a logistical nightmare to return to Australia and become a tax resident for the mere reason of selling the house.
The record keeping and substantiation requirements will become complicated for many. Many taxpayers just would have not considered retaining any of the records in relation to purchase and most importantly holding costs as they relate to their main residence and would rely on CGT exemption.
Estate and financial planning implications
Despite the criticism from numerous tax bodies, the most disappointing thing about the bill is that it applies retrospectively. Because the main residence exemption has existed since 1985, potentially hundreds of thousands of people are sitting on a very large gain and counting on the property sale for their estate planning, retirement savings, opportunity to invest and so on. Do you know what your potential tax bill is or have you considered the impact on your estate planning desires? If you are sitting on a significant gain, it is probably time to review your financial plans and how this new measure will affect you.
Is this the time to sell?
Taking into consideration the full ramifications of this new tax, in conjunction with your financial and non-financial objectives, it is critical to ensure you are aware of the impact it may cause on your current and future plans. If you want to fully understand your tax implications and options please get in touch with one of the expert team at Hoffman Kelly.