The main residence exemption allows capital gains to be tax free for Australian taxpayers when they sell property that was their place of residence, subject to certain criteria. The exemption applies to property that was never available for rent, and also for a further six years once it has been available for rent (the “six year rule”). There is also the requirement that no other property is nominated as the taxpayer’s main residence. It is important to note that when a property is reoccupied as the main residence the six years will also reset.
On 9 May 2017 as part of the Federal Budget, the Government announced they would be removing the Capital Gains Tax (CGT) main residence exemption for foreign residents. This was enacted on 12 December 2019, however the rules are to be applied retrospectively to CGT events from 7.30pm AEST on 9 May 2017 onwards. Transitional relief is available to those who acquired their main residence after 9 May 2017 and sold before 30 June 2020.
If at the time the CGT event occurs the taxpayer is classified as a foreign resident, they will not be entitled to the main residence exemption. For individuals, the CGT event is generally the time a contract for the sale was entered into. This includes Australian citizens or permanent residents who live overseas and are classified as non-residents for tax purposes.
The new legislation does not allow for any apportionment of the main residence exemption for the time of residency. There is also no cost base reset available at the time of becoming a foreign resident. If someone has lived in their Australian property for 30 years, moves overseas, and then sells their property, they will be subject to tax on the total gains from the original purchase cost. Holding costs can usually be applied to decrease the gain, however records of these are likely to not have been kept as they have were never before expected to be required at sale in this scenario.
The trustee of a deceased estate is not entitled to the CGT main residence exemption if the deceased individual was a foreign resident at the time of death. However, a beneficiary of the deceased estate that is a foreign resident, is entitled to the main residence exemption if the deceased person was not a foreign resident excluded from the exemption.
Life events test
If a taxpayer has been a foreign resident for less than 6 years, they may be able to access the main residence exemption if they satisfy a “life events test”, with applicable events including terminal illness, death and divorce. Speak to an accountant at FAJ to see if this may apply to you.
If you plan on moving abroad, we strongly suggest speaking to your accountant well in advance about your property holdings.
Expatriates over 65 selling their main residence may have increased flexibility in some circumstances by utilising the “super downsizer scheme” which was introduced from 30 June 20.
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Author: Jake Solomon