The new tax sting for non-resident property owners

Big changes have been introduced for foreign residents who sell their Australian main residence. The new changes will particularly impact people who were previously Australian resident for tax purposes but who have become non-resident, such as those who have gone overseas to live or work.

What’s happened?

Normally when you sell your main residence, any capital gain you make on the sale is disregarded because the main residence exemption applies.

Going forward, most individuals who are non-residents for tax purposes at the time they sell their home (ie the date they sign the sale contract, not the date of settlement), will no longer qualify for the main residence exemption from 1 July 2020.

Does this apply to all foreign residents?

Not quite. The main residence exemption may still be available for taxpayers who have been non-residents for tax purposes for a continuous period of six years or less when the house is sold, if certain “life events” happened.

The “life events” referred to are:

  • The taxpayer, the taxpayer’s spouse or child under 18 had a terminal medical condition (ie two medical practitioners certified that the illness will likely result in death within 24 months of this certification)
  • taxpayer’s spouse or child under 18 dies, or
  • The sale of the home involved the distribution of assets between the taxpayer and the taxpayer’s spouse as a result of divorce, separation, or similar maintenance agreements. For example, if the taxpayer has been a non-resident for six years or less when they sell their home and the sale happened because of a court order under the Family Law Act 1975 (arising from a divorce), the taxpayer would still qualify for the main residence exemption

That exemption won’t apply very often! What if I’m not sick, dead or divorced?

If the “six years certain life events exception” does not apply, it is important to determine when you acquired the home to determine whether you lose the main residence exemption or not.

For homes acquired on or before 9 May 2017 (where the “six years certain life events exception” does not apply), the availability of the main residence exemption depends on when the non-resident individual sells their home:

  • for homes sold on or before 30 June 2020, non-resident sellers still qualify for the main residence exemption
  • for homes sold after 30 June 2020, such non-resident sellers would not qualify for the main residence exemption.

If you acquired your home after 9 May 2017 and you sell your home before 30 June 2020 whilst non-resident, the new law already applies to you and you are not entitled to claim the main residence exemption.

Can I claim the exemption for the period I was tax resident in Australia?

No. Controversially, there are no partial exemptions. Where a taxpayer has lived in their home as a main residence for a long time and has subsequently become non-resident before they sell their home, the taxpayer would not qualify for any main residence exemption at all. This is a very harsh and unfair outcome.

Who is impacted?

Those who are impacted are Australians going overseas who sell their main residence at the time they are a foreign resident:

  • where a “life event” does not occur
  • after six continuous years as a non-resident, even where a life event occurs; or
  • do not qualify for the transitional relief because they acquired their main residence after 9 May 2017 or sold it after 30 June 2020.

Example:

Vicki acquired a dwelling on 10 September 2010 moving into it and establishing it as her main residence. On 1 July 2018 Vicki vacated the dwelling and moved to New York. On 15 October 2020 Vicki signs a contract to sell the dwelling. As Vicki is a foreign resident on 15 October 2020, she is not entitled to the main residence exemption.  

This outcome is not affected by Vicki previously using the dwelling as her main residence.

What if I come back to Australia and then sell my home?

Where an individual returns to Australia and resumes Australian tax residency before entering into a contract of sale, they can still claim the main residence exemption. The period they spent overseas as a non-resident is completely overlooked.

I might be affected. What should I do?

Talk to a tax professional to assess your options. If you are already non-resident and have kept your Australian main residence, you may need to look at the feasibility of either selling the property before 30 June 2020 (and hence probably getting the full main residence exemption) or moving back to Australia and then selling. If you sell after 30 June 2020 whilst overseas, you could be looking at a very substantial CGT bill!

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