Changes to CGT and the Family Home: Impact on Expats and Foreigners

Legislative amendments have significant implications for non-residents, particularly concerning the main residence exemption in relation to Capital Gains Tax (CGT). These changes affect both foreign nationals and expatriates with properties in Australia or overseas.

Understanding CGT and the Main Residence Exemption

CGT applies to the profits made from selling capital assets, including property. Typically, your main residence (the home you primarily live in) is exempt from CGT. However, if the home has only been your main residence for part of the ownership period, a partial exemption may be available. Moreover, the 'absence rule' allows you to treat the home as your main residence for up to six years if rented out, or indefinitely if not rented out, even if you no longer live there.

New Rules and Their Implications

From 9 May 2017 onwards, the main residence exemption is no longer accessible to foreign residents at the time of a CGT event (usually the contract signing date). This applies even if you were an Australian resident for part of the ownership period. The exemption hinges on your residency status at the time of the CGT event, without any apportionment based on past residency.

Transitional Rules Until 30 June 2020

Non-residents who held property continuously from 9 May 2017 could still apply the old rules if the CGT event occurred by 30 June 2020. This transitional period provided an opportunity for some tax relief under the previous main residence exemption rules.

Certain life events offer limited exclusions to the new rules if you have been a foreign resident for six years or less:

• Death of the taxpayer, spouse, or child under 18 years
• Terminal illness of the taxpayer, spouse, or child
• Marriage breakdown and divorce

In these scenarios, the main residence exemption remains applicable within the six-year foreign residency period. Beyond six years, the exemption is no longer available unless the individual re-establishes Australian residency before the CGT event.

Determining Australian Residency for Tax Purposes

Determining residency status involves several tests rather than a straightforward time-based assessment:

• Resides Test: Considers whether you reside in Australia permanently.
• Domicile Test: Evaluates where your permanent home is located.
• 183-Day Test: Looks at physical presence in Australia within a specific income year.
• Superannuation Test: Applies to members of certain Commonwealth Government superannuation funds.

Residency status can be complex, and seeking professional advice is recommended for clarity.

Common Scenarios and Queries

1. Living Overseas for Work - If you own a property in Australia that was your main residence, the absence rule might allow you to maintain its exempt status. Returning to Australia and selling the property could enable access to the main residence exemption or a partial exemption.
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2. Family Home and Inheritance - If a non-resident owner passes away within six years of becoming a non-resident, the main residence exemption may apply to their estate or beneficiaries. However, if the property is sold more than two years after the owner's death or if the owner was a non-resident for over six years, the exemption is lost unless the property is gifted to children before 30 June 2020.

Key Takeaways: What the CGT Changes Mean for You

The legislative changes to the main residence exemption represent a significant shift for non-residents and expatriates. While these changes aim to close loopholes and ensure fairness in the tax system, they also introduce complexities for individuals who have built their lives across borders. It’s essential for affected property owners to stay informed and seek professional advice to navigate these changes effectively. The transitional rules and limited exclusions provide some relief, but the overall impact underscores the need for careful tax planning. At R J Sanderson & Associates, we believe that understanding these changes and how they affect your personal circumstances is crucial for making informed decisions about your property investments.

Need Further Assistance?

For a detailed understanding of how these changes might affect you, please reach out to our team. We are here to help explain the nuances and provide tailored advice to ensure your financial well-being.