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CGT: Impact of the Government’s Plan to Remove Main Residence Exemption for Non-Residents
The Australian Government has reignited its plan to limit access to the main residence exemption for non-residents, a move that could have significant tax implications for expats and foreign residents. This change, initially introduced in the 2017-18 Federal Budget, was put on hold for a time but has now resurfaced with modifications. Understanding the impact of this change on capital gains tax (CGT) is critical for non-residents who own property in Australia.
Background: The Original Proposal and Its Reintroduction
In the 2017-18 Federal Budget, the Australian Government proposed the removal of the ability for non-resident taxpayers to claim the main residence exemption from CGT. Although the proposal was introduced into Parliament, it faced resistance and was delayed. However, with a change in the composition of Parliament and the ongoing housing affordability discussions, the Government has revived the proposal, albeit in a modified form.
Proposed Changes to CGT for Non-Residents
The key change would prevent non-residents from applying the main residence exemption to the sale of a property, regardless of whether they were a resident of Australia for part of the ownership period. These proposed rules would apply retroactively from 9 May 2017, meaning that properties sold after that date could be affected.
A transitional rule is also being introduced to soften the impact. If a property was sold before 30 June 2020, the existing rules might still apply, provided that the property was continuously held from before the 9 May 2017 announcement.
Impact on Expats and Non-Residents
For non-resident taxpayers, the proposed changes have a range of potential consequences, including:
- Loss of Main Residence Exemption: Non-residents would no longer be eligible for the main residence exemption, which could mean paying CGT on the sale of their Australian property.
- Non-Resident Tax Rates: Non-residents are generally taxed at higher rates, with limited access to tax-free thresholds and a CGT discount that is typically lower than the 50% offered to residents.
- No Cost Base Reset: Non-residents may not benefit from cost base reset rules that would otherwise allow an uplift in the property’s cost base when first rented out, potentially leading to higher CGT liabilities upon sale.
- Foreign Resident Withholding: Non-resident sellers could face issues with the foreign resident withholding rules, which may affect their cash flow upon sale.
Potential Exceptions for Expats
The Government’s proposal includes an exception for expats who have been non-residents for up to 6 years, provided they experienced certain life events during their time abroad. These life events include terminal medical conditions, the death of a family member, or the breakdown of a marriage or de facto relationship. This exception is designed to protect expats facing personal hardships while living overseas, allowing them to still claim the main residence exemption under certain circumstances.
Current Status of the Legislation
The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 is currently before the House of Representatives and is yet to pass into law. Therefore, non-residents should not take any immediate actions based solely on these proposed changes. However, it’s important to plan for potential tax adjustments once the legislation is enacted.
What Does This Mean for You?
For non-resident property owners, particularly expats, it’s important to stay informed about these impending changes to CGT and how they might impact your property sales in Australia. While the main residence exemption has traditionally been a valuable benefit for those owning property in Australia, the Government’s latest proposal signals a shift in policy that could lead to significant tax liabilities.
If you’re an expat or non-resident and concerned about how these changes might affect your property, it’s highly advisable to seek professional advice. By consulting a tax professional or financial adviser, you can assess your current situation, plan ahead, and understand your options in light of the changing CGT rules.
Final Thoughts: Stay Informed, Plan Ahead
The proposed changes to the main residence exemption under CGT are still in progress, and while the legislation is not yet law, planning for potential impacts is crucial. These changes will have a significant flow-on effect for non-residents, especially those who are looking to sell their Australian property in the coming years. Understanding these reforms and how they will affect your tax obligations can help you make informed decisions.
For more guidance on CGT, property ownership, or the implications of the Government’s proposed changes, please contact us for tailored advice.
Keep up to date with the rules on the ATO’s website.
