Changes to Capital Gains Tax Main Residence Exemption for Non-tax Residents
In December 2019 the government passed laws that affect the main residence exemption for non-tax residents. If you are a non-resident of Australia, for tax purposes, you may need to consider selling your Australian family home before 30 June 2020*.
*Note: This article was drafted before the Coronavirus pandemic which has had a significant impact on the value of residential homes. While for tax purposes it may be appropriate to sell prior to 30 June 2020, this needs to be weighed up against the impact of the Coronavirus (COVID-19) on current market values.
In the May 2017 budget, the government announced changes to remove access to the capital gains tax main residence exemption for non-tax residents. Legislation was introduced into Parliament, some minor exemptions were allowed, and legislation passed in December 2019 to give effect to the changes. Given the 30 June 2020 deadline, if you do need to act, this will need to happen promptly!
Who is affected by these changes?
You will be caught by these changes if you have left Australia and are now a non-resident for tax purposes and you have not sold the home that was previously your principal residence. The changes apply even though you remain an Australian citizen.
Previous Capital Gains Tax Climate
Prior to these changes, if you sold a house that was your main residence, you were not required to pay tax. This was the case even if you moved out of your Australian family home, to go overseas, leaving it vacant before you sold it.
If you used the house to earn rental income while overseas, you were able to be absent for up to six years, remaining tax free. This allowed you to only pay tax on the period of absence that exceeded six years.
When you first rented your Australian family home, the old rules allowed you to treat the property as if it has been sold and bought back at its market value at that time, making any gains up to that point tax-free.
New Capital Gains Tax Climate
Non-tax residents who already held property on May 9, 2017 will be able to claim the capital gains tax (CTG) main residence exemption, if they are able to sell their property on or before 30 June, 2020.
If you miss the June 2020 deadline and you are a non-resident on the day you sign a sale contract you will receive no tax exemption, making any gain made on your home subject to capital gains tax (CTG).
Effectively it is as though your home was never your principal residence, rather a standard investment property.
An Example of How the CTG Change Could Affect you
Theoretically, you may have purchased a property in 1986 for $600,000 and spent $400,000 renovating it in 2001. You didn’t keep receipts because you didn’t think you needed them. You moved overseas in 2014 and started renting the property when it was valued at $4,000,000.
If you sign a sale contract before 30 June 2020 you would likely pay no capital gains tax in Australia. If you sell after that date, while you are a non-resident, you will pay tax on the difference between the sale price and the $1,000,000 cost base.
If you can’t substantiate the renovation cost, you might have to pay tax on the difference between the sale price and the $600,000 cost! If that property was now worth $8,000,000, you would pay capital gains tax in excess of $2,000,000 on a property that was otherwise tax free.
Will the Changes Affect You?
The changes will not affect you if you move back to Australia and become a tax resident at the time you sign a sale contract. There is no opportunity to temporarily return because the facts will show whether you remain a non-resident.
In the past, many clients have stated that they always intend to return to Australia and wouldn’t sell whilst away. This is not always controllable however, due to the possibility of unforeseen circumstances. For example, the death of someone when a non-resident, could trigger the capital gain if the person passed away more than six years after leaving.
A minor exemption in the final version of the legislation is that if you sell within 6 years of becoming a non-resident due to divorce, death or a terminal illness, either for the foreign resident, their spouse, or their dependent, the new laws will not apply. Click here to read further about the exemptions that may apply for certain ‘life events‘.
What You Need to Do
You will need to work out the following:
- What is my capital gains tax liability if I sell before 30 June 2020?
- What is my capital gains tax liability if I sell after 30 June 2020 as a non-resident of Australia?
- What is my likelihood of returning to Australia in the future?
If you are affected by these changes, you do not want to find yourself listing your house for sale in June 2020, when:
- It might not sell before the deadline; and
- You might be competing with a lot of others (in the same situation), trying to sell their home before the 30 June 2020 deadline.
At Allan Hall Business Advisors, we can help you answer the tax questions, and work with you to solve the problem about what you should do (if anything) before 30 June 2020. Please do not hesitate to contact a Business Advisor should you have any questions.