CGT Main residence exemption removed for Foreign residents

The Australian Senate passed the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 overnight.

If you are a “foreign resident” for Australian tax purposes at the time you sign the contract for the sale of your residence in Australia, your ability to access to the capital gains tax (CGT) main residence exemption may now be denied, or (at best) be significantly limited. These changes also apply if you are a “temporary resident” of Australia (such as an expat working in Australia) and have purchased a residence in Australia.

The changes could expose you to a considerable CGT liability, especially when considering that:

1. your tax liability would be assessed at (considerably higher) Australian non-resident tax rates; and
2. the general CGT 50% discount (applicable if an asset is held for 12 months or more) would either:
   1. not be available if the property was acquired after 8 May 2012 (after which foreign residents are no longer eligible to access the discount); or
   2. be apportioned if you acquired the property before that date or you had a period of Australian residency after that date; and
3. if you live in a high State tax jurisdiction of the United States (such as California), your effective tax rate could be as high as 52%!

Generally, you would be regarded as a “foreign resident” for Australian tax purposes (regardless of whether you are an Australian citizen or have permanent resident status) if during the tax year in which the sale of the residence occurs you reside outside of Australia for 183 days or more, unless your domicile / permanent place of abode is considered to be in Australia.

Under the new rules, as a foreign resident you would no longer be entitled to claim the CGT main residence exemption unless at the time the CGT event occurs:

1. you are a foreign resident for tax purposes for a continuous period of six years or less; and
2. during that 6 year period, one of the following life events occurred:
   1. you, your spouse, or your minor child, had a terminal medical condition;
   2. your spouse or minor your child passed away; or
   3. the CGT event involved the distribution of assets between you and your spouse as a result of a Family Law settlement;

The changes are proposed to apply as follows:

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What should you do?

1. first, determine if you are (or would in future, be) a “foreign resident’ for Australian tax purposes;
2. calculate your estimated CGT liability, taking into account the dates when you acquired the property, ceased to be an Australian resident for tax purposes, or had periods of Australian residency;
3. calculate what your likely tax liability exposure would be, in the country in which you now reside. If you live in the United States, you would need to consider both your Federal and if applicable, State tax liability;
4. consider whether a relevant life event has occurred (or will likely occur) within a continuous period of 6 years of you becoming a foreign resident for tax purposes, and if you are close to the 6 year mark, consider selling the property now; and
5. consider selling the property prior to 30 June 2020 if the property was purchased before 9 May 2017, especially if the likely CGT liability is significant, taking into consideration, the non-resident tax rates and the loss of the CGT 50% discount, and the applicable foreign tax liabilities.

For more information, contact:

Renuka Somers

Senior Tax Advisor

U.S. Australia Tax Desk