Massive Retrospective CGT Hit Still Threatens Non-Tax Residents of Australia:
Legislation was introduced in February 2018 removing the CGT main residence exemption for foreign tax residents. The removal of this exemption was to apply from 9 May 2017, with any foreign tax resident who owned a home on 2017 Budget night able to sell their main residence before 30 June 2019 and still get the exemption. Apart from that, if at the time of sale you were not a tax resident of Australia (including temporary resident) then you would have no access to the main residence exemption regardless of the circumstances of the property and your ownership.
The 45th parliament of Australia was prorogued on 11 April 2019. This means that the original legislation lapsed. In order for this proposal to become law, it would need to be re-introduced into the new parliament. It was thought that due to the impact, the retrospective nature of this proposal, and previous bad press, that it would not re-surface.
Surprisingly, Treasurer Josh Frydenberg has told the Australian Financial Review this month, that “Our position hasn’t changed. Our policy remains as it was pre-election.”
Realistically, if it is re-introduced it is unlikely to have the same retrospectivity and if it did it would not have much chance in the Senate. Until this is clarified there is still a risk.
An example of a typical scenario would be Fred. Assuming Fred purchased a home in the 2013 for $500k, lived in it, then commenced a banking career in London where he has lived since 2015. Fred let his sister stay in the house during that time for no rent so has access to the indefinite main residence absentee extension (if rented the extension is limited to 6 years but can be renewed). If Fred sold the house now for $1m there would be no tax, even if he did not resume Australian tax residency before selling. If the rules come in as originally drafted Fred would face tax of up to $225k if he did not resume his Australian tax residency before selling. If Fred passed away before being able to resume residency and sell the property his estate would have no access to the main residence exemption.
The following planning issues arise:
Non-Residents with property potentially qualifying for CGT main residence exemptions should follow this closely.
The CGT Main Residence Exemption is deceptively complex at the best of times. Seek advice regarding your own situation.
If the rules come in as previously proposed consider resuming tax residency of Australia before selling to preserve your CGT exemption.
Similarly if the rules come in as previously proposed, consider selling your main residence before leaving Australia and abandoning your Australian tax residency.
If you are a non-resident property owner pay close attention to the impact on other taxes such as State Land Tax.