Previous Foreword
Under the Main Residence Exemption, Australian taxpayers whose property is or has been their ‘main residence’ are exempt from Capital Gain Tax (CGT) if they meet certain criteria. They are exempt from Capital Gain Tax (CGT) if they meet certain criteria. These long-standing rules mean that capital gains associated with a qualifying main residence (main residence) are generally exempt from Australian CGT; and the exemption applies permanently to properties that have never been rented out and for a further six years from the time the property is rented out – this is known as the ‘six-year rule”.
This exemption only applies if no other property is designated as the principal residence and the six-year exemption ‘resets’ when the property is re-used as the principal residence.
The principal residence exemption does not apply to foreign residents from 1 July 2020
On Wednesday 23 October 2019, the Australian Assistant Treasurer reintroduced legislation that had previously lapsed.
“Removes the entitlement of foreign residents to the CGT principal residence exemption, except for certain real-life events that occur during a person’s time as a foreign resident, which is six years or less.”
The proposed changes to the previously defunct legislation will come into effect on 1 July 2019, with the new legislation having a later effective date of 1 July 2020, with the above definition of “foreign residents’ foreign residents” including, Australian citizens and permanent residents who reside outside Australia as well as non-tax residents of Australia for tax purposes.
The bill passed the House of Representatives on Wednesday 27 November 2019 and received Royal Assent into law on 12 December 2019. As a member of the Australian Tax Institute, the Australian tax association, said, “there is no legitimate policy reason to deny Australian citizens the CGT main residence exemption in these circumstances”. It is also inevitable that many foreign residents will sell their properties unaware of these changes, with significant financial implications, while foreign residents who are in Australia for a short period of time retain the opportunity to obtain the exemption.
The original draft legislation was aimed primarily at foreign investors in Australian property, and although later amendments removed temporary residents from the scope of the legislation, the LNP Liberal National Coalition government – with less than enthusiastic support from Labor – doggedly pursued the legislation, fully know that it is Australian citizens and permanent residents permanently residing overseas on a long-term basis, not ‘foreign investors’, who will be most affected.
Given the long delays and disruptions inherent in this legislation, many foreign residents hoped that it would simply go away as they were reluctant to sell their family properties in Australia. However, when it became clear that the legislation would apply from 1 July 2020, many had only 6-9 months to sell their Australian property to avoid a very significant tax loss afterwards. But with the Covid 19 epidemic stepping in and bringing the world and the Australian property market to a virtual standstill, it was almost a ‘complete storm’ for many foreign residents.
It was a non-essential, discriminatory piece of legislation, and apparently the government felt that foreign residents could be ignored because they were ‘disenfranchised’ from a voting point of view. Australian expatriate groups around the world should adopt an approach to government representatives when seeking assistance in the future; it is hoped that “missions” against such bills will always resume once the Covid 19 outbreak has subsided.
Summary of legislation
The Bill is accompanied by an explanatory memorandum which summarizes below some of the key features and implications of the proposed legislation and notes that they may have a significant impact on Australia’s heritage if the deceased was a non-resident, or if the beneficiary was a non-resident.
Current law, applicable from 1 July 2020 Past law
Main residence exemption: Individuals
Generally, individuals who are foreign residents at the time of a CGT event in a residence (or, in the case of compulsory acquisition, part of a residence) in which they have an ownership interest are not entitled to the CGT main residence exemption.
However, an individual who has been resident in a foreign country for six years or less may be entitled to the CGT principal residence exemption if certain ‘life events’ occur during that foreign residence.
An individual who is a resident of a foreign country is entitled to the same CGT main residence exemption as an individual who is an Australian resident.
Main residence exemption: Deceased is foreign resident at time of death
Main residence exemption, where the individual is a foreign resident at the time of death
A trustee of a deceased estate who was an excluded foreign resident at the time of death is not entitled to the CGT main residence exemption in respect of the ownership interest in the deceased individual’s home.
A beneficiary of a deceased estate who was an excluded foreign resident at the time of death is not entitled to the CGT main residence exemption in respect of an ownership interest in a deceased personal residence.
The trustee of a deceased estate is entitled to the CGT main residence exemption in respect of an ownership interest in a residence in which the deceased individual was a foreign resident at the time of death, in the same manner as if the deceased individual had been resident at that time.
Main residence exemption: Beneficiary of deceased estate is a foreign resident
Main residence exemption: Beneficiary of deceased estate is a foreign resident
The beneficiary of a deceased estate is entitled to the main residence exemption component of CGT in relation to the deceased individual’s ownership interest in the residence, provided that the deceased was not an excluded foreign resident at the time of death. This applies even if the beneficiary was a foreign resident at the time of CGT on the residence.
However, if the beneficiaries were foreign residents at the time of CGT on the residence, then they are not entitled to any additional part of the main residence exemption to which they would otherwise be entitled in their own right.
A beneficiary of a deceased estate is entitled to the CGT principal residence exemption in respect of an ownership interest in a deceased individual’s residence, provided that the beneficiary was a foreign resident and taxed in the same way as an Australian resident.
The following is a summary of the main aspects of the legislation that
An individual who sells their principal residence will not be entitled to the principal residence exemption if they are foreign residents at the time of disposal – this includes non-resident Australian citizens or permanent residents living overseas.
For individuals, the date of disposal of the proceeds of their property is usually when the contract of sale is entered into.
The Act does not provide for any ‘allocation’ of the principal residence exemption. Any days that the property was owned as an Australian resident do not need to be included in the calculation of CGT.
The new legislation provides that foreign residents – who satisfy the ‘life events test’ (unless they have been a foreign resident for more than six years) – can be granted the CGT primary residence exemption – for events such as terminal illness, death and divorce. death and divorce.
