In the previous article we mentioned that the sale of a home by a non-tax resident is subject to full capital gains tax.
Non-tax residents in Australia include
Being in Australia for a holiday or visit of less than six months.
Choosing to leave Australia permanently to begin with.
Temporary and permanent residence visa holders and Australian citizens who visit Australia for more than six months and spend most of their time travelling and working in different parts of Australia.
However, if the life events test occurs while a non-tax resident, the application for the principal residence exemption will still be available. It is difficult to make a judgement on the ‘life events test’ and it is likely to be perceived as a political ‘talisman’ that can cause practical problems and injustice. The following case helps us to illustrate if the guideline is applied.
Case, Principal Residence Exemption – Life Events Test life events test
Joan purchased a home on 7 February 2015, moved into the home with her spouse, John, and identified the home as their primary residence in the first instance. Joan and John were Australian citizens when they purchased the property and in 2020, they retired to another country where they purchased a new residence, at which point they became non-tax residents. At this point they become foreign residents. In 2021, John dies, and Joan decides to sell their old home.
As Joan had been a foreign resident for less than six years when the capital gains tax CGT event occurred on the contracted sale of the property, and her spouse had died during her foreign residence, she was entitled to a partial principal residence exemption on the sale of the residence based on how long she had been a principal residence.
To summarize the above cases, the principal residence exemption remains available when the overseas resident can satisfy both of the following life events.
Has not been an overseas tax resident for more than six consecutive years
During that period, one of the following has occurred.
the person, or spouse, or child under the age of 18 suffers from a terminal illness
the death of the person, or spouse, or child under the age of 18
The assets giving rise to the VAT on assets may involve a division of assets between the person and the spouse in the event of divorce or separation, etc.
Failure – Primary Residence Exemption Denied
Vicki purchased a home in Australia on 10 September 2010 and moved in as soon as practicable and made it her primary residence. on 1 July 2018, Vicki left the home and moved to New York. vicki rented out the home while attempting to sell it. on 15 October 2020 Vicki finally signed a contract to sell the On 15 October 2020 Vicki finally signed a contract for the sale of the residence with a settlement date of 13 November 2020. At 15 October 2020, Vicki was a non-tax resident for tax purposes. The capital gain on the sale of the residence, CGT event A1, occurs at the time the sale contract is signed, i.e. 15 October 2020. As Vicki was non-tax resident at the time, she was not entitled to the principal residence exemption.
Even if Vicki previously used the residence as her principal residence; and between 1 July 2018 and 15 October 2020 (assuming all the requirements are met), the absence rule in section 118-145 is absent and the residence can be used as Vicki’s principal residence. Her primary residence exemption remains unsatisfied.
In this case, remember that any income from capital gains incurred under non-resident status is taxed at the ‘non-tax resident’ rate – the 32.5% threshold – and there is no exemption. Alternatively, you may choose to return to Australia, become an Australian tax resident again and then sell the property, thereby qualifying for the tax-free status of your principal place of residence.
Writing at the end
These recent proposed changes, and the withdrawal of the 50% CGT discount on capital gains tax for non-Australian citizens in 2012, will have a significant impact on whether or not you should continue to hold Australian property.
Based on the recent restrictions on making super non-concessional contributions, for Australian expats aged 65 and over selling their primary residence in Australia, from 30 June 2018, a maximum of $300,000 each in ‘downsizer” contribution into a superannuation, subject to certain eligibility requirements being met, which are only likely to become more stringent.
All in all, the government effectively continues to support domestic mobility and temporary resident status, while penalizing international mobility for its own citizens. It is clear that all the major political parties continue to abandon the support of the ‘no vote’ Australian diaspora. From a practical point of view, all Australian expatriates who maintain a primary residence in Australia should work with their tax advisors to consider in detail their disposition of the property and should not sell it without first receiving comprehensive tax advice.
