Tax Changes Hit Expats Main Residence CGT Exemption

I have always struggled to comprehend how this legislation is going to actually reduce the pressure on housing affordability as the ultimate outcome will probably be that fewer homes will be listed for sale as owners choose not to sell their main residence to avoid incurring any capital gains tax as a result of a disposal. Perversely, this legislation may have the opposite outcome to the one it supposedly seeks to address as it may reduce supply on the market.

Passage of this Bill by the Senate means that Australian property owners overseas will now lose their capital gains tax exemption for the family home.

Expats will now have until 30 June 2020, to sell their family home or they will be forced to pay capital gains tax on any transaction thereafter.

The changes, which were led by the Morrison Government and initially proposed in the 2017/18 budget, have been criticised heavily and we have lobbied against the removal of these exemptions for the last 2 years.

Initially, the legislation was put on hold, pending the outcome of the Federal Election, but since the Liberal victory, the legislation started moving forward once again.

As it stands, the changes would likely impact up to 100,000 Australian’s who are currently living overseas and generate $581 million for the Government. However, there are some concessions in place for those that are impacted by particular circumstance such as a serious life event.

According to Assistant Treasurer Michael Sukkar, “foreign residents will no longer be able to access the main residence capital gains tax exemption, other than when a specific life event occurs if a person is a foreign resident for a period of six years or less,” he said.

“Grandfathering arrangements will apply to properties owned on May 9, 2017 and will enable foreign residents to access the existing main residence exemption if they sell that property by June 30, 2020.”

Serious Life Event Exceptions

The exceptions to the new legislation for a serious life event will only apply when an individual has been a foreign resident for a period of six consecutive years or less.

A ‘life event’ is considered something like a terminal medical condition or death of a spouse or child. There is also a situation where the CGT event in relation to the property occurs in connection with a family law matter. This might be something like a divorce or separation which would need to have occurred during the period of foreign residency.

Additional Compliance Burden

One of the major issues with the new legislation is more than just the tax implications. If a home has been in the family all the way back to the introduction of capital gains tax, which was in 1985, then that’s when the cost base of a property would be assessed from.
To determine the tax payable on the sale of a home under these new laws would first require the cost base of the home or acquisition cost, which could date back to 1985.

Then any renovations or improvements would require full documentation to be considered as a deduction. Owners would then also need to account for the incidental costs (stamp duty, legal costs, etc.) on both the purchase and sale of the property and other expenses that are not allowable as a deduction from income over the life of the ownership of the home.

Not only is this not practical, but it is also another burden put onto homeowners, thanks to these changes.

What Does This Mean for Expats?

If you owned a main residence as of May 9, 2017, current and future foreign residents may consider selling their main residence before June 30, 2020 to obtain the CGT main residence exemption under the transitional rules.

So instead of having a six-year grace period, sellers will be subject to the tax if they are no longer Australian tax residents after the June 2020 deadline.

However, it is important to note that the CGT exceptions will still be available to any Australian tax resident who moves back into their family home before putting it on the market.

Generally speaking, you need to have lived in the home for a continuous period of time, to receive the CGT exception based on normal circumstances.

However, as ever, the situation is still a little more complicated than that. It’s worth seeking independent tax advice before deciding what to do with your family home if you are currently living overseas and non-resident for tax purposes. It is also essential to examine other aspects of your investment strategy to determine whether this will actually have any impact at all on your long term plans and potential tax outcomes.