Changes to Capital Gains Tax – Is your home still your castle?

The Australian dream has long been to own your very own castle. This has long been part of the Australian psyche and is reflected in the tax exemption for the “family home” in tax law.

Capital Gains Tax (CGT), broadly does not apply to a property you call “home”.

There are some conditions, but these were often common sense:

  • You can only have one main residence at any time (subject to a six month overlap for sale of one residence and purchase of another)
  • Land on which you built a home qualifies as a main residence, so long as you commenced construction within two years
  • You can’t claim empty land as a main residence, as there is nothing “habitable” for you to live in
  • If you rent your main residence, you partially lose your tax exemption
  • If you inherit a main residence, you have two years to sell and maintain the tax exemption. This is largely an administrative concession, given executors can take time to get affairs in order. There may also be other circumstances that permit an extension of time for deceased estates (e.g. life tenancies).

Moving overseas

Australian’s not only love their property; they love to travel. Australian’s are amongst the most widely travelled people in the world, and often leave Australia for several years to work abroad.

The Australian tax legislation recognises this and until recently, these travelling Australian’s could sell their Australian homes and not lose their tax exemption on the sale. There are some conditions, but broadly speaking, if your absence period does not exceed six years (if you rented it), and you do not acquire another residence overseas, your Australian home still qualifies for a tax-free sale. If you never rented the property, it never lost its tax-free status. This applies irrespective of whether you are in or outside of Australia.

ATO attacks the family home

On 7 May 2017 the Government announced in the budget that the main residence exemption would be lost by foreigners.

This caught many by surprise and it was unclear whether “foreigner” extended to non-resident for tax purposes (budget papers are often scant on detail). When the draft legislation was released, it was confirmed that a foreigner is a non-resident for tax purposes.

Whilst the spirit of the law was clear - foreigners should not benefit from the main residence exemption and avoid CGT on property in Australia, this was couched by the naming of the Bill (“Reducing Pressure on Housing Affordability Measures”). A number of casualties would result from these changes, namely Australian citizens who moved abroad or were travelling and working for an extended period yet kept homes in Australia.

The Bill provided a transition period up to 30 June 2019 where properties could be sold by foreigners, and if they qualified under the old law, they would still enjoy the main residence exemption. Unfortunately, as with politics we are given legislation by announcement, elections come and go and bills lapse. This is precisely what happened with this measure and many thought the “political hot potato” of removing this exemption was pushed aside and may not see the light of day again.

Attack confirmed

On 23 October 2019 the Government confirmed its attack on the main residence exemption and reintroduced the Bill, with some notable changes. Lobbying and consultation has seen some concessions to the original measures.

Firstly, the transitional period has been extended to 30 June 2020.

Unchanged, disposal of a foreign resident’s (Australian tax non-resident) main residence will attract CGT, which will apply to the full amount of the capital gain and will be taxed at the foreign resident marginal tax rates (i.e. rates that have no lower tax thresholds and commence at 32.5% and no general 50% CGT discount), regardless of how long a person was an Australian tax resident.

The changes for foreign residents and their main residence include:

  • Properties held prior to 7:30pm (AEST) on 9 May 2017; the exemption can only be claimed for disposals that occur up to 30 June 2020.

  • Properties acquired after 7:30pm (AEST) on 9 May 2017; the exemption will no longer apply from that date.

That is, if a foreign resident decides to sell their rental property (that they used to live in as their main residence), before 30 June 2020, they would still be eligible to claim the exemption if this property was owned before 9 May 2017.
However, if they sell after 30 June 2020 and are foreign residents at the time of sale, the entire capital gain is subject to tax with no reduction for the time they were an Australian tax resident.

Under the new Bill, individuals who have been foreign residents for a period of six years or less may be still able to access the CGT main residence exemption if, during the period of that foreign residency, certain life events occurred.

These life events include a terminal medical condition to the foreign resident, their spouse or their child under 18 years of age, death, and divorce or separation.

If an individual, who has been determined to be a foreign resident (tax non-resident), returns to Australia and qualifies as an Australian tax resident, they will be able to sell their main residence and qualify for the full or partial CGT exemption even though they were considered a tax non-resident for a period of time. Effectively, the previous rules will apply.

It is important to note that these measures apply irrespective of whether you are an Australian citizen, permanent resident or foreign resident, with the exemption based on tax residency status.

Call to action

The removal of the exemption is now largely all but certain. We do not see the opposition blocking the passing of this Bill given their philosophical stance on collecting more tax. Those who could be caught by the changes should seek advice and act rapidly, before the 30 June 2020 transitional period lapses.

Please contact us if you would like assistance or more