Losing the Main Residence Exemption
If Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 2) Bill 2018 (‘Bill’) is passed Australian citizens may lose the benefit of the main residence exemption.
The Bill has passed the House of Representatives and is before the Senate. If passed it can apply to sales of homes from 9 May 2017 onwards. There are transitional provisions for people who owned property on 9 May 2017 and sell before 30 June 2019.
This window of opportunity could be important to the many Australian Citizens currently living overseas. Each of them needs to consider the pros and cons of maintaining their ownership of a residence in Australia after the June 2019 deadline. In reality many will simply not be aware of the new law until it is too late.
The provisions are capital gains tax (‘CGT’) changes for foreign residents but will, if passed affect individuals whom you and I might not immediately recognise as ‘foreign’. Individuals who may have moved overseas for work intending at some indeterminate time to return to Australia.
The intended effect is that a person who owns his or her residence but is not a resident for tax purposes loses access to the Main Residence Exemption; their capital gain is not disregarded on the sale of their home. The loss of the concession is absolute. There is no provision for apportionment, the Main Residence Exemption will not apply in respect of any of the period in which a dwelling was a main residence. A gain on a family home lived in for decades may become wholly subject to CGT. Add to this the loss of the general discount on that proportion of the gain relating to a period after 8 May 2012 during which the person was a foreign resident.
Residency is to be determined at the date the contract is signed. However, determining a persons residency is not easy. Tax law provides four alternative tests of residency for an individual and their application is far from straightforward. In a recent Federal Court decision, now on appeal, the presiding judge said of one residency test “it can be accepted that reasonable persons may differ as to the correct interpretation” (Harding v Commissioner of Taxation [2018] FCA 837).
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Deceased Estates
Where an individual dies overseas the proposed laws may have adverse consequences for their Estate. If a person dies overseas their Executor will need to confirm whether or not that person was a resident for tax purposes. This is not at all the same thing as being an Australian Citizen and in many cases will require specialist advice. Those leaving Australia may need to consider whether to keep or sell the family home from an estate planning perspective.
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Family Law Settlements
Issues also arise in relationship breakdowns where one spouse has become a foreign-resident and is a foreign resident at the time of sale. The additional potential tax impost will need to be considered in settlement negotiations; particularly when deciding whether to sell or hold the family home.
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Example
Consider Simon and Nikki who bought a family home in Kensington in 1990. They and their two children moved in straight after purchase and lived there continuously for over 26 years without using any part of the property to earn income. In 2016 after the children had grown up and moved on, Nikki, a university professor, took a post in Canada and she and Simon moved intending to stay there indefinitely. They keep the house in Kensington for the time being, secure in the knowledge that they could sell it when they were ready to purchase a new home in Canada and the proceeds would be free of tax as long as they sold within six years.
Simon and Nikki decide to sell in July 2019. Having held the house for almost 30 years they make a significant capital gain. If the Bill is passed, Simon and Nikki will be taxed at non resident tax rates on the whole of the gain.
If the Bill passes, overseas residents should consider a transfer of their Australian residence prior to 30 June 2019 to crystallise capital gains before the 30 June 2019 deadline. Stamp duty implications must be taken into account and this cost considered in comparison with the expected CGT impost.