Update: Measure regarding changes to CGT main residence exemption now introduced to Parliament

As previously reported in November 2017 (see here), the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 introduced to the Parliament in October of that year dropped, without notice or explanation, reference to the proposed change to the CGT main residence exemption as that exemption applies to foreign residents.

We queried at the time whether this measure had been dropped completely or would reappear in a later Bill.

This measure has now reappeared and is included in Schedule 1 of the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 2) Bill 2018 introduced to Parliament on 8 February 2018 (see here). 

Of note, the measure provides a transitional rule so that, for example, the amendments to the main residence exemption do not apply for certain dwellings held before the ‘application time’ (being 7:30pm, by legal time in the ACT, on 9 May 2017) which are disposed of by way of a CGT event occurring on or before 30 June 2019. 

Example 1.9 at paragraph 1.61 to the Explanatory Memorandum to the new Bill (EM) provides an example of application of this scenario.

However, the potential implications of this measure must not be discounted especially to those Australian tax residents that may become foreign residents in the future and could therefore lose the benefit of the CGT main residence exemption because of their status as a foreign resident at the time of the relevant CGT event.  This treatment is irrespective of the use of the dwelling or the taxpayer’s tax residency status during their ownership of the dwelling. 

Example 1.2 at paragraph 1.28 to the EM has a scenario where the CGT main residence exemption is denied to a taxpayer who, relevantly:

  • acquired a dwelling as an Australian tax resident;
  • held it for a period of time as an Australian tax resident;
  • subsequently left Australia to work overseas becoming a foreign resident for tax purposes whilst renting out the dwelling; and
  • was then a foreign resident when they disposed of the dwelling. 

This example specifically notes the outcome is not affected by either:

  • the taxpayer having previously used the dwelling as their main residence; or
  • the absence rule in section 118-145 of the Income Tax Assessment Act 1997 (which allows a dwelling that was a main residence to be rented for up to 6 years before losing the CGT exemption) that could otherwise have been applied to treat the dwelling as the taxpayer’s main residence in the period when she vacated the dwelling and moved overseas and then sold the dwelling.

A partial CGT main residence exemption to the pro rata gain for the periods between the times when the taxpayer is a resident and a foreign resident is also not possible under the measure (see Example 1.4 at paragraph 1.33 of the EM).

Whilst the proposed measure and its application to foreign residents can be understood, what may be harder to fathom for those Australian citizens and permanent residents who are working overseas and want to dispose of their main residence whilst they are foreign tax residents is that they would also be caught.  Other than in the circumstances covered by the transitional rules, the CGT main residence exemption will be lost to those taxpayers who are foreign tax residents at the date of sale of their property.

These new rules and the application of these rules need to be carefully considered including by those Australian tax residents who may wish to work overseas and are consequently treated as foreign tax residents and choose to sell their main residence whilst they are overseas.

To discuss this further or for more information please contact:

Sam Campbell
Associate / Business Law
Sladen Legal
M +61 423 515 454 | T +61 3 9611 0135
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia

Neil Brydges
Special Counsel | Accredited specialist in Tax Law
Sladen Legal
M +61 407 821 157 | T +61 3 9611 0176
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia