Main Residence Not Necessarily Tax Free Anymore

Moving overseas? Be careful of potential tax liabilities on selling your Australian home.

As part of the 2017-18 Federal Budget, the Australian Government announced ‘housing affordability’ reforms that proposed changes to the availability of the main residency exemption for foreign tax residents. If implemented, these changes will restrict access to the CGT main residence exemption to only be available to individuals that are Australian tax residents at the time of the sale. Importantly, all foreign tax residents selling Australian property are affected, regardless of their residency status throughout the ownership period.
 
Currently, CGT on the disposal of a main residence may be reduced to nil regardless of the owner’s tax residency status, provided that the property is maintained as the owner’s main residence throughout the entire ownership period.
 
The below table outlines the proposed legislation:

 
Time Period Proposed Legislation
Properties purchased on or before 9 May 2017 Full main residence exemption is available for properties sold prior to 1 July 2019 provided the property has been maintained as the main residence of the owner throughout the entire ownership period.
 
No main residence exemption will be available for properties sold by foreign tax residents on or after 1 July 2019.
 
Properties purchased after 9 May 2017 No main residence exemption applies to properties sold by foreign tax residents, regardless of the sale date.

 

It should be noted that the relevant sale date for the above is the date of contract. Where a property is sold prior to 1 July 2019 but settlement occurs after this date, access to the main residence exemption may still be available.
 
While the Bill is currently before the Senate, it is unclear when the legislation will be enacted and therefore foreign tax residents will be given little time to take action in response to the changes.

Issues to consider

Establishing main residence

The current CGT exemption applies to all properties that have been held as a main residence throughout the ownership period. As this exemption continues to apply to properties owned by foreign tax residents prior to 1 July 2019, it is important to maintain evidence showing the owner established the property as their main residence.

In order to determine whether a property is considered a main residence, the ATO considers the below as some key indicators:

  • Whether the owner and their family are living in the property and their personal belongings are kept there;

  • The address listed for the owner on the electoral roll;

  • Whether mail for the owner is addressed to the property; or

  • Whether services such as gas and power are connected.

Where properties are sold prior to 1 July 2019, the capital gain will be reduced to nil provided that the property was established as the taxpayer’s main residence throughout the entire ownership period. Where the property was a taxpayer’s main residence for only a portion of the ownership period, or if the property was used for income producing purposes, a partial exemption may still apply.

For any portion of a capital gain that is subject to CGT, a 50% discount is available when calculating the taxable capital gain where the property was owned for at least 12 months. However, it should be noted that complexity exists for foreign tax residents who may only access the 50% discount for an ownership period prior to 8 May 2012.

Valuations

Obtaining a market valuation from a qualified valuer can be of assistance when there is any change in use of a property or a change in tax residency of the owner. It would be useful to obtain a valuation for a property when any of the following occurs:

  • When the property is first used as a main residence, if this is not immediately after the settlement date;
  • When the property is first used for income producing purposes; and
  • As at 8 May 2012 for foreign tax residents owning Australian property at this date.

Based on the proposed legislation, it does not appear that foreign tax residents may rely on valuations at the time their Australian tax residency ceased in order to reduce their taxable gain only to the period of foreign residency. If the Bill is enacted in its current form, any individual who is a foreign resident at the time of selling a property will be taxed on the entire gain on disposal.

Withholding for foreign residents

For all contracts entered into on or after 1 July 2017, purchasers of property from foreign tax residents valued at $750,000 or more are required to withhold and remit 12.5% of the purchase price. This withholding rate may be reduced in cases where it is expected that the actual Australian tax liability on the gain will be less than 12.5% of the sale price, for example, if the main residence exemption applies, or if the vendor has carried forward tax or capital losses.
 
An application must be made to the Commissioner of Taxation to allow for a reduction of foreign resident CGT withholding. As an application would need to be submitted and clearance provided in the period between entering into a purchase contract and settlement, it is extremely important that affected taxpayers plan in advance. If not, meeting deadlines for time intensive tasks such as identifying and collating evidence relating to establishing a property as a main residence can become overly difficult, especially for long-held properties.
 
For a further discussion on how any of the above issues may apply to your personal circumstances, please contact Tim Cheong or your usual Moore Stephens advisor on (03) 9608 0100.