Legislation has now passed the Australian Parliament that will significantly affect many individuals who are not Australian Tax Residents and who sell a former main residence in Australia.
Ordinarily, the sale of a taxpayer’s main residence is exempt from Capital Gains Tax (CGT) when a gain is made on the disposal of a dwelling that has been the individual’s main residence throughout the period of ownership.
An individual who does not treat any other dwelling as their main residence can treat a dwelling as their main residence for CGT purposes for up to six years if it is rented out, or for an unlimited period where the property is not rented out.
Under the new legislation an individual who is a foreign resident and who sells a former Australian main residence at the time of the disposal will no longer be entitled to the main residence CGT exemption, subject to some limited exceptions surrounding family breakdown and health.
Consider Steve and Serena, who bought a property in Melbourne in April 2000 for A$600,000.
They lived in the property for 15 years until April 2015 when they departed to live and work in Malaysia.
They rented out their Melbourne property while living in Malaysia.
It is now December 2019. Steve & Serena are still in Malaysia. They are planning to sell the property which is now worth A$2.6m, and would like to know how the new legislation will affect them.
If the property is sold in March 2020 the period in which they occupied the property as their main residence will be factored into the capital gains tax calculation.
The property has appreciated in value by A$2m over a 20 year period.
It is probable that in addition to the 15 years in which the property was their main residence a period of up to 6 years is available to be treated as a CGT free period of ownership.
Therefore none of the A$2m capital gain will be subject to tax in Australia if the property is sold in April 2020.
Juxtapose this against a disposal of the Melbourne property after the end of June 2020m, while not tax resident in Australia, will mean the gain to be taxed is A$2m – none of the ownership period when the property was occupied as their main residence can be treated as a CGT free period of ownership. The same applies for the subsequent period of up to 6 years.
Tax on the A$2m capital gain is likely to be charged almost wholly at 45% – which amounts to A$900k. This is the additional cost arising from selling the Melbourne property after the 30th of June 2020 while non resident.
Steps that might be considered to mitigate the tax payable and to retain the CGT exempt period of ownership include:
- Selling the property before the end of June 2020 – maybe accepting a lower price for the sale, recognising that additional tax approaching A$900k will be payable if the sale takes place at a later date.
- Resuming tax residency in Australia before the property is sold. Note that occupation of the property that is being sold is not required.
Persons likely to be affected may want to have clarity on the tax payable if they sell a property in Australia:
- If not resident in Australia during the current tax year, compared with a sale when not resident after the end of June 2020
- After 30th June 2020 while not resident in Australia compared with a sale having resumed tax residency in Australia.
- Review of ability to claim main residence exemption given a complex history of movements to and from your main residence.
- Foreign residents may also want to establish the steps they should take to resume tax residency in Australia, while also having regard to what a resumption of residency will mean for the taxation of other sources of income.
If you are concerned by the above please feel free to complete the enquiry form on the Trident Financial Group website and we will be pleased to have a no obligation initial chat with you, and to advise our fixed fee for reviewing and advising you.