Buying a home to live in is part of the Australian dream and has historically been supported by the government by allowing any principal place of residence held by an Australian to be capital gains tax (CGT)-free. That allowance historically continued for a period of up to six years from the date the property is no longer a person’s principal place of residence, provided the person did not claim another property as their principal place of residence.
That historical position started to shift in relation to foreign residents on 1 July 2016.
From that date when selling Australian residential land, if the sale price exceeded $2 million and the Purchaser was not provided by the Vendor with a Foreign Resident Capital Gains Clearance Certificate from the Australian Taxation Office (ATO), the Purchaser had to hold back from the Vendor 10% of the purchase price and send it to the ATO. These rules changed on 1 July 2017 so that they now apply where the sale price exceeds $750,000.00 with the amount to be held back and sent to the ATO increased to 12.5% of the sale price.
A new Bill proposing capital gains tax changes to the main residence rules for foreign residents has passed through the Lower House of the Parliament and is currently before the Senate. This Bill combined with the withholding rules set out above will have a substantial impact on foreign owners of Australian residential real estate. The Bill, if passed by the Senate, will apply to remove the capital gains tax (CGT) exemption on disposal of a main residence for individuals who are nonresidents at the time of disposal.
If a home is sold while the owner is a nonresident then the sale would cause the new rules to apply on the disposal of the main residence with the entire gain subject to CGT, no matter what the previous residential status of the seller was for GST purposes.
There is some temporary relief for those people who are foreign residents. A transitional rule allows the CGT exemption to continue to apply for disposal of a home that happens on or before 30 June 2019, if the home was owned prior to 9 May 2017. After that grace period the CGT exemption no longer applies. For example, If the owner of a home is overseas on assignment, not expecting to return before the 30th of June 2019, then that owner should consider carefully whether they wish to dispose of the home prior to the 30th of June 2019 to take advantage of the CGT status of the property. These changes will only apply if the owner of the home is a nonresident at the time a contract to sell the property is entered into.
A nonresident who inherits a resident’s former main residence will also be affected by these rules. If as a nonresident you dispose of the inherited interest within two years after the date of death, no CGT will be payable, but if the interest is disposed of after the two year period then the new rules will apply to you and only the period up to the date of death will qualify for the CGT exemption.
These rules also apply to:
- joint holdings where one of the joint owners is a nonresident; and
- a main resident owner dies while a non-resident of Australia.
As the rules currently apply to the foreign residence status of the owner at the time of dispose of the property the loss of the CGT exemption can be cured by change of the status of the owner of the property to be an Australian resident again at the time of the disposal of property.
If you are a foreign resident with property in Australia you should consider carefully whether you are likely to return to Australia as a resident before your intended disposal of the property. If that is not the case you should consider disposing of any Australian held property prior to 30 June 2019.
Similarly if you are an Australian resident with beneficiaries of your will who live outside Australia now might be a good time to review your will to make sure the Capital Gains Tax changes will not affect your estate when you die.
If you have any questions on the Capital Gains Tax changes for foreign residents, please contact our Property and Development team.
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