Australians who are currently overseas and still have their principal place of residence (PPOR) or main residence might not enjoy the Capital Gains Tax (CGT) main residence exemption if they plan to sell their home.
The new bill that passed parliament on 12 December 2019 is removing the main residence exemption for Australian expats.
The bill will come into effect from 1 July 2020.
What is the Capital Gains Tax main residence exemption?
A taxpayer’s main residence or Principal Place of Residence (PPOR) is exempt from CGT when they sell their main residence.
When a CGT asset is sold, the taxpayer has to pay tax on part or all of the capital gain incurred.
Currently, a law that has been in place since 20 September 1985 states that Australian taxpayers and Australian expats are exempt from paying the Capital Gains Tax – when they sell their main residence.
However, the new law states that the CGT main residence exemption for expats will be removed.
This means that Aussie expats would have to pay hefty taxes when selling their main residence.
Let’s say you purchased a property in 1998 in NSW for $200,000 and are selling it in July 2020 for $800,000. The difference between the purchase price and the sale price is $600,000, which is added to your taxable income.
Who is affected by the change?
Foreign residents who want to sell their Principal Place of Residence (PPOR) after 30 June 2020 will have to pay CGT.
Here, a foreign resident is an individual who is not a tax resident of Australia at the time the CGT event (sale of the main residence) occurs, which includes Australian citizens and permanent residents who are overseas.
Individuals who are Australian tax residents at the time of sale of PPOR will not be implicated.
The change is estimated to affect more than 100,000 Australians working and living overseas.
The change is applicable for foreign residents under the following circumstances:
- Where a life event does not occur.
- They have been living overseas continuously for six years and above, even where a life event occurs.
- They do not qualify for transitional relief wherein they acquired their main residence after 9 May 2017 or sold it after 30 June 2020.
Besides foreign residents, the bill also affects people who come to Australia for temporary periods and foreign nationals who bought a home while living in Australia and want to sell before returning to their home country.
What about the six-year absence rule?
Australian expats could still treat their dwelling as a main residence even when they had moved out and rented their property for up to six years (or indefinitely if the property was not rented out).
So, under the six-year absence rule, the dwelling could still be treated as a main residence even if the property was being rented.
The CGT main residence is not exempt for the period the property was used to produce income, exceeding the six years.
However, the new bill completely negates the six-year absence rule, so the foreign resident will still need to pay CGT when selling the main residence for the whole ownership period.
Even if the foreign resident was a taxpayer for the first few years of ownership, and had only rented out the property after moving overseas, CGT will be calculated for the whole ownership period.
The new bill does not take into consideration the period when the foreign resident was living in the main residence as an Australian taxpayer.
For example, Sally had brought a property in 2005 and established it as her main residence. She moved to New York due to a lucrative job offer and vacated her house in 2018. On 15 August 2020, Sally signed a contract to sell her dwelling. As Sally was still a foreign resident, she is not entitled to the main residence exemption even if the period of her being a foreign resident only began after 2018.
However, if a foreign resident moves back to Australia and lives in the main residence within six years and becomes an Australian taxpayer, then the CGT main residence exemption will apply.
Are there any exceptions even after the new bill is passed?
Expats might still get the CGT main residence exemption under the following circumstances:
- If the residence has been held continuously before 9 May 2017, a contract to sell the property must be signed before or on 30 June 2020.
- Even if the contract of sale is entered after 30 June 2020, if a life event occurs and the individual has been overseas for six years or less.
- If the residence has not been held continuously before 9 May 2017, the exemption will only apply if the owner was not a foreign resident continuously for six years and a life event occurs.
What is a life event?
There are conditions under which an expat might still get CGT main residence exemption if he/she was a foreign resident for six years or less, and fulfil the following criteria:
- The individual, spouse or minor children under 18 years have a terminal medical condition.
- The individual dies, or there is a death of the spouse of minor children.
- Divorce or separation.
What happens if the foreign resident dies while overseas?
The CGT main residence exemption still applies.
In the case of the death of a foreign resident, then the changes will apply to:
- Legal personal representative, trustee, beneficiaries of the deceased.
- Surviving joint tenants
- Special disability trust
If you’re an Australian expat and you’re looking to sell your PPOR soon, think twice as you could be hit with the capital gains tax.
Disclaimer: Capital gains tax is complex, so we recommend that you speak with your accountant or financial adviser when calculating how much CGT you’ll need to pay.
Our brokers are experts in helping Australian expats.
Call us on 1300 889 743 or enquire online.