Legislation to strip foreign residents of the main residence CGT exemption hits the Senate this month. Many Australian citizens and permanent residents living abroad could be affected, according to Pride Advice’s Riady Haryono and Azlin Lutfi.
Legislation that seeks to remove the Capital Gains Tax (CGT) main residence exemption for foreign residents quietly passed through the House of Representatives in November.
The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 goes to the Senate this month and, if passed, it will affect all Australian citizens and permanent residents living and working overseas who sell their primary residence.
The Bill means that expats who sell their Australian main residence while living abroad will incur capital gains tax on the full amount of the capital gain and taxed at the foreign resident marginal tax rates.
This is regardless of how long the individual was an Australian tax resident. It is potentially a massive tax bill for the estimated 300,000 plus Australians living overseas.
Our client Jane
That includes people like our client Jane*.
A decade ago, before Australian property prices went berserk, Jane bought a unit in Sydney’s Eastern suburbs. It was her main residence for many years before she moved to America after landing her dream job.
Since then, Jane’s parents have been living in the unit.
As Azlin explains, “Jane never expected to have to pay tax on this property, as under the previous rules it would have been entirely tax-free – it was her home. However, she’s now starring at a potential $100,000-plus tax bill, due to proposed changes to the law because she is living and working overseas”.
Riady commented that the problem is acute for many people “given Sydney property prices have risen exponentially to the point where two bedroom apartments in the Eastern Suburbs are selling for upwards of $1.3 million. That’s a healthy profit for Jane and one she never planned to pay CGT on”.
Why is the government doing this?
The proposed changes were originally announced in the 2017/18 Federal Budget as part of measures designed to crack down on foreign residents buying (and selling) Australian residential property but not residing here.
However, the legislation is drafted so broadly that it could have a much bigger impact than intended.
As the legislation was passed in the 2017 budget, these measures could now be applied retrospectively from May 2017. While there are transitional provisions contained in the draft legislation, they are limited.
Basically, the existing exemption from paying tax on the a person’s principle place of residence will only be extended for people who bought their property before 9 May 2017 (Federal Budget night) and sell it before 30 June 2020. Thus, anyone who’s recently purchased a property (since May 2017), or retains their property after 30 June 2020, stands to pay capital gains tax on the sale of their home.
What should our client Jane do?
If the Bill is enacted, there are only two options available to Jane, assuming she doesn’t qualify for the CGT main residence exemption under the “life events” exception – death, divorce or terminal illness that has occurred within six years of living abroad.
- She can sell her unit before the 30 June 2020 deadline to obtain the CGT main residence exemption under the transitional rules OR
- She can move back to Australia and re-qualify as an Australian tax resident, before selling the residence.
Where Jane has always intended to return to Australia someday, she needs to seriously think about her future plans.
Get Tax Advice
At Pride Advice, part of our role is to stay abreast of the tax rules and keep our clients informed of any changes that may affect them.
If you believe proposed changes to the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 may impact you or a family member, we can assess your situation, review your options and help you plan ahead to ensure the most tax efficient outcome.
For more information, contact Azlin Lutfi or Riady Haryono at Pride Advice and Accounting Sydney, 02 9222 1422.
*Name has been changed to protect the person’s identify.