Main Residence Exemption Update for Australian Expats
Following our Treasurer, Josh Frydenberg’s comments that they stood by their policy to remove the main residence exemption for Australian expats and other foreign residents, the retrospective Bill is back. While most of the proposed amendments are the same as was originally announced in the 2017-18 Federal Budget, the key change is that the deadline has been pushed forward to 30 June 2020, whereby Australian expats and foreign residents will continue to receive the exemption until this date.
There are also a number of other key amendments that could be positive for some expats, including that Australian expats could still access the Main Residence exemption where they are foreign tax residents for less than 6 continuous years or where certain ‘life events’ take place.
Background of the Main Residence Exemption
Until those amendments announced in the 2017 Federal Budget, non-Australian tax residents whether citizens or otherwise who had lived in a property, and then rented it out upon moving offshore were eligible for the 6-year capital gains tax exemption, just as Australian residents currently are. By way of example, consider that if you lived in a property in Australia that was your main residence for a number of years, moved offshore to Singapore for example, and decided that you would rent out your property to provide some income to cover the mortgage repayments or otherwise, sold it 3 years later, you could receive the benefit of the 6-year exemption and pay no capital gains tax (CGT) on your property.
Consider the following example; Let’s assume that Jack lived in his own home in Melbourne from 2012 – 2015. In April 2015, Jack receives an offer to move to Hong Kong with his current employer and decides that he wants to rent out his Melbourne property rather than sell it. Jack then later decides at the beginning of 2019 that he’ll sell the Melbourne property as he’d prefer to invest the money elsewhere, and as he is renting a condominium (apartment) in Singapore, he can seek to claim the Main Residence Exemption for his Melbourne property. As Jack has rented out the Melbourne property for less than 6 years, by claiming the Main Residence exemption he will not be liable for any Capital Gains Tax (CGT).
What are the ‘life events’?
The life events that have been outlined in the proposed amendments include the following:
- Terminal medical condition
- Death of a spouse of minor child
- Divorce or separation
Who will be impacted by the changes?
The key demographic of those who will be impacted are those Australian expats who move overseas and sell their previous main residence at the time of residing abroad whereby a ‘life event’ does not occur, more than 6 continuous years have passed or if the property was purchased after 9 May 2017 or sold after 30 June 2020.
It's important to also recognise here the meaning of a foreign resident. This includes anybody who isn’t a tax resident of Australia, which includes Australian citizens, Permanent Residents and foreign residents who own property in Australia. Anybody who remains a tax resident of Australia even if they’re living offshore at the time of the sale will not be impacted by these proposed changes.
Absence rule for Australian expats
We must also consider the ‘absence rule’. The absence rule in Australia states that any individual, whether Australian citizen or otherwise, who does not treat another dwelling as their Main Residence can treat another dwelling as their main residence for Capital Gains Tax (CGT) purposes for a period of up to 6 years under the Main Residence exemption, which applies if the property is being rented out. If it’s not, then it may be treated as their Main Residence for CGT purposes for an indefinite period. Given the proposed amendments, it looks likely that Australian expats and non-residents will receive no benefit whatsoever from the absence rule if they sell the property while a non-tax resident of Australia.
While the absence rule won’t benefit those who sell their property while residing offshore, it could benefit those who return. Consider the following example:
- Julie purchased a property in Brisbane in August 2005 and signs the contract of sale for the property in July 2021.
- Julie resided in the property from August 2005 until March 2011.
- From March 2011 to September 2016, Julie rented an apartment in New York as a foreign resident (absence rule applies here whereby Julie can treat her Australian property as her main residence)
- Julie returns to Australia in September 2016 and lives in her Brisbane property until December 2017.
- Julie is then offered a new job in Singapore and relocates to Singapore renting an apartment from December 2017 through to June 2019 (absence rule applies again).
- From July 2019 Julie returns to Australia and resides in the property.
- As Julie is an Australian tax resident at the time that the contract of sale is signed, then she should be eligible for the Main Residence Exemption and not pay Capital Gains Tax (CGT)
What happens next...?
The Senate Committee for the scrutiny of proposed Bills has reviewed this amended and has reiterated “its long-standing concerns that provisions with retrospective application (including where provisions are back-dated to the date of announcement of an initiative) challenge a basic value of the rule of law that, in general, laws should only operate prospectively.” You can read their detailed discussion regarding the Bill at this link.
The Committee have provided their comments and feedback to the whole Senate, who will now review all information provided and decide on how to implement the amendments in the Bill and its retrospective nature.
While we do not have complete clarity over if or when this Bill will be applied, Australian expats and those foreign residents with property in Australia, should be exploring how the proposed changes could impact them. To discuss how these changes affect you, click here to book a complimentary consultation: Book Your Meeting Here
To Your Financial Success!
Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Planner with Australian Expatriate Group of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to Australian professionals in Singapore. Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd - No: 200305462G | MAS License No: FA100035-3
Australian Expatriate Group is a division of Global Financial Consultants in Singapore providing specialist advice to Australians living abroad.
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General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.
*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.
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