From 1 July 2020 any person who is considered a foreign resident for tax purposes will no longer receive the main residence exemption even if they have rented out the property and wish to use the 6 year absence provision.
The ordinary 50% CGT discount is not available for the period of foreign residency after 8 May 2012. Also, the resulting capital gain will be taxed at non-resident rates.
The new legislation states that if you are a foreign resident at the time the contract is signed, you will be required to pay tax on the Capital Gain from the period you became a non-resident for Tax purposes.
However, if you purchased the property before 7.30pm on 9 May 2017 and disposed of the property before 30 June 2020 and were considered a foreign resident for tax purposes at date of disposal, you are entitled to claim the main residence exemption.
Example
Bob purchased a residential property in Brisbane for $500,000 on 05/06/2012, moves into this property as soon as practical, and will not claim the main residence CGT exemption for any other property.
He continues to reside in his Brisbane property until leaving Australia on 30/01/2018 to take up a 4 year work contract in the UK where his employer will provide him with accommodation as part of his package.
During his 4 year period in the UK, Bob will become a foreign resident and will rent his Brisbane property to a 3rd party. Bob is confident that at the expiry of his contract he will permanently return to Australia.
Let’s look at 3 potential scenarios for Bob:
Scenario 1: Bob sells his Brisbane property on 03/07/2020 for $1,000,000 and none of the ATO’s ‘certain life events’ exemptions apply.
As Bob has sold the property after 30 June 2020 and during his period of foreign residency, he is subject to CGT.
As a result, Bob’s total capital gain for 2020/21 is $500,000 ($1,000,000 – $500,000). He is eligible for the ordinary 50% CGT discount for his period of Australian tax residency, however he is not eligible for the ordinary 50% CGT discount for the period of foreign residency. This results in $325,000 being included in his assessable income for 2020/21 which will be taxed at non-resident rates. Depending on Bob’s level of income (such as rent) which is taxable in Australia, the sale would result in a tax liability of an amount
greater than $130,000.
Scenario 2: Upon his return to Australia, Bob reattains his Australian tax residency on 30/01/2022, and moves back into his Brisbane property. He subsequently sells the Brisbane property on 04/10/2022 for $1,100,000.
Bob is not impacted by the change as he is eligible to claim the full main residence CGT exemption.
This is because Bob has sold the property whilst an Australian resident. He is eligible to claim the CGT main residence exemption during the period in which he resided in his Brisbane property (05/06/2012 – 29/01/2018 and 30/01/2022 – 04/10/2022) and may apply the 6 year absence provision for the period he was working in the UK (30/01/2018 – 29/01/2022).
Scenario 3: Upon his return to Australia, Bob reattains his Australian tax residency on 30/01/2022, decides to live and rent in Melbourne and continues renting his Brisbane property to a 3rd party. He subsequently sells the Brisbane property on 04/10/2022 for $1,100,000.
Bob is not impacted by the change as he is eligible to claim the full main residence CGT exemption. This is despite not re-establishing his Brisbane property as his main residence upon his return to Australia.
This is because Bob has sold the property whilst an Australian resident. He is eligible to claim the main residence CGT exemption during the period in which he resided in his Brisbane property (05/06/2012 – 29/01/2018) and may apply the 6 year absence provision, as his total period of absence from the Brisbane property (30/01/2018 – 04/10/2022) is less than 6 years.
Author
Natasa Briffa
