The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 was passed by the Senate in December without amendment and will soon become law.

First announced in the 2017–18 Budget, the Bill denies non-residents the CGT main residence exemption for CGT events that happen on or after 9 May 2017, although there are exceptions – more on that in the ‘Transitional provisions’ section below.

This reform is a major shock to the taxation system as it is effectively a retrospective tax dating back to 20 September 1985. It is imperative that those who are affected keep as clear records as possible regarding the purchase and related costs of their main residence, as well as understanding their residency status when selling a property.

What is the CGT main Residence exemption?

The CGT main residence exemption allows taxpayers to treat a dwelling as their main residence even after they have stopped living in it – for up to six years if it is used to produce income, or indefinitely if it is not used to produce income – provided no other dwelling is treated as a main residence.

So what's changed?

Before this change, foreign residents and Australian residents were treated the same way for tax purposes. That is, people who are foreign residents were entitled to the CGT main residence exemption in the same way as people who are residents of Australia for taxation purposes.

Under the new law, people who are foreign residents at the time a CGT event occurs (usually when a contract of sale is exchanged) will not be entitled to the main residence exemption for any portion of the time they own the dwelling.

Scenario: Main residence exemption denied

Vicki purchased a dwelling in Australia in September 2010, living in it for eight years as a resident for tax purposes. In July 2018, Vicki moved to New York and rented out her property. She was a non-resident for tax purposes in October 2020 when she signed the contract to sell the dwelling. Under the changes, Vicki is now not entitled to any main residence exemption and she will be liable on potential capital gains arising on the property from 2010

Exemptions - Life events

There are exemptions for people who have been foreign residents for up to six years whereby they can access the full or partial CGT main residence exemption if, during that time, they experience certain life events. These include:

• A terminal medical condition to the foreign resident, their spouse or their child under 18 years of age
• Death of a spouse or child under 18 years of age
• Divorce or separation

Scenario: Life events test - Death of a spouse

Joan acquired a dwelling on 7 February 2015, living in it with her spouse John as residents of Australia. In 2020 they retire and move to the Bahamas, becoming foreign residents. They do not purchase a new home there but simply rent one - which means they do not establish a new main residence. In 2021 John dies and Joan sells their Australian residence. Because Joan has been a foreign resident for less than six years at the time of signing the sale contract, and John passed away during that period, she is entitled to the main residence exemption for the sale of her Australian residence.

Deceased Estates - Where the deceased was a foreign resident

If someone dies and they were a foreign resident for more than six years by the time of their death, then the portion of the main residence exemption accrued during the time of their ownership of the dwelling cannot be ‘transferred’ to the estate or beneficiaries.

This is different for people who were residents of Australia (or had been foreign residents for six years or less) at the time of death. In these cases, the portion of the main residence exemption accrued during the time of their ownership continues to be available to the executor or beneficiaries of their estate.

In both scenarios, the beneficiaries who inherit a dwelling can be entitled to the portion of the main residence exemption accrued during the time of their ownership if they are Australian residents at the time they sell their ownership in the inherited dwelling.

Scenario: Resident beneficiary inherits a dwelling from someone who was a foreign resident at the time of their death

Edwina purchased a dwelling in February 2011 and lived in it as an Australian resident until September 2016. Edwina then moved to Johannesburg and rented out the property. Edwina passed away in January 2018. At the time of her death, she had been a foreign resident for taxation purposes. As she had been a foreign resident for less than six years, the CGT main residence exemption can still apply. Rebecca, an Australian resident, inherited the dwelling from Edwina. Rebecca moved into it and established it as her main residence. When Rebecca later sells the property, she can access the main residence exception for the whole period of ownership since February 2011.

Deceased Estate - where the beneficiary is a foreign resident

The beneficiary of an estate cannot claim portion of the main residence exemption if they were foreign residents at the time the CGT event occurred. This applies regardless of whether the person they inherited from was an Australian or foreign resident.

Scenario: Foreign resident beneficiary inherits main residence from an Australian resident deceased person

Con acquired a dwelling in February 2001. The property was his main residence until his death in August 2017. He had always been a resident of Australia. Con’s daughter Jacqui inherited the dwelling, but she resides in Buenos Aires. When she inherited the dwelling, Jacqui rented it out and in January 2021, she signs a contract to sell the dwelling. Jacqui is entitled to a partial main residence exemption at the time she sells it, given the exemption that accrued during the time Con owned the residence (February 2001 until August 2017). She is not entitled to any main residence exemption for the period of time that she owned the dwelling herself (August 2017 to January 2021).

Transitional Provisions

The amendments to the main residence exemption generally apply to CGT events happening on or after their announcement on Budget night at 7:30pm on 9 May 2017.

However, transitional arrangements are in place. The amendments do not apply to a capital gain or loss from a CGT event that occurs to a dwelling if the CGT event occurs on or before 30 June 2020 if:

• An owner held their ownership interest in the dwelling from 7:30pm on 9 May 2017 until the CGT event happens, or
• An owner inherited the property as a beneficiary of a deceased estate, and from 7:30pm on 9 May 2017 until the CGT event happens, the ownership interest in the dwelling was held by either the beneficiary, the deceased person or the deceased estate.

Scenario: Foreign resident beneficiary inherits main residence from an Australian resident deceased person

Samantha acquired a dwelling in April 2013 and established it as her main residence. In September 2016 she moved to Bahrain and became a foreign resident for tax purposes. She rented out her Australian property until January 2019 when she signed a contract to sell the dwelling. Samantha is entitled to the CGT main residence exemption under the transitional rule because: • She continued to own the property between 9 May 2017 and sale date • Sale date was before 1 July 2020, and • The property had stopped being her main residence for a period of less than six years.

If this information has raised questions for you, please feel free to contact us for a discussion on how we can help you.

December 2019

This article was written by Chris Holloway from our Taxation Services team. Equity Trustees Limited (ABN 46 004 031 298) AFSL 240975 and Equity Trustees Wealth Services Limited (ABN 33 006 132 332) AFSL 234528 are part of the EQT Holdings Limited (ABN 22 607 797 615) group of companies, listed on the Australian Securities Exchange (ASX:EQT). This article is intended as a source of information only. In preparing this information, we did not take into account the investment objectives, financial situation and particular needs of any particular person. Before making an investment decision, you need to consider whether this information is appropriate to your needs, objectives and circumstances. Copyright © 2019 Equity Trustees, All rights reserved.