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Removal of CGT Main Residence concession for foreign residents
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Removal of CGT Main Residence concession for foreign residents

The Federal Government has passed legislation to limit the circumstances in which the CGT main residence concession is available to foreign residents, with potentially serious implications for many individuals.

How will the new rules work?

The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 (“the Bill”) was passed by the Parliament without amendment on the 5th of December.  The Bill will significantly limit the circumstances when a foreign resident would be able to apply the main residence CGT concession to the sale of their property.

Broadly, the effect of the Bill is that the CGT main residence concession will only be available to a foreign resident where the following two conditions are satisfied: (a) the individual has been a foreign resident for a continuous period of no more than 6 years at the time of the contract for sale; and (b) at any time during that 6-year period either (i) the individual, their spouse or minor child was diagnosed with a terminal illness, (ii) the individual’s spouse or minor child died or (iii) the sale occurred as a result of divorce or other Family Court approved property settlement (referred to as “life events”).

Who do the changes apply to?

The changes will apply to all foreign resident individuals otherwise seeking to apply the CGT main residence concession to disregard some or all of a capital gain arising on the sale of their former home.  The changes could also apply to trustees and resident beneficiaries of deceased estates of an individual who was a foreign resident at the time of their death.

When do the changes apply from?

Depending on the date the property was acquired, the changes will apply: (a) retrospectively from 9 May 2017 for homes acquired after this time, or (b) from 1 July 2020 for homes acquired before 9 May 2017 and owned continuously from that date until the time of the sale.

What are the changes trying to achieve?

As indicated by the title of the Bill, the changes are intended to reduce pressure on housing affordability in Australia.

Are there any substantive changes from the proposed legislation of 2018?

The Bill largely replicates the Government’s original proposal despite extensive lobbying by Australian expatriate groups for changes.  The main difference from the original proposal is the 6-year concession for individuals who have experienced one of the specified life events.

There is also a one-year extension of the transitional period for foreign residents who acquired homes before 9 May 2017 (as above).

What is an example of how the changes will operate?

James and Briana are both Australian citizens.  They purchased a home in Melbourne in 2010 and occupied it as their main residence until 2016 when James was seconded to the Singapore office of his employer.  The house has been rented since James and Briana moved to Singapore.  The house has increased in value by approximately $300,000 since 2010.

Under the old law, as the property was originally James and Briana’s main residence, the CGT main residence concession would have applied to enable the full amount of the gain to be disregarded provided the sale occurs before 2022.  That is, provided the sale occurs within 6-years of the house first being rented.

In contrast, under the new Bill, no main residence concession will be available if the home is sold after 30 June 2020 and James and Briana are still foreign residents at that time.  James and Briana may be entitled to a reduced general discount as they acquired the house before 8 May 2012.  In brief, the reduced discount percentage is the number of days during the period they owned the house that they were Australian residents expressed as a percentage of twice the number of days they owned the house.

If instead, the property is sold prior to 1 July 2020, James and Briana will not be liable for tax in Australia.

What are the next steps?  

It is critical that clients consider their position and how the proposed rules apply.  Clients should contact their Pitcher Partners representative to review their situation and determine what action is required well before 30 June 2020.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.
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