CGT Main Residence Exemption Rules Change For Non-Residents
If you become or are a non-Australian resident for tax purposes and you wish to sell your main Australian residence, then you should be aware of some recent tax law changes that were legislated on 12 December 2019.
Subject to certain exclusions, when a non-resident sells their main Australian residence, the total profits from the sale will now be subject to capital gains tax. The full profit will be taxed at non-resident marginal tax rates regardless of how long you were historically an Australian tax resident.
Prior to the legislative change, non-residents were able to work and live overseas while still qualifying for a full or partial main residence CGT tax exemption on the sale of their Australian home.
Under the “Six-year absence rule”, a non-resident used to be able to continue to treat a former home as their main residence for CGT purposes indefinitely, if it was not income producing, or for up to six years if the home generated income.
Foreign residency for tax purposes
Usually you will be treated as a non-resident by the Australian Tax Office (ATO) if you reside overseas for 183 days or more in a financial year. This applies even though you are an Australian citizen or permanent resident for immigration purposes.
Non-residents are taxed differently to residents. They do not enjoy many tax concessions and exemptions that residents do. For example, non-residents pay tax at 32.5% on their first dollar of taxable Australian income and their tax rates increase on a sliding scale. Also, the CGT general discount of 50% is unavailable to non-residents.
Removal of main residence CGT exemption
This new legislation applies to all disposals which took place from 7:30 pm (AEST) on 9 May 2017. However, a transitional provision applies to non-residents who already held property on 9 May 2017. They will be able to claim the CGT main residence exemption if they sell their property on or before 30 June 2020.
Exemptions also apply if the disposal of the property is due to certain life events such as terminal medical condition or death of a spouse or child, or divorce, etc.
It is important to note, this new law only applies to people who are non-residents at the time of disposal. Non-residents who re-establish tax residence status upon returning to Australia before disposing the property will not be impacted.
Matthew is a management accountant and he purchased an apartment in Melbourne CBD for $600K on 1 Jan 2014 which he moved into shortly after settlement. In 2017, Matthew was transferred to the UK subsidiary of his employer and has been living there since. He is now in a stable relationship and it’s unlikely for him to return to Australia in the next few years. Matthew’s Melbourne apartment has been leased out since his departure and its market value has risen to $1 million. He doesn’t own any other property.
If Matthew sells his apartment before 30 June 2020, he would not be liable to pay any capital gains tax as he can still apply the CGT main residence exemption under the transitional provision.
However, if Matthew sells his apartment at the end of 2020 and we assume the market value remains unchanged, he would be liable to pay tax of $161,5501 on capital gains of $400,000 at the non-resident tax rate.
How will the ATO collect the tax?
The ATO will collect some of the tax via the non-resident capital gains withholding provision, where a buyer must pay 12.5% of the purchase price to the ATO. The withholding payment will apply if the market value of the property at that time is $750,000 or more.
Despite being a non-resident for tax, a vendor is required to lodge a tax return for the income year that the disposal took place as they will have taxable Australian income.
Determining your tax residency status can be complicated and there are other various CGT credits and discounts which may be available to foreign residents who are eligible. We recommend you speak with your accountant or tax agent for further details.
1 Based on foreign tax rates 2019-20 and assuming there’s no other taxable income.