Tax Q&A: Are non-tax residents’ entitled to CGT exemption?

06/12/2018

Question: Are there going to be changes to the existing laws stating that a non-tax resident does not have to pay capital gains tax when selling their principal place of residence (PPOR)?

My husband works overseas and is a nonresident for tax purposes, though he’s a permanent resident of Australia, while I am an Australian resident. We own our PPOR as well as one investment property under our joint names. The PPOR was bought in 2005, while the investment home was bought at the end of 2011.

Thanks, Susan

Answer: I am assuming your husband satisfies the principal place of residence exemption conditions on the basis that, notwithstanding that he no longer lives in the property, he has elected to continue to treat the property as his PPOR. In addition to this, it has not been used to produce income, and no other property has been treated as his main residence during that period.

In short, with respect to your specific question, yes, there will probably be big changes to the tax implications for nonAustralian resident taxpayers (foreign residents) disposing of their Australian PPORs.

In the 2017/18 Federal Budget and a bill introduced in Parliament in February 2018, the government announced that foreign residents would no longer be entitled to claim the PPOR exemption when selling property in Australia. A foreign resident for tax purposes includes Australian citizens and permanent residents who are not tax residents of Australia.

If the law is passed as drafted and your husband is a foreign tax resident when you sell your home, he may no longer be entitled to claim the main residence exemption.

In your husband’s case, as the property was held prior to 7.30pm (AEST) on 9 May 2017, the current PPOR exemption will only be able to be claimed for a disposal of the property that happens on or before 30 June 2019.

If you are disposing of your PPOR on or after 1 July 2019, you will no longer be entitled to claim capital gains tax (CGT) exemption if you are a foreign tax resident. This change will only apply if your husband is not an Australian resident at the time of the disposal (contract date). That is, if he later to claim capital gains tax (CGT) exemption if you are a foreign tax resident.

"If you are disposing of your PPOR on or after 1 July 2019, you will no longer be entitled to claim CGT exemption if you are a foreign tax resident"

This change will only apply if your husband is not an Australian resident at the time of the disposal (contract date). That is, if he later becomes an Australian tax resident and then sells the property, and assuming all the usual PPOR conditions have been satisfied, the sale should be exempt from CGT.

It is important to note that the bill does not contain any apportionment of the main residence exemption. This means the number of days the house has been owned by an Australian resident will be irrelevant. Further, in the bill, there is no consideration of the ‘absence rule’. Accordingly, if your husband is a foreign resident at the time of sale and it occurs after 30 June 2019, he will be subject to CGT on the full amount of any capital gain.

While the legislation is yet to be enacted at the time of writing, it is likely to be finalised based on its current form. Therefore the tax implications for your husband upon sale will likely drastically differ if the property is sold after 30 June 2019 and he is a non-Australian tax resident at that time.

Need to know

- A proposed bill will prevent foreign residents from claiming CGT exemptions.

- Under the bill, exemptions can only be claimed for property sales made up to 30 June 2019.

- There is no consideration of the ‘absence rule’ in the proposed bill.

Ryan Smith

is financial advisory partner

at PwC