Tax Q&A: Being a foreign resident for tax purposes

Question: In April 2014 we bought a unit in Sydney. At the time, it was rented out, and we moved in on 10 November 2014. We lived there until 20 May 2017, at which time we rented it out to travel overseas.

Now we are in Sweden, where we have found jobs and are working. So we are considering selling the unit in Sydney. As this is our primary home, what would we pay in CGT?

Best regards, Nektaria

Answer: There are a couple of variables to consider in your situation that will impact on your capital gains tax (CGT) position upon the sale of the property. The first key variable is your tax residency position and the second the proposed legislative changes (which are yet to be enacted).

Legislation is currently before Parliament that aims to give effect to the government’s 2017/18 Federal Budget announcement that foreign residents will no longer be entitled to claim the main residence CGT exemption when they sell property in Australia after 30 June 2019. A foreign resident for tax purposes includes Australian citizens and permanent residents who are not tax residents of Australia.

It is important to note that the proposed Bill does not contain any apportionment of the main residence exemption. This means that the number of days the house has been owned by an Australian resident is irrelevant. Accordingly, if you are considered a foreign tax resident at the time of sale and it occurs after 30 June 2019, you will be subject to CGT on the full amount of any capital gain.

This change will only apply if you are not an Australian tax resident at the time of the disposal (contract date). If you later resume being an Australian tax resident and then sell the property, assuming all the usual main residence conditions have been satisfied, the sale should be partially exempt from CGT.

If you are still considered Australian tax residents, the changes contained in the Bill should not impact on your CGT position. In this scenario, assuming you have not elected to have any other property as your main residence, this property can continue to be rented out for a period of up to six years from May 2017 and the main residence CGT exemption should continue to apply. However, as you rented out the property before it became your main residence (April to November 2014), a portion of any capital gain will be taxable.

In calculating the taxable gain, you apportion the non-exempt days of ownership relative to the total ownership period. In your situation, the non-exempt period would be from April 2014 to November 2014 (circa seven months).

By way of example, assuming a sale date of April 2019, you will have owned the property for five years. Therefore, approximately 11.66% (seven months as a proportion of five years) of any capital gain will not be exempt. The taxable portion of the gain could then be further reduced by 50% for owning the property for more than 12 months.

As you can see, the tax implications for you will vary greatly depending upon whether you are an Australian tax resident at the time of sale and whether the Bill is enacted. While the Bill 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 you upon a sale will very likely differ drastically if the property is sold after 30 June 2019 and you are a non-Australian tax resident at that time.

Need to know

- A proposed bill states that foreign residents will be ineligible for CGT exemption.

- A foreign resident is someone who is not an Australian tax resident.

- You can resume being a tax resident and be entitled to partial exemption.

Ryan Smith

is financial advisory partner

at PwC