Sydney Tax Adviser
December 2020 Tax News
The following is general in nature and shouldn’t be relied upon as taxation advice:
December 2019: Recent developments
CGT main residence exemption and foreign residents – Bill receives Assent
|New law erases CGT-exempt family home for some
– by David Montani, National Tax Director, Nexia Australia
It can be quite an adventure to live and work overseas for a time, should the opportunity arise. Many people who have done so choose to keep their home because they can maintain the exemption from CGT.
Not anymore. In fact, not ever.
No more family home CGT exemption for foreign residents
Parliament recently passed without amendment the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 (it received Royal Assent on 12 December 2019), which removes the CGT exemption for your home if you are a foreign tax resident. When the change was originally announced, the stated intent was to reduce pressure on housing affordability. How it achieves that is not clear, and the subject doesn’t even get a mention in the Explanatory Memorandum accompanying the law.
The change applies to sales from 9 May 2017, but the truly draconian part is that there’s no recognition of the time the property was a person’s home. The law simply asks whether a person is an Australian tax resident at the time of sale. If the answer is yes, these changes don’t affect them. If the answer is no, the person’s house is subject to CGT in the same way as shares or an investment property – it does not matter that it was once their home, nor for how long. Despite much lobbying from the tax profession, including offering alternatives that would achieve more sensible and fair outcomes (eg at least some form of apportionment would have been desirable), our concerns fell on deaf ears.
A separate matter is whether a person’s tax residency does in fact change upon moving overseas, which itself can be a complicated question to resolve.
A person purchased their home in October 1985 for $70,000. They moved overseas in October this year, and became a foreign resident. They sell the house in October 2020 for $970,000. As they are a foreign resident at the time of sale, the family home CGT exemption is not available to any extent on their $900,000 capital gain – it having been the person’s home for 34 of the 35 years they owned it is now meaningless.
At foreign resident tax rates, the person’s Australian CGT bill will be hundreds of thousands of dollars. Without this change in the law, it would likely have been nil.
“Last chance” rule
There are 2 exceptions where the home will be unaffected by this change. First, the “Last chance” rule. The CGT exemption is still available for a person’s home if they satisfy all of the following:
- They acquired it before 9 May 2017.
- They subsequently became a foreign resident.
- They sell it by 30 June 2020.
Selling the home by 30 June 2020 means the contract must be executed by that date (irrespective of when settlement occurs). This doesn’t leave much time for the owner.
Home owners in this situation need to make a decision – soon
If a person bought their home before 9 May 2017, and has since become a foreign resident, they have a significant decision to make, and soon. Here are their options:
- Sell their home by 30 June next year (“Last chance” rule). They will have the full or partial CGT exemption they always thought they had.
- Keep it. CGT exemption is lost come 1 July 2020. If they are still a foreign resident when the home is sold, a CGT liability will arise. (That is, unless they qualify for the “Life events” exception below – which they will hope they don’t.)
- Return to Australia (whenever in the future) and become an Australian tax resident again. Sell while an Australian tax resident. The new laws won’t apply, and the person will get the same outcome as Option 1.
If the person is entrenched in their life overseas, Option 3 might not really be an option. So, if it’s between Options 1 and 2, making an informed decision – sell or keep – requires having an idea of the starting CGT cost that will become embedded in the house as of 1 July 2020 under Option 2. That will be an instant – and for many, substantial – hit to their personal wealth. With an estimate of the property’s current value, that initial CGT exposure they are facing can be estimated. But those in that situation need get onto this quickly – they have only a matter of months.
Affected persons will also need to judge the future growth in value of the property beyond 30 June 2020. Here’s the critical point: Option 2 means they will get the benefit of that future growth in value (net of CGT, now), but it comes at the expense of the CGT exposure that will instantly pop into existence from 1 July next year. Substantial after-CGT capital growth beyond 1 July 2020 may be required just to make up for that embedded CGT cost arising from 1 July. They will also need to consider whether any tax liability will arise in the country of their tax residency, and whether any double-taxation relief is available.
Of course, if Option 2 is chosen, Option 3 will still be open, if things work out that way for the person concerned.
“Life events” exception
The other exception is available only where a person has been a foreign resident for 6 years or less. It applies if during that time, any one of certain “life events” have befallen the person. These events include the person, their spouse or minor child having a terminal illness, their spouse or minor child dying, or they get divorced. Obviously, there is no joy in the home remaining CGT exempt under this exception.
Calculating the capital gain – practical problem
If a person bought their home after 20 August 1991, they will likely encounter a difficulty with calculating their capital gain. Their home’s cost base includes ownership costs such as interest, insurance, rates, and repairs and maintenance (for periods when it was not used to produce income). The higher the cost base, the lower the capital gain, and thus the lower the CGT bill. These costs could add substantially to the person’s cost base – but who has kept records of these for their home? Virtually no one, because there was never any need. But now there is. Perhaps the ATO will provide guidelines for making acceptable estimates of these costs that any home-owner would have incurred.
The Government has continued to argue that this change is not retrospective, because it applies only to homes sold after it was announced on 9 May 2017. Well, yes, but it creates a Back to the Future-style time paradox in which the family home CGT exemption all the way back to September 1985 is erased from existence. Does the Government’s argument pass the pub test?
A big decision for those affected
If a person has kept their house since becoming a foreign resident, they have a big decision to make. If they’re thinking of going overseas, the entire CGT exemption for their home is at risk.
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