Removal of Main Residence Capital Gains Tax Exemption for Foreign Residents

With the release of the 2017-18 Budget in May of last year, the Australian government announced plans to not only strengthen ‘the integrity of the capital gains tax rules’[1], but to also reduce pressures on housing affordability. In order to achieve both goals, the Australian government intends to remove the capital gains tax (CGT) exemption for foreign residents who make capital gains on dwellings that qualify as their main residence[2].

Current Capital Gains Tax Exemption

Put simply, the main residence tax exemption provides individuals with an exemption to CGT where the dwelling upon which a capital gain is made is an individual’s main residence. The Income Tax Assessment Act 1997 (Cth) (‘ITTA’) also currently provides for what is known as the ‘absence rule’. Where a dwelling ceases to be an individual’s main residence, the dwelling may continue to be considered an individual’s main residence[3]. The rule also provides a partial exemption where a dwelling was used partially as both a main residence, and to also produce assessable income[4].

Proposed Changes

On 8 February 2018, the Australian Government introduced legislation into the House of Representatives that would bring into effect changes to the main residence tax exemption for foreign residents. These changes would prohibit foreign residents from utilizing the main residence CGT exemption as of 9 May 2017. There is grandfather clause within the proposed Bill whereby dwellings acquired prior to 9 May 2017 will not be affected by the rule if disposed of before 30 June 2019.

The proposed Bill also clarifies that ‘for the purposes of determining whether an entity’s underlying value is principally derived from taxable Australian real property (TARP), the principal asset test is to be applied on an associate inclusive basis.’[5].

Retrospective Application

Although the Bill has been criticised by the Senate Standing Committee for the Scrutiny of Bills for its retrospective application, any amendments to the Bill have yet to be proposed.

Given this, if the Bill is enacted as it is currently drafted, those that may be affected by this legislation should seek independent legal advice. For example, individuals who may be adversely affected by changes to the ITAA may decide to resume tax residency in Australia before disposing of a dwelling, in order to benefit from the main residence CGT exemption.

[1] Commonwealth, Budget Strategy and Outlook Budget Paper No.1 2017-18, 2017, 1-23.

[2] Explanatory Memorandum, Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018 (Cth) 11.

[3] Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018 (Cth).

[4] Ibid.

[5] Standing Senate Committee for the Scrutiny of Bills Digest, Scrutiny Digest No. 2 of 2018, 14 February 2018, 60.

Peter Gell

Peter was admitted as a solicitor in 1981 and holds qualifications in law and a Masters degree in taxation conferred by the University of NSW. Peter practises in taxation advisory, estate planning and wills, probate and commercial law.