If you are a foreign resident in Australia, it is likely that the proposed changes to Capital Gains Tax (CGT) introduced by the Treasury on 21 July 2017 will directly affect you.
The Exposure Draft Legislation released by Treasury is the culmination of CGT measures announced in the 2017 Federal Budget aimed at reducing pressure on housing affordability. These changes are proposed to apply retrospectively from 9 May 2017.
Previously, foreign residents were essentially treated the same as Australian residents in relation to CGT exemptions. Now, the implementation of changes proposed by Government will mean that foreign residents are no longer entitled to CGT exemptions that were once available to all.
So, what changes are proposed?
The Government is set to remove the entitlement to the CGT “main residence” exemption for foreign residents only. The CGT exemption previously applied to individuals who were foreign or Australian residents and had a dwelling that qualified as their “main residence”.
The Government’s move to restrict the application of this exemption will mean individual foreign residents selling a dwelling that previously qualified for the main residence exemption will no longer be exempt from CGT. As part of the sale, foreign residents will now need to report any capital gain or loss arising upon the sale and will be liable to pay CGT on the amount of any capital gain or loss.
The changes proposed will have no impact on the application of this exemption to individual Australian residents.
Whether the removal of the main residence exemption affects you will depend on when the Contract of Sale was finalised and signed.
If you are an Australian resident for income tax purposes at the time the Contract of Sale is signed (Contract Date), then the exemption will remain available regardless of your prior residence status.
If you are a foreign resident for income tax purposes at the time the Contract of Sale is signed, then no exemption will be available. In this case, the CGT exemption will not apply even if you were previously an Australian resident for tax purposes. This includes for example, if you sign a Contract after relocating overseas and becoming a non-resident.
The proposed changes will generally apply to Contracts entered into from 1 July 2019, however certain transitional exemptions remain if the foreign resident owned the residence on or before 9 May 2017.