As part of the 2017–2018 Budget, the Federal Government announced a range of reforms intended to reduce pressure on housing affordability. Legislation – the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018 – has now been introduced into Parliament. It proposes to:
- remove the entitlement to the capital gains tax (CGT) main residence exemption for foreign residents; and
- modify the foreign resident CGT regime to clarify that, for the purpose of determining whether an entity's underlying value is principally derived from taxable Australian real property (TARP), the principal asset test is applied on an "associate inclusive" basis.
When the Bill has passed, both of these measures will apply from 9 May 2017. At the time of writing, the Bill is before the House of Representatives.
The main residence exemption disregards a capital gain or loss for CGT purposes if the taxpayer is an individual and the gain or loss came from selling or disposing of a dwelling that was their main residence throughout the ownership period. A partial exemption is available if the dwelling was their main residence for only part of the period or was also used in part to produce assessable income.
For this exemption, a dwelling includes:
- a building (eg a house) or part of a building (eg an apartment or townhouse) that consists wholly or mainly of accommodation;
- a caravan, houseboat or other mobile home; and
- any land immediately under the unit of accommodation; and
- adjacent land that, together with the land under the dwelling, does not exceed two hectares, and adjacent structures (eg a storeroom, shed or garage) used mainly for domestic or private purposes.
The main residence exemption may also apply to:
- an individual beneficiary in, or entity that is a trustee of, the deceased estate of a person who used the dwelling as a main residence; and
- the trustee of a special disability trust where the dwelling was the main residence of the individual principal beneficiary of the trust, or the main residence of another beneficiary who inherited the dwelling upon the principal beneficiary's death.
Under the foreign resident CGT regime, a capital gain or capital loss that a foreign resident makes in respect of a membership interest is disregarded unless both the non-portfolio interest test and the principal asset test are satisfied for the interest.
The principal asset test's purpose is to determine when an entity's underlying value is principally derived from TARP. A membership interest that a foreign resident holds in another entity will pass the principal asset test if the total market value of the entity's TARP assets is greater than the total market value of its non-TARP assets.
The Bill also proposes to amend the Income Tax Assessment Act 1997 (ITAA 1997) and the Taxation Administration Act 1953 (TAA 1953) to provide an additional discount on CGT for affordable housing. The discount of up to 10% will apply if a CGT event happens to an ownership interest in residential premises that has been used to provide affordable housing.
This measure will apply to capital gains that investors realise from CGT events that occur on or after 1 January 2018, for affordable housing tenancies that start before, on or after 1 January 2018.