Laws limiting foreign residents' ability to claim the capital gains tax (CGT) main residence exemption are now in place. This means that if you're a foreign resident at the time of disposal of the property that was your main residence, you may not be entitled to an exemption and may be liable for tens of thousands in CGT. Some limited exemptions apply for "life events", as well as property purchased before 9 May 2017 and disposed of before 30 June 2020.
The restrictions apply to any person who is not an Australian resident for tax purposes at the time of disposal (ie when the contract is signed to sell the property).
According to the ATO, a person's residency status in earlier income years will not be relevant and there will be no partial CGT main residence exemption. Therefore, not only are current foreign residents affected, but current Australian residents who are thinking of spending extended periods overseas for work or other purposes may also need to factor in this change to any plans related to selling a main residence while overseas.
For current foreign residents, there may still be time to act. You can still claim the CGT main residence exemption if, when the CGT event happens to your property, you were a foreign resident for tax purposes for a continuous period of six years or less and during that time one of the following "life events" happened:
- you, your spouse, or your child under 18 had a terminal medical condition;
- your spouse or your child under 18 died; or
- the CGT event involved the distribution of assets between you and your spouse as a result of your divorce, separation or similar maintenance agreement.
Further, if you purchased your main residence before 7:30 pm (AEST) on 9 May 2017, you may still be entitled to the exemption provided you sell your home on or before 30 June 2020, subject to satisfying other existing requirements for the exemption. If you miss the 30 June window for disposal of the property in 2020, you will not be entitled to the main residence exemption unless one of the listed "life events" occurs within a continuous period of six years of becoming a foreign resident.
Similarly, for properties acquired at or after 7:30 pm (AEST) on 9 May 2017, the CGT main residence exemption will not apply to disposals from that date unless certain "life events" occur within a continuous period of six years of the individual becoming a foreign resident.
It's important to note that these changes apply even if you die – if you're a foreign resident for tax purposes at the time of your death, the same foreign resident restrictions will apply to your legal personal representatives, the trustees and beneficiaries of deceased estates, any surviving joint tenants and special disability trusts.
Since this law change is retrospective, the ATO requires foreign residents who acquired property at or after 7:30 pm (AEST) on 9 May 2017 to review their positions back to the 2016–2017 income year and seek tax return amendments where necessary. Foreign residents who purchased their property before 7:30 pm (AEST) on 9 May 2017 and who then dispose of their property after 30 June 2020 will only need to review their positions to the 2020–2021 income year.
The ATO has said it will not apply shortfall penalties and any interest accrued will be remitted to the base interest rate up to the date of enactment of the law change. Additionally, any interest in excess of the base rate accruing after the date of enactment will be remitted where taxpayers actively seek to amend their assessments within a reasonable timeframe of the law coming into force.