CGT main residence exemption removed for foreign and temporary residents

In the 2017/18 Federal Budget, it was announced that foreign and temporary tax residents will no longer have access to the CGT main residence exemption. The removal of this exemption will apply from 9 May 2017. However, any foreign or temporary resident who owned a home on Budget night will be able to sell their main residence before 30 June 2019 and still get the exemption.

This announcement poses many questions, which hopefully will be clarified on release of the legislative Bills and their attached explanatory memorandum.

 

Foreign and temporary residents

The terms “resident”, “resident of Australia” and “non-resident” are defined in ITAA 1936 s 6, while the definitions of “foreign resident” and “temporary resident” are contained in ITAA 1997 s 995-1.

A “foreign resident” means a person who is not a resident of Australia for the purposes of ITAA 1936.
Section 6 of that Act defines a resident of Australia as someone whose domicile, or permanent place of abode, is in Australia. Also, individuals who have actually resided in Australia, continuously or intermittently, for more than half of the income year are determined to be residents.

The above paragraph shows an obvious issue in relation to this new legislative announcement.

Notably, if an individual who has a temporary visa sells their permanent place of abode, say to move back to their native country, at the time of the CGT event they were an Australian resident under ordinary terms.

There will be an opportunity for the Treasury to outline the definition of foreign and temporary resident as it will only relate to ITAA 1997 Subdiv 118-B. Therefore, areas of law dealing with residency vs non-residency will not be affected. Specifically, the removal of the CGT discount for non-residents should have no change.

 

Connection with state government changes

Recently, various state governments have implemented additional taxes and duties for individuals who are foreign and temporary residents. It is unconfirmed at this stage how the federal government will define an Australian resident in this manner for ITAA 1997 Subdiv 118-B. In most (if not all) state jurisdictions, the following individuals are declared exempt from additional charges of stamp duty on purchase and land tax surcharge:

  • Australian citizens
  • individuals who have a current permanent residency visa
  • a New Zealand citizen who holds a special category visa with s 32 of the Migration Act 1958 (Cth).

 

Transitional rules and other exemptions

Upon the enactment of the removal of the CGT discount for property held by foreign residents in the 2012/13 Federal Budget, transitional rules applied to homes owned after this point. It appears that the grandfathering rule only applies to 30 June 2019, meaning homes could become fully taxable after this point.

However, what we do not know is the circumstances surrounding a change in residency status and this provision.

For example, a foreign or temporary resident may own a property at the date of the announcement and choose not to sell, as they are in the process of becoming a permanent resident or Australian citizen. Will there be transitional rules if the individual becomes a permanent resident:

  • between 9 May 2017 and 30 June 2019, or
  • after 30 June 2019? Will the individual’s intention matter for ITAA 1997 s 118-B, as it does for other capital gains tax provisions?

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