Main Residence CGT

Foreign Residents – Watch that CGT Main Residence Exemption!

The Federal Government has passed legislation which prevents people who have been Australian residents for tax purposes for many years from using the CGT main residence exemption (MRE) if they are foreign residents at the time they sell their property (with limited exceptions). An example of how this new legislation applies is detailed below.

An Australian born couple, Jennifer and Simon, have lived in Brisbane and own a home there. Not unusually the home was purchased in Jennifer’s name only on 1 April 1991. The purchase price was $1.2 million. 

In January 2019, Jennifer is offered a senior position in a bank in Canada on an initial 2-year contract but renewable by joint agreement. They decide she would accept, and they leave for Canada in April 2019. As they were unsure of their future, they rent out the Brisbane property on a 1-year lease commencing 1 April 2019. 

The job turns out to be a perfect fit and Simon has also secured employment. They decide to stay in Canada permanently. 

On 1 April 2021, the Brisbane property is sold for $4.6 million. 

As a result of the Act, if Jennifer is a foreign resident at the time of sale, which is likely on these facts, she will, be unable to use the main residence exemption, resulting in a significant taxable capital gain.

As Jennifer owned the property at the time of the announcement of the measures on 9 May 2017, she is unable to access the transitional rule which would have avoided the outcome outlined above. 

Had she sold prior to leaving Australia (and becoming a non-resident), no capital gain would have been included as the full benefit of the Main Residence Exemption would have applied especially since the 6-year absence rule could also have been utilised. 

Jennifer will be taxed on the capital gain calculated using the original cost base, she will need to have kept accurate records of her purchase. She is most unlikely to have kept these records as they date back to 1991 and she justifiably assumed that as it was her main residence, she would not be required to pay tax in respect of its ultimate sale. She will also need records of the stamp duty paid on acquisition (the second element of the cost base) and any costs of improvement (fourth element of the cost base). As the property was acquired in April 1991 (i.e. before 20 August 1991), she is unable to include any third element costs such as interest, rates, insurance or repairs/maintenance. This final rule applies to all taxpayers regardless of their residency status and is unchanged by the new measures. 

In simple terms if you are deciding to leave Australia permanently selling your home prior to leaving Australia will mean that you will still have access to the main residence exemption, however if you sell after departure a significant capital gains tax bill awaits.

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