I’ve been living and working in Singapore with my family for the last three years and have rented out my family home in Australia. What do the changes in the Capital Gains Tax Principal Place of Residence Exemption mean to me?
Every Australian homeowner is entitled to a principal place of residence exemption for capital gains tax on their main home, during the time that they lived there. This is together with a concession which allows them to maintain this exemption indefinitely, if the property is not rented out, or alternatively they can rent it out for up to six years with the same concession. This concession is also available on a prorate basis for those that rent their property for more than six years.
This is readily used and relied on by Australian expats, so that they can return home without having to deal with a large tax liability. Expats whose circumstances change whilst they are living offshore (which is many!), may choose to sell their property to downsize or invest funds elsewhere, and rely on these funds being capital gains tax free to help with their broader financial planning.
So, what’s the change? As part of the 2017/2018 Australian Budget, the Coalition introduced a bill which proposed to remove the principal place of residence exemption for foreign tax residents (i.e. most expats and foreign investors). This bill was met with opposition and ended up expiring in June 2019. On 23 October 2019, the Government then re-introduced a new bill, which is largely unchanged, with a couple of exceptions to help those who have suffered a loss in their family (spouse or child under the age of 18) or are going through a matrimonial settlement, providing that they have lived offshore for less than six years.
Fundamentally, for those who held a property on budget night of 2017 (9/5/2017), the main residence exemption for capital gains tax can only be claimed up to 30 June 2020, if you dispose of your property while you are living offshore.
Most importantly, for those who don’t intend to sell their property while living overseas, the six years of capital gains tax free growth, and principal place of residence exemption for the time they lived in the property, is still available – providing that you eventually sell your property when you return to Australia and take up Australian tax residency again. You don’t have to move back into the property, however you do need to be a resident at the time of the contract signing for the sale.
Sadly, the tax consequence for those not in the know are far worse. If an expat sells their former principal place of residence home post 30 June 2020, while they are living offshore (i.e. they are a foreign tax resident), they will lose the whole concession, including the time they lived in the property, regardless of how long they may have lived in the property prior to moving offshore.
Property tax planning can make a real difference to your financial position, so it’s vital to stay close to your local tax professional and seek the right advice before transacting on a property.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.