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CGT Main residence exemption

Aussies Abroad: CGT Main residence exemption considerations for foreign residents 

Moving overseas is an exciting prospect, but it comes with a range of financial considerations, particularly regarding your tax obligations in Australia. One key area of concern for Australians relocating abroad is how the Capital Gains Tax (CGT) rules applies to their main residence. In 2017, there were changes to the rules that affect expats who intend to depart Australia and cease tax residency. Understanding these changes and how they impact you is crucial to managing your finances effectively.

Previously, Australian residents could claim a full CGT exemption on their main residence for up to 6 years if they moved overseas and rented out their property. The exemption has been advantageous for homeowners in Australia, giving them significant tax relief by exempting them from capital gains tax when selling their property in Australia. 

However, from 9 May 2017 7.30pm ACT time, the Government announced changes to the main residence exemption rules that would affect Australian expats moving overseas.  Under the new rules, the CGT main residence exemption is no longer available to non-residents, unless certain life events occur.

There was a transitional relief for individuals who held a main residence before the announcement date and sold the property before 30 June 2020. As the transitional period has lapsed, the main residence exemption would no longer be available to foreign residents unless certain life events occur. 

Now, if you move overseas and rent out your Australian property, you can only claim the CGT main residence exemption if certain ‘life events’ occur while you are a foreign resident. 

These life events include:

  • you, your spouse or your child under 18 had a terminal medical condition
  • your spouse or your child under 18 died
  • the CGT event happened because of a formal agreement following the breakdown of your marriage or relationship.

If one of these life events occurs, you may still be eligible for the CGT exemption on your main residence, provided that you have been a foreign resident for six years or less at the time of the CGT event. 

It is important to take note that a person who is a foreign resident for a continuous period of more than six years is not able to access the CGT main residence exemption even if certain life events occur.

From 1 July 2020, if you are planning to leave Australia and cease your Australian tax residency, you will not be eligible to claim any main residence exemption if your main residence is sold while you are a foreign resident. 

You will be liable to pay capital gains tax on any capital gains derived from the sale of your property. The capital gains will be subject to tax at the non-resident tax rates. Any capital loss from sale of the property can be used to offset against other capital gains in the current or future income years. 

The capital gains from the sale of the property can potentially be further reduced by a partial CGT discount. A CGT discount is available for property owners in Australia to reduce the capital gain on their property by 50% if they have owned the property for more than 12 months.

However, from 8 May 2012, the 50% CGT discount must be apportioned based on the percentage of time you were an Australian resident during the ownership period of the CGT asset. In short, if you spent a large amount of time overseas as a foreign resident during the ownership period of your property, you may only be eligible for a limited amount of CGT discount. 

It’s crucial to consider this aspect when assessing potential tax implications related to the sale of your property as a foreign resident.

If you are planning to leave Australia permanently, it’s important to consider the potential benefits of selling your main residence before becoming a foreign resident. Selling your property before becoming a foreign resident allows you to leverage the main residence exemption, saving you from paying any capital gains tax on the sale.

However, if your intention is to return to Australia at some point in the future, an alternative approach could be to keep your main residence and only sell it when you return to Australia in the future. 

Given the complexities of tax regulations and the impact of residency status on your eligibility for main residence exemption, it is highly advisable to seek professional advice and obtain personalised guidance for your situation as part of your tax planning process prior to your departure from Australia. 

For more insights and updates on navigating CGT considerations for foreign residents, Book a Chat or Consult Today.

For any enquiries related to this update, contact us today.

Elaine Soon

Elaine, Assistant Manager in Andersen Australia’s Global Mobility Tax team, brings 12+ years of global and multinational experience across Malaysia and Australia. She excels in tax compliance, equalisation, shadow payroll, and employee share scheme reporting.

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