Changes in Main Residence Exemption for Australian Expats and Foreign Investors

In May 2017, the Australian government announced changes in main residence exemption for capital gains tax (CGT). These changes affect Australian expats and foreign investors who own property in Australia. Under the new rules, foreign residents are no longer entitled to the main residence exemption for property sold after 30 June 2020, unless they satisfy the requirements of the life events test. The life events test includes events such as death, divorce, and terminal illness.

The changes to the main residence exemption are designed to make it fairer for Australian residents. Previously, foreign residents could sell their Australian property without paying CGT, even if they had never lived in Australia. The new rules will ensure that foreign residents pay CGT on any capital gains made from the sale of Australian property, just like Australian residents.

What Is The Capital Gains Tax Main Residence Exemption?

The capital gains tax (CGT) main residence exemption is a provision in Australian tax law that allows you to sell your main residence without paying CGT on any capital gains made. A main residence is a property that you own and live in as your main home.

To qualify for the main residence exemption, you must meet the following criteria:

You must have owned and lived in the property as your main residence for at least one year during the five years before you sell it.
You must not have used the property for any other purpose during that time, such as renting it out or running a business from it.
You must not have claimed the main residence exemption on any other property in the five years before you sell it.

If you meet all of these criteria, you will be able to sell your main residence without paying CGT on any capital gains made.

Exceptions To The Main Residence Exemption

There are a number of exceptions to the main residence exemption. These exceptions include:

Significant improvements: If you have made significant improvements to the property, you may be liable for CGT on the increased value of the improvements.
Temporary absence: If you have been absent from the property for a temporary period, such as for work or study, you may still be able to claim the main residence exemption. However, the period of absence cannot exceed four years in total.
Renting out the property: If you have rented out the property for any period of time, you may be liable for CGT on the capital gains made during that time.
Using the property for business purposes: If you have used the property for any business purposes, such as running a home office, you may be liable for CGT on the capital gains made during that time.
Death or divorce: If you have died or divorced, the main residence exemption may still be available to you or your spouse.

If you are unsure whether you qualify for the main residence exemption, you should speak to our tax advisors at Odin Tax.

What is the 6-Year Main Residence Exemption?

A segment of the MRE, known as the 6-year rule, acts as a safety net for numerous property owners. According to this provision, you can still regard your property as your main residence for CGT implications, up to 6 years even if you’re not currently residing in it. If you dispose of your property within this tenure, you may be exempt from CGT.

To qualify for the 6-year main residence exemption, you must meet the following criteria:

You must have owned and lived in the property as your main residence for at least 6 years before you sell it.
You must not have used the property for any other purpose during that time, such as renting it out or running a business from it.
You must not have claimed the main residence exemption on any other property in the five years before you sell it.

If you meet all of these criteria, you will be able to sell your property without paying CGT on any capital gains made.

For example, if you bought a property in 2010 and lived in it as your main residence until 2016, you could sell the property in 2023 without paying CGT on any capital gains made.

However, if you moved out of the property in 2016 and rented it out, you would not be able to claim the 6-year main residence exemption. You would only be able to claim the main residence exemption if you lived in the property for at least one year during the five years before you sell it.

Key Changes in Main Residence Exemption for Expats

Here are the key changes in the main residence exemption for expats:

Foreign residents are no longer eligible for the main residence exemption for property sold after 30 June 2020, unless they satisfy the requirements of the life events test. The life events test includes events such as death, divorce, and terminal illness.
The six-year absence rule has been abolished. This means that foreign residents who have been away from Australia for more than six years will no longer be able to claim the main residence exemption on property they owned while they were away.
The main residence exemption is now only available for property that has been used as the taxpayer’s main residence for at least one year during the five years before it is sold. This means that foreign residents who have owned property in Australia for more than five years but have not used it as their main residence for at least one year will no longer be able to claim the main residence exemption.

These changes were made in response to concerns that the previous rules were being used by foreign residents to avoid paying CGT on capital gains made from the sale of Australian property.

These modifications signify that as an Australian expat or a foreign resident, if you decide to sell your Australian property while living abroad, you no longer qualify for the full or partial MRE. As a result, you may find yourself obligated to pay capital gains tax on any profit made since acquiring your property. With the abolition of the MRE for non-residents, you could be looking at a potentially higher CGT liability, necessitating strategic tax planning.

Exploring Capital Gains Tax Exemption for Foreign Residents

Foreign residents are typically not exempt from Australian capital gains tax. However, they do possess an avenue to alleviate their CGT liability through a capital gains tax exemption.

Given the recent removal of the main residence CGT exemption for non-residents, it becomes increasingly important to reassess your tax strategies to ensure compatibility with these alterations.

Tackling Changes: Verifying Your Main Residence

Establishing your main residence can present challenges, more so for expats and foreign residents. The responsibility lies with you to present substantial evidence demonstrating that a property was your main residence.

Documentation like utility bills, personal correspondence, and official documents featuring your address could be invaluable. In the wake of these changes, it’s increasingly important to have strong evidence of your residency.

Other Ways to Avoid Capital Gains Tax

There are several legitimate strategies and exemptions available in Australia that can help individuals minimise or potentially avoid capital gains tax liabilities. It’s important to note that tax laws are complex and subject to change, so seeking professional advice from a qualified tax specialist is crucial to ensure compliance and maximise tax benefits.

Here are other ways to potentially reduce or avoid CGT in Australia.

Partial Main Residence Exemption: If you have used your property as both your main residence and for income-producing purposes (such as renting out a portion of it), you may be eligible for a partial main residence exemption. In this case, only the proportion of the property used for income-producing activities is subject to CGT.
Small Business CGT Concessions: Small business owners may be eligible for various CGT concessions, including the 15-year exemption, 50% active asset reduction, retirement exemption, and small business rollover. These concessions provide opportunities to reduce or defer CGT liabilities when selling or transferring assets related to a qualifying small business.
Asset Hold Period: The length of time you hold an asset can impact the amount of CGT you owe. Assets held for longer than 12 months may be eligible for a CGT discount, which means only 50% of the capital gain is subject to tax.
Superannuation: Contributing funds to your superannuation (retirement) account can provide tax advantages. Capital gains on investments held within a superannuation fund are generally taxed at a concessional rate or may be tax-free in the retirement phase.
Inheritance: Assets inherited from a deceased estate generally receive a cost base adjustment to the market value at the date of the original owner’s death. This adjustment can reduce the capital gain when the inherited asset is later sold.
Deferring Capital Gains: If you anticipate a capital gain, you may consider deferring the sale to a future financial year. This strategy can help spread the CGT liability over different tax years, potentially reducing the overall tax impact.

It’s important to note that each individual’s circumstances are unique, and the availability and suitability of these strategies may vary. Consult a professional tax advisor or accountant specialising in CGT for personalised guidance based on your specific situation.

Tips to Navigate These Changes With Odin Tax

Procure professional guidance: Tax regulations are complex and constantly changing. Engage a tax professional to grasp how these changes can influence your financial scenario.
Retain documentation: Preserve your bills, correspondence, and other documents that can validate a property was your main residence.
Strategise in advance: Contemplate the possible tax implications before deciding to sell your Australian property while stationed overseas.

Reach out to Odin Tax today for tailored advice and allow us to assist you in leveraging these changes to your advantage. Contact us today!

Frequently Asked Questions

What is the 6-year main residence exemption?

The 6-year rule enables you to regard a property as your main residence for CGT implications, for up to 6 years even when not living in it.

What is the main residence exemption in Australia?

The main residence exemption is a tax benefit that allows Australian residents to disregard or exempt capital gains tax (CGT) when selling their primary residence.

What is the main residence exemption?

The main residence exemption allows homeowners to transact their primary residence without attracting capital gains tax.

How can I demonstrate a property was my main residence?

You can establish a property was your main residence by retaining documentation such as bills, correspondence, or official documents featuring your address.

How does the revision in Main Residence Exemption impact my capital gains tax?

The revision implies you might be required to pay capital gains tax on any profit made since buying your property if you’re an Australian expat or a foreign resident selling your Australian property.

Are there any exceptions to the changes in the main residence exemption for expats?

Yes, there are limited exceptions to the changes. If certain life events occur, such as terminal illness or death, or if the property was acquired before the changes came into effect (pre-CGT assets), the main residence exemption may still apply.

How do the changes affect foreign investors in Australian property?

Foreign investors are also impacted by the changes to the main residence exemption. Similar to Australian expats, foreign investors are no longer eligible for the main residence exemption, and they may be subject to capital gains tax when selling their property in Australia.

How can Australian expats and foreign investors minimise their tax liabilities?

To minimise tax liabilities, it is advisable for Australian expats and foreign investors to seek professional tax advice from qualified experts who are knowledgeable about the changes in the main residence exemption. They can provide guidance on tax planning strategies and any available exemptions or concessions.

Are there any other tax considerations for Australian expats and foreign investors?

Aside from the main residence exemption, Australian expats and foreign investors may have other tax obligations, such as rental income tax, land tax, and foreign resident withholding tax. It is essential to understand and comply with all relevant tax laws and regulations.