Removal of capital gains tax exemption for foreign residents on sale of main residence
On February 8, 2018 the Australian Government introduced a Bill to remove the capital gains tax (CGT) exemption for the sale of a main residence by a foreign resident. A foreign resident for tax purposes includes Australian citizens, permanent residents and New Zealand citizens who are not a tax resident of Australia.
As part of the 2017-18 Federal Budget, the Australian Government announced on May 9, 2017 a range of reforms to reduce pressure on housing affordability. The main reform that will affect internationally mobile employees is the removal of the main residence exemption for Australian CGT purposes for foreign residents.
This proposed reform was the subject of a consultation process during July/August 2017 with the release of an Exposure Draft. On February 8, 2018, a Bill, which does not differ from the Exposure Draft, has been introduced into the House of Representatives.
For properties acquired on or before May 9, 2017, the new rules will not apply to disposals of the property until after June 30, 2019.
Most of the other reforms related to properties have now been legislated such as:
New law denying landlords deductions for travel expenses relating to rental properties;
New law limiting depreciation deductions for assets in rental properties;
Increase of the withholding tax rate from 10% to 12.5% and reduction of the CGT withholding threshold for Australian real properties from A$2 million to A$750,000 for foreign resident vendors; and
New property vacancy fee and annual reporting by foreign owners who have an Australian residential property which is not occupied for at least 183 days in a 12-month period.
If the Bill is legislated in its current form, the main residence exemption removal for foreign residents will have impacts for both companies and individuals.
Employers of expatriates
Employees may be more reluctant to accept an assignment outside Australia if they will be negatively impacted by these rules.
In order to benefit from the main residence exemption, employees will need to either sell their home before going overseas, wait until they return to Australia before selling their main residence, or perhaps delay or not take up the assignment at all.
Employees may seek to remain Australian tax residents or defer their assignment until their main residence is sold. This may have associated cost implications for the employer. For example, there could be additional tax costs for the employer on benefits if the employee were to remain an Australian tax resident.
Employees may alternatively seek reimbursement from their employer of any additional tax should they sell their main residence while on assignment (where transitional relief is not available).
Employers who have tax equalisation arrangements and who tax equalise personal income, should consider whether they will tax equalise any CGT imposed on the sale of an employee’s main residence where they are a foreign resident and no longer qualify for the main residence exemption.
Finally, employers should ensure that employees who are either foreign residents or who will become foreign residents are made aware of the changes, and seek appropriate tax advice.
Individuals who are either foreign residents or who will become foreign residents will need to be aware of the potential tax implications should they sell their main residence while they are foreign residents.
Advice on tax residency, the potential impact of the proposed rules, as well as the calculation of any potential CGT should be considered.
If a main residence was acquired on or before May 9, 2017, current and future foreign residents may want to consider selling their main residence before June 30, 2019 in order to benefit from the transitional rules.
In any case, globally mobile employees should seek specific personal taxation advice in order to evaluate the impact of these measures and take action where appropriate.