Removal of CGT main residence exemption for foreign residents

Removal of CGT exemption for foreign residents

Mardi Heinrich and Selina Kneale discuss draft legislation released by Treasury seeking to remove CGT exemptions on the main residence for foreign residents.

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Treasury has released an Exposure Draft containing the details of the highly anticipated legislation seeking to remove the Capital Gains Tax (CGT) main residence exemption for foreign residents. This measure was announced as part of the ‘housing tax integrity’ measures included in the 2017-18 Federal Budget.

The Exposure Draft has been released for comment and proposes that the entitlement to the CGT main residence exemption will be removed for all foreign residents (i.e. taxpayers that are not resident for Australian tax purposes). Accordingly, any capital gain or loss arising upon disposal of an Australian main residence by a foreign resident must be declared.

Transitional provisions allow for foreign residents to still access the CGT main residence exemption provided the CGT event occurs on or before 30 June 2019 and the ownership interest in the residence was held throughout the period starting just before 7:30pm (by legal time in the Australian Capital Territory) on 9 May 2017 and ending just before the CGT event occurs.

As the legislation proposes to apply to ‘foreign residents’, which, by definition, are those taxpayers that are not ‘resident’ for Australian tax purposes, the new legislation will also apply to Australian citizens or permanent residents who dispose of their Australian main residence whilst a foreign resident, e.g. whilst working overseas on secondment.

The determining factor is the residency status of the taxpayer at the time of the CGT event (i.e. when the contract for sale is signed). Therefore, for Australian citizens and permanent residents who may be a foreign resident for a period of time and perhaps rent out their Australian main residence whilst working overseas, the CGT main residence exemption should still be available (provided all other requirements are satisfied) if they repatriate to Australia and dispose of their main residence after re-establishing Australian tax residency.

Interestingly, whilst the Budget papers indicated that the CGT main residence exemption would be denied for both foreign residents and temporary residents, the Exposure Draft legislation makes reference only to foreign residents.

The Exposure Draft legislation and Explanatory Memorandum contains comprehensive examples and scenarios. The closing date for submissions relating to the Exposure Draft legislation is 15 August 2017.

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