Most Australians are familiar with the Capital Gains Tax (CGT) exemption for your main residence (being the property in which you live). But what if your client moves overseas and sells their home in Australia while they're not an Australian tax resident?
Changes to the main residence exemption were finally enacted on 12 December 2019, which limit the circumstances in which a foreign resident can access the main residence exemption for the home they own back in Australia.
In a nutshell, if your client is a foreign resident at the time of selling their home, they will not be eligible for the main residence exemption. This also applies to their executors, beneficiaries, and surviving joint proprietors if they die whilst being a foreign resident.
Let’s take an example. Meet Sarah and Tom, who bought their first home together in March 2004. They have undertaken some fabulous renos on the property over the years, expanded their family to five plus a crazy black lab, and forged ahead in their corporate careers.
In May 2016, Sarah was offered an awesome job overseas and so they pulled up stumps and headed to the Big Apple.
As the market starts to pick up post the coronavirus in late 2020, they decide to sell their home in Australia while they are still living overseas and not Australian tax residents.
Although Sarah and Tom have lived in their home for over 12 years until they moved overseas, they will not have access to the main residence exemption when they sell their property as foreign residents, and they will pay CGT on the disposal.
The one exception to this rule is if your client experiences a significant life event (such as a death of a spouse or child, a terminal illness, or divorce or separation), and have been a foreign resident for a continuous period of fewer than six years. This is (hopefully) going to be a rare occurrence.
What can your clients do? There is a small window of opportunity. If they owned their home before 9 May 2017, and they sell before 30 June 2020, they can still access the main residence exemption. So if your client is living overseas, prompt them to consider taking advantage of the CGT main residence exemption before it’s too late. If your client is planning on moving overseas (not that anyone is going anywhere at the moment), they should consider whether they sell before they depart.
On the flip side, if selling the property triggers a capital loss in this current climate, perhaps it might be in their interests not to be able to claim the main residence exemption right now if they have carried forward capital gains. Specialist tax, financial and legal advice is imperative.
*New York's Not My Home was the third song on Jim Croce’s album ‘You Don't Mess Around with Jim’ released in 1972