The Government yesterday reintroduced draft legislation to remove the Capital Gains Tax (“CGT”) main residence exemption for foreign residents.

Where previously the sale of a person’s ‘home’ was ordinarily exempt from CGT in Australia, these gains may be taxed in full for foreign residents and the changes could result in a significant tax exposure for current and future globally mobile employees, and in turn, their employers where there are tax equalisation policies in place.

If passed, the measures would apply retrospectively from 9 May 2017. As such, expatriates and other foreign residents who have sold a property after this date whilst on assignment may have unintentionally triggered a Capital Gain. Please note transitional provisions will continue with the main residence exemption for CGT events that occur on or before 30 June 2020 (extended from the previously proposed 30 June 2019), where the dwelling was held before 9 May 2017.

In addition, individuals who have been foreign residents for a period of six years or less may still be able to access the exemption where certain life events occur during that period. A life event includes a terminal medical condition to the foreign resident, their spouse, or their child under 18 years of age, death, and divorce or separation. 

 

The impact

The initial perceived impact of these changes has been focused on the restriction of the main resident exemption for foreign resident investors. However, these changes will have the same impact on:

• Australian citizens who go on assignment overseas and sell their properties during a period of foreign residency.
• Inbound assignees who sell their Australian property after returning to their home country.

After a downwards trend, economists are starting to forecast potential price growth in Australian properties and there is an increased temptation for assignees to cash in and sell their homes whilst they are on assignment or relocating. This can lead to the increased likelihood of an unintended Capital Gains exposure.

This exposure may be passed on to their employer as part of a tax equalisation program, or worse, litigation where assignees hold their employers accountable for tax exposure where they have not been appropriately informed of the changes.

 

What to do

The changes will have a significant impact on globally mobile employees and their employers alike.

Employers should inform all current and future assignees of the changes to avoid any of their employees inadvertently giving rise to capital gains tax exposure in Australia. They should also make them aware of:

• the window of opportunity in respect to the transitional provisions (up to 30 June 2020); and
• the fact that the main residence exemption would be reinstated once the assignee recommences Australian residency.

Given the importance of the timing of disposal and complexity of the existing rules surrounding properties used in part for income producing purposes, we recommend specific advice is sought to understand the full implications of these changes and the tax planning opportunities available.