Current Status of Proposed Legislative Changes

Legislation enabling the removal of the CGT main residence exemption from foreign residents was originally scheduled for debate on October 16, 2018, in the Senate. In a nutshell, the Government's draft legislation provided that, with effect from July 1, 2019:

• Individuals who sold their main residence and who were foreign residents at the time of disposal would no longer be entitled to the main residence exemption - this included Australian citizens or permanent residents living overseas who were non-residents
• For individuals, the date of the disposal of their interest in a property would generally be the time a contract for sale was entered into.
• The Bill did not provide for any apportionment of the main residence exemption. This means that any days the dwelling had been owned as an Australian resident for Australian taxation purposes were irrelevant in calculating any CGT liability.
• Non-residents inheriting Australian real property would also have significantly impacted, with the legislation prohibiting them from claiming the main residence exemption with respect to parental property. Wills should be amended to provide protection where possible.

We provide more history below regarding this proposed legislation below, but note that the Bill lapsed at the end of Parliament on July 1, 2019. However, when the Treasurer Josh Frydenberg was later asked by ABC News about the status of the proposals, he replied that, "this remains our government's policy". He gave no indication of whether or when new legislation might be introduced, or whether modifications might be included.

Consequently, considerable uncertainty remains regarding the status of the legislation, and in particular whether any effort will be made to make changes retrospective, and also whether Australian citizens and permanent residents might be excluded from the ambit of any new draft legislation. The situation is totally unsatisfactory, and it is hard to imagine how any Government can be satisfied that it has effectively manufactured a "vacuum" around such an important issue for expatriate Australians. Importantly, also, depending on how the legislation is drafted it could exclude the exemption from applying to Australian property inherited by expatriates and wills should probably be examined to see if they provide protection from this possibility.

The whole affair probably continues to provide an accurate reflection of the importance the Government attaches to expatriate community.

2.32 The committee acknowledges the concerns expressed regarding the changes to the CGT main residence exemption for foreign residents including Australian citizens and permanent residents living and working overseas that may be affected by the changes. The committee acknowledges those people who may be affected by these changes and notes that it is the government's responsibility to ensure that they are made aware of the changes and the transitional arrangements, so they can plan accordingly.

Individuals who are foreign residents at the time a CGT event occurs to a dwelling in which they have an ownership interest are not entitled to the main residence exemption

Individuals who are foreign residents are entitled to the main residence exemption in the same way as individuals who are residents of Australia for taxation purposes.

Vicki acquired a dwelling on 10 September 2010, moving into it and establishing it as her main residence as soon as it was first practicable to do so.

On 1 July 2018 Vicki vacated the dwelling and moved to New York. Vicki rented the dwelling out while she tried to sell it. On 15 October 2019 Vicki finally signs a contract to sell the dwelling with settlement occurring on 13 November 2019. Vicki was a foreign resident for taxation purposes on 15 October 2019.

The time of the CGT event A1 for the sale of the dwelling is the time the contract for sale was signed, that is 15 October 2019. As Vicki was a foreign resident at that time she is not entitled to the main residence exemption in respect of her ownership interest in the dwelling.

Note: This outcome is not affected by

• Vicki previously using the dwelling as her main residence; and
• the absence rule in section 118 - 145 that could otherwise have applied to treat the dwelling as Vicki’s main residence from 1 July 2018 to 15 October 2019 (assuming all of the requirements were satisfied) .

Terry acquired a dwelling on 20 August 2008.

On 13 November 2019 Terry signs a contract to sell the dwelling and settlement occurs on 11 December 2019. At this time he was a foreign resident.
Terry used the dwelling as follows during the period of time for which he owned it:

• establishing the dwelling as a main residence and residing there from when he acquired the property until 31 January 2010;
• renting it out from 1 February 2010 until 5 June 2011;
• re-establishing the dwelling as his main residence and residing there from 6 June 2011 until 17 June 2019; and
• leaving the property vacant from 18 June 2019 until it was sold. From 19 June 2019 Terry resided in London as a foreign resident.

The time of CGT event A1 for the sale of the dwelling is the time the contract for sale was signed, that is 13 November 2019. As Terry was a foreign resident at that time he is not entitled to the main residence exemption in respect of his ownership interest in the dwelling, even though he used the dwelling as his main residence for part of the time that he owned it.

Terry first used the dwelling to produce assessable income, by renting it out, on 1 February 2010. However, the special rule for when a dwelling is first used to produce assessable income (which would allow him to be taken to have acquired the dwelling for its market value at that time) will not apply. This because he is not entitled to a partial main residence exemption at the time the CGT event occurs. This is because Terry was a foreign resident at the time CGT event A1 occurs to the dwelling.