It’s seen as one of the main Australian dreams – owning your own family home. For many expats and foreign residents, this dream has become a reality. However, due to legislative changes that took place late last year, the sale of the property may now be subject to hefty taxes. Capital Gains Tax (CGT) exemptions or part exemptions may not apply to many who are non-residents for tax purposes, especially if a sale is made after 30 June 2020. This week’s blog dives into CGT including:
- What has changed;
- Who will be affected by these changes;
- Exceptions to the new rules; and
- How to determine if you are or are not a resident of Australia for tax purposes.
What is Capital Gains Tax?
Let’s start with a definition on what CGT is. A capital asset, such as real estate or shares, will often make a capital gain or capital loss, depending on the value that you bought versus the amount that the asset has been sold for. Regardless of if there was a gain or loss, this information needs to be recorded on your annual tax return and tax will need to be paid on any gains, which is added to your assessable income. This can have quite a significant impact on your overall tax position.
Unless specifically excluded, CGT will apply to any assets that you’ve acquired since capital gains was implemented on 20 September 1985. However, most personal assets such as your car, personal use assets like furniture, and your family home will be exempt. Depreciating assets, such as business equipment or fittings in a rental property are also exempt.
What Has Changed?
In December last year, new legislation passed limiting the CGT exemption for those considered non-residents of Australia for tax purposes, in a move that was set to affect thousands of Australians selling their main residence from 9 May 2017 onwards. With these new rules, if your are not an Australian resident at the time that the CGT event is triggered (in the case of a property sale, this is often the date that the contract on the property is signed), then the CGT exemption or part exemption will not apply.
Who Is Affected?
Essentially, if you are non-resident for tax purposes at the time you sell your main residence, you will be affected by these changes and will no longer be eligible for a full or part CGT exemption for any CGT events that occurred from 9 May 2017 onwards. This means that you will need to pay CGT on any gain you made (subject to transitional rules and other exclusions). These new rules apply regardless of whether or not you were an Australian resident for part of the time you owned the property. However, if you are an Australian resident at the time of the CGT event, then you may be able to access part of or the full CGT resumption.
Are there any exceptions to this new rule?
In short, the answer is yes, but there are specific requirements that would need to be taken into consideration. A certain life event could result in you still being able to claim a CGT exemption on a main residence sale even if you are a non-resident at the time of the CGT event. Providing that you have been a foreign resident for six years or less, the following events may result in an exemption being applied to your situation:
- Your death or the death of your spouse or child;
- Terminal illness of you, your spouse or child;
- Marriage breakdown resulting in a divorce.
Am I a non-resident for tax purposes?
Unfortunately, there is no hard and fast rule to determine if you are considered a non-resident for tax purposes. To determine if you are a resident for tax purposes, you need to consider the following four tests below:
Resides Test: This test looks at whether you reside in Australia or not and the actions that you take in the leadup to moving to another country. For example, are you moving to another country for a short-term period, or migrating permanently? Have you sold your furniture or placed it in storage? If you have kept your ties to Australia, then you are considered a resident for tax purposes. Note: this is the most common test used to determine if a person is a resident for tax purposes.
Domicile Test: This test asks you to show where your permanent home is. For example, if you are working overseas, is your home permanent or temporary, such as a hotel. If you can prove that your permanent home is in Australia, then you are considered an Australian resident for tax purposes.
183-Day Test: This test looks at how long you have physically been in Australia for. If it is for half the income year (whether continuously or with breaks), then you are considered a resident.
Superannuation Test: If you have a current superannuation membership which covers Commonwealth Government employees, then you will be generally considered a resident for tax purposes.
Who Can I Go to For Help?
CGT, exemptions and determining if you are an Australian resident status for tax purposes can be a challenge. If you need some assistance with determining if this new legislation applies to you, help with CGT or are not sure if you are a resident for tax purposes, contact our team today.