Just when you thought that the current Tax Reform agenda was bare, the Government recently re-introduced another measure that was previously announced by the former Government but had lapsed.
The measure targets non-residents and their ability to access the CGT main residence exemption. On the face of it, the policy behind this appears sound. Why should a non-resident of Australia access a potentially full exemption from CGT on the sale of a house they do not live in?
What this question fails to recognise is that the current law will only allow an exemption for a period in which the dwelling is used as the taxpayer’s main residence. That test is essentially a question of fact that considers a number of factors including the length of time spent at the dwelling, any other dwellings owned, where your family lives, the location of personal possessions, your mailing address and a number of other factors. So to even access the exemption, a taxpayer must first be able to prove that the dwelling was their main residence. That will be difficult to do, during a period where the taxpayer is a non-resident. Therefore in that sense, a non-resident is unlikely to qualify for the main residence exemption in the first place.
Where it gets interesting is where a former resident of Australia, who has established a dwelling in Australia as their main residence, moves overseas for work or family reasons and becomes a non-resident. They may have owned and lived in their dwelling for 20 years, it clearly qualifying as their main residence, but take up a 3-year posting overseas, with their family. Whilst overseas, for whatever reason, they decide to sell their former home. Under these proposed amendments, from 1 July 2020 they get no exemption for the previous 20 years of the property being their main residence, and pay CGT on any capital gain made on the property (after allowance for the pro-rata CGT discount for the period they were a tax resident of Australia).
By any measure this is unfair and retrospective, in that the current tax residency position of the taxpayer dictates the way the entire 23 years of ownership of the property is treated. Let’s hope the Senate sees the inequities here and recommends some changes before the Bill is passed. They don’t have to look too far for guidance with many commentators raising concerns see #RobynJacobson.