Tax changes threaten CGT exemption

By Gerv Tacadena | 30 Oct 2019

The federal government has revived its crackdown on capital gains tax (CGT) exemptions for Australian living and working overseas.

Assistant Treasurer Michael Sukkar introduced redrafted legislation to Parliament last week, only allowing Australian expatriates to sell their homes and still be eligible for capital gains tax exemption until the deadline on 30 June next year.

Sukkar told The Australian Financial Review that grandfathering arrangements will apply to properties owned on 9 May 2017. These will also enable foreign residents to access the existing primary residence exemption if they sell that property by the deadline.

"This represents a 12-month extension to the grandfathering arrangement announced in the 2017-18 budget and means that foreign residents will have had over three years to consider and plan their affairs," he said.

Changes to impact 100,000 expats
The government initially announced the $581m plan to remove CGT exemptions for expats during the 2017-2018 budget. Due to the backlash from the expat community, the government put the plan on hold before the federal election, letting the bill lapse in Parliament.

However, Federal Treasurer Josh Frydenberg said the government will ensure that the changes will be put into place.

"This remains our government's policy. Our policy remains as it was pre-election," he said in recent reports.

Around 100,000 expats would be affected by the changes, said H&R Block tax expert Mark Chapman said.

"You literally won't get the exemption at all, no matter how long you've owned the house, no matter how long you've lived in it as your main residence. But now the government has decided to bring it back again, so this is just creating even more confusion for foreign residents who have a main residence here," he told News.com.au.

What the new bill means
In an analysis, KPMG tax partner Mardi Heinrich said the new bill contains "exception provisions".

One exception is under the transitional provision, which allows foreign residents to still access the exemption provided the CGT event occurs on or before 30 June 2020.

Another tackles life events. However, these exceptions to the general rule will only apply when an individual has been a foreign resident for a period of six consecutive years or less, and only in "very limited and unfortunate, extenuating circumstances".

"These circumstances are described as 'life events' and include a terminal medical condition or death. They also include a situation where the CGT event in relation to the property occurs in connection with a family law matter, such as in the event of divorce or separation or similar maintenance agreements," she said.

In this case, the life event needs to have occurred during the period of foreign residency.

"For those individuals who do not qualify for the transitional provisions or life event exception, the removal of the entitlement to the CGT main residence exemption for foreign residents should mean heavier tax costs tied to ownership of main residences and sales thereof, as well as a change in how they would declare the CGT event in their Australian tax returns," Heinrich said.

Furthermore, Heinrich said the changes would not allow for any "pro-ration or apportionment of capital gain" that would enable partial exemption.

"Rather, the entire capital gain accrued over the full ownership period would be subject to Australian CGT, and the period that the property was held as an Australian tax resident is irrelevant.  Furthermore, there is no consideration of the six-year 'absence rule' in determining the taxable capital gain where the contract is entered into as a foreign resident," she said.

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