Tax Q&A: CGT exemption for non-residents

Q: I bought my first home, a two-bedroom townhouse, seven years ago. Two years ago, I moved from Sydney to Melbourne and have rented out my townhouse ever since. I have been living in a rental in Melbourne.

Recently, I received a job offer from overseas. If I take it, it means I may decide to live overseas for two to three years. Then I will return to Australia and sell the house, without moving into it again, so I can use the profits to buy a bigger home.

Will I still be fully exempted from CGT in this scenario?

Thanks, Angela

A: Based on the current legislation, the short answer is yes: assuming you have not elected any other property as your main residence, this property can continue to be rented out for a period of up to six years and the exemption should still apply.

As long as no other property that you own becomes your main residence during the six-year rental period, you will be entitled to the exemption, and the capital gain realised on the sale should be CGT-free. The fact that you are not in Australia during part of the six-year rental period does not impact on your ability to claim the main residence exemption.

The fact that you are not in Australia during part of the six-year period does not impact on your ability to claim exemption

However, it is important to note that in the 2017–18 federal budget announcement and a Bill introduced in February 2018, the Coalition government announced planned changes to some of the CGT exemptions.

Specifically, it was proposed that if you were a non-resident of Australia for income tax purposes at the date of the property’s sale, you would no longer be eligible for the main residence exemption. Further, the Bill did not contain any apportionment of the main residence exemption.

Accordingly, it was proposed that if you were considered a foreign tax resident at the time of sale, you would be subject to CGT on the full amount of any capital gain, even if you were an Australian tax resident during part of the ownership period.

These proposals were not enacted and the Bill has now lapsed. However, following the re-election of the Coalition earlier this year, it is expected that similar changes may be reintroduced for consideration. Therefore, if you are to become a non-resident of Australia for tax purposes, it is important that you continue to monitor the situation, as the legislative changes could have a material impact on your CGT position.

It is recommended that you get a valuation of the property at the date that you first make it available for rent – in your case, two years ago (you can request a backdated valuation from your valuer).

This valuation will be required if you end up renting the property for longer than six years. The value will become your new cost base and is required when calculating the taxable gain/loss.

For example, assume that you end up renting out the property for eight years. The capital gain/loss will broadly be calculated by looking at the sale proceeds, less the value of the property at the time you first made it available for rent. The taxable gain will be reduced by 6/8ths, representing the six-year main residence exemption period as a proportion of the total eight-year period in which the property was available for rent.

Need to know

• You may still claim a main residence exemption even when not living in Australia.
• You may need to monitor legislation regarding non-resident property ownership.
• It’s important to get a valuation relevant to the date the property was fi rst available for rent.

Ryan Smith

is financial advisory partner at PwC