Following the 2017/18 Federal Budget, Australian expat property owners now have some clarity with the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 having been passed by both the House of Representatives and the Senate. We are now just awaiting Royal Assent, which will result in Australian expats and foreign owners of Australian property no longer being able to claim the Main Resident Exemption (MRE).
This is a punitive tax change for Australian expats and means that some important decisions need to be made quickly for both Australian property owners living offshore and those considering a position abroad in the short term. The deadline for the change to take effect is 30th June 2020, whereby if a property is sold after this date, the Main Residence Exemption will not be granted to the seller. If the property was owned prior to the 9th May 2017, and sold prior to 30th June 2020, then the seller could be eligible to receive the Main Residence Exemption.
What are the current Main Residence Exemption rules?
The amendment was announced in the 2017/18 Federal Budget, and until this time, non-Australian tax residents, who had lived in a property in Australia, and then rented out the property upon moving offshore were eligible for the Main Residence Exemption, just as Australian residents currently are, and will continue to be. Consider that you lived in a property in Australia that was your main residence for a number of years. You then decided to move offshore to Malaysia and decided that you would rent out your property, before deciding to sell it 3 years later. Based on this timeline you would likely be eligible for the Main Residence Exemption, and therefore would pay no capital gains tax (CGT) on the sale of your property. This is because you would still be within the allowable band of the Main Residence Exemption.
Why was the amendment announced?
The reason for the amendment to the Bill, as far as Australia’s politicians are advising, is to reduce pressure on housing affordability, i.e. to reduce house prices to allow for more Australians to enter the market and buy their own home. The Government has provided no clear explanation as to how this will be achieved, or how the change will impact the supply of properties available on the market.
There will be a transitional period also, which means that if you owned property prior to the 9th May 2017, and sell it prior to 30th June 2020, you will still be eligible for the Main Residence Exemption. If you sell the property after 30 June 2020, then the Main Residence Exemption will not apply, and capital gains tax could be triggered to as far back as the 20th September 1985, when Capital Gains Tax (CGT) was first introduced. Further, if you didn’t own the property on or prior to the 9th May 2017, you will also not be eligible for the Main Residence exemption.
If the property is sold beyond the 30th June 2020, then not only will the Main Residence Exemption not be available to be claimed for non-residents, but tax would apply from the acquisition of the property. This could be an administrative nightmare to work out any costs of renovation, other costs of the sale to reduce your potential tax liability.
Are there any exemptions?
There were some minor amendments made to the original proposal announced in the 2017/18 Federal Budget, however sadly they did not go far enough to avoid the punitive nature of this change. If you are within the 6 year window of renting out your property, and suffer from one of the following life events, then you may be eligible to claim the Main Residence Exemption (MRE).
- Terminal medical condition
- Death of a spouse of minor child
- Divorce or separation
What should Australian expats do?
Given the complex nature of this Amendment, we would certainly recommend that Australian expats and other property owners seek professional tax and financial advice to consider your situation and your options.
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