Legislation has recently become law and has taken effect retrospectively from 9 May 2017 that abolishes the Main Residence Exemption for most taxpayers who are non-residents for tax purposes at the time when they sell their main residence (contract signing date).
Prior to this legislation, your ‘main residence’ (your home) was generally exempt from capital gains tax irrespective of whether you are a non-resident for tax purposes or not.
Taxpayers who are Australian residents for tax purposes at the time of selling their main residence will not be affected by this legislation and will continue to have access to the main residence exemption.
Two key elements to determine if this new legislation affects you is the status of your dwelling (whether it is deemed to be your main residence for tax purposes) and your Australian residency status (resident or non-residence)
The first test is to determine whether your dwelling being sold is your main residence.
A dwelling is generally considered to be your main residence if:
- You and your family live in it
- Your personal belongings are in it
- It’s the address your mail is delivered to
- It’s your address on the electoral roll
- Services such as gas and power or connected
It is worth nothing the main residency status of a dwelling is not based on one of the above factors alone and more a combination of factors and the length of time you stay in your dwelling.
The second test is determining whether you are an Australian resident for tax purposes or a non-resident.
How will the ATO determine my residency status?
There are four tests the ATO use to determine your residency status. Passing any one of these four test means you are an Australian Resident for tax purposes.
1. Resides Test:
If you reside in Australia, you are considered an Australian Resident for tax purposes.
The definition of ‘reside’ is “to dwell permanently or for a considerable time, to have one’s settled or usual abode, to live in or at a particulate place.
2. Domicile Test:
Passing this test means you permanently reside in Australia or the individual currently resides in Australia and intends to reside in Australia indefinitely.
3. 183-day Test:
You are an Australian Resident under this test if you are physically present in Australia for more then 183 days in any given financial year.
4. The Commonwealth Superannuation Test:
This test applies to Australian Government employees working in various Australian posts overseas (still considered an Australian resident).
Should an individual be selling their ‘main residence’ and are considered and Australian resident for tax purposes, there is nil Capital Gains Tax payable on the sale of the dwelling (no change in the legislation).
If an individual is selling their main residence and they are a non-resident at the date of signing the contract, the individual will not qualify for the main residence exemption unless:
- The individual/s have been non-residence for less then six years in a row and a certain life event/s have occurred in this six year that allow an exemption or:
- The dwelling was purchased on or before 9 May 2017 and sold prior to 30 June 2020 (refer to below for more details).
Non-resident for six years and certain life event to occur
Should you be deemed a non-resident and still wish to qualify for the main residence exemption (if selling your dwelling after 30 June 2020), a certain life event would need to have occurred. Examples of certain life events provided by the ATO include;
- Taxpayer’s spouse or child under 18 had a terminal medical condition (ie two medical practitioners certified that the illness will likely result in death within 24 months of the certification)
- Taxpayer’s spouse or child under 18 dies, or
- Divorce or separation (and asset distribution occurs)
For example, if the taxpayer has been a non-resident for six years or less when they sell their home and the sale happened because of a court order under the Family Law Act 1975 (ie because of a divorce), the non-resident taxpayer would qualify for the main residence exemption.
When was the home acquired and sold?
If the six-year certain life events exception does not apply, it is important to determine when the home was acquired and sold.
For dwellings acquired on or before 9 May 2017, the ability to access the main residence exemption would depend on when the non-resident individual sells their home.
- For these homes sold on or before 30 June 2020, such non-resident sellers would still qualify for the main residence exemption
- For these homes sold after 30 June 2020, such non-resident sellers would not quality for the main residence exemption.
For dwellings acquired after 9 May 2017, the non-resident seller cannot claim the main residence exemption when they sell their home (even if sold prior to 30 June 2020).
This new law can have a significant tax effect on taxpayers who sell their homes when they are non-residents and do not qualify for the six year certain life events exception.
For more information on the main residence exemption for non-residents and how this may affect you, please contact your Davidsons team member or call our office on 03 5221 6399 to speak with a Tax and Business Services Specialist for more information.
Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.