Changes have been introduced that mean the Capital Gains Tax (CGT) exemption regarding main residences will no longer apply for those not considered “residents” come tax time.
This means that there is currently a small window of opportunity for expats and other non-residents to sell up and take advantage of the exemption before the new changes come into effect on 30 June 2020.
What is Capital Gains Tax (CGT)?
Capital gains or losses are the result of a sale of a capital asset, such as real estate or shares, being “the difference between what it cost you to acquire the asset and what you receive when you dispose of it”.
CGT is the tax calculated based on that difference when you sell your capital asset. If you make a gain, such as selling land or property at a higher value than its purchase price, this amount will be added to your assessable income tax, meaning that you’ll need to calculate the tax owed on that gain in addition to your other income sources.
There are two main exceptions from CGT. According to the ATO, “most personal assets are exempt from CGT, including your home, car and personal use assets such as furniture,” and “CGT also doesn’t apply to depreciating assets used solely for taxable purposes, such as business equipment or fittings in a rental property.” The ATO provides a full list of CGT assets and exemptions and you should seek advice from a taxation specialist for your particular circumstances.
What are the recent changes to CGT?
The recent changes were initiated by the government on 9 May 2017 when it was announced that Australia’s foreign resident capital gains tax (CGT) regime would be extended to deny foreign and temporary tax residents’ access to the CGT main residence exemption.
Before the bill was introduced to parliament, the change to the main residence exemption was amended to ensure that only Australian residents for tax purposes can access the exemption. That means that temporary tax residents who are Australian tax residents will not be impacted by the change. There are also other exemptions in the case of “life events”, such as death and divorce, that the government has included.
When will the changes come into effect?
The initial grandfathering of the changes was extended from 30th June 2019 to 30th June 2020, meaning that there is still a small window of opportunity for foreign investors and residents to sell their properties before the changes are enforced. This transitional exemption, however, doesn’t apply for properties purchased after 9th May 2017. For further details regarding the transitional provisions and criteria, visit the ATO website.
Who will the changes affect and how?
The changes primarily affect foreign investors and non-residents as this means they can no longer claim the main residence exemption. Previously, these foreign residents could claim the property as their main residence so long as it wasn’t rented out for more than six years at a time. This means that come tax time, people who don’t meet the definition of a “resident” need to ensure they calculate and state the amount of capital gains earned since the purchase of the property.
This means that foreign residents will no longer be able to sell without taking CGT into consideration. This tool provided by the ATO can help you calculate what your proposed CGT may be.
It’s expected there could be over 182,000 people impacted by the changes. This key fact sheet provides more information on scenarios to consider if you think you may be impacted.
How are these changes affecting the property market now and in the future?
Currently, the property market is on the rebound from the dip in sale values during early 2019. We can expect to see some more foreign residents looking to sell their Australian properties before the changes kick in on 30th June 2020, which could result in more stock coming onto the market. The increased competition among sellers could help to level out the rising prices and empower buyers in price negotiations.
In the future, we are likely to see a change in the nature of home ownership, as foreign residents may shy away from property investment due to the changes. This means there may be more buying opportunities for local investors and people looking to purchase and live in their main residence.
If you’re looking to sell and need help with navigating CGT, talk to our team today and seek expert advice to ensure that you navigate the new tax rules effectively.