The main residence exemption for foreign residents used to be easy. Once you got it, you didn’t lose it for at last 6 years – and even indefinitely as long as you didn’t rent it out.
Main Residence Exemption for Foreign Residents
It used to be easy. Your main residence exemption used to be independent from your residency status. So you could be a foreign resident and still qualify for the main residence exemption. But this is changing as Andrew Henshaw of Velocity Legal in Sydney will tell.
Here is what we learned from this episode, but please listen in as Andrew Henshaw explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Main Residence Exemption for Foreign Residents
It all depends on your residency status on the day you sign the contract. You are a resident, if you pass the reside test (which is basically case law), the domicile test, the 183 day test or the (obscure) Commonwealth test – just passing one of these 4 tests is enough to be a resident. And you are a non-resident / foreign resident when you don’t pass any of these tests.
And – as you know – the reside and domicile tests are really hazy – but that is a topic in itself. Let’s put that aside. Let’s assume that your residency is a clear Yes or No.
So on the day you sign the contract you step in front of two doors – side by side – one is green with a large sign that says ‘Main residency exemption – Yes’. And the other one is red and says ‘No Exemption’. Very black and white – or to be more precise – very green and red. Yes or No.
If you are a resident, you go through the green door. The Yes door. And voila, there is the main residence exemption waiting for you – for the time you lived in the house. But what about the time you are away? That depends on what happens to the house while you are away – whether you rent it out or you don’t.
Any time you leave it empty, so not producing income, the indefinite-absence rule kicks in and you can continue to treat the property as your main residence – indefinitely. No CGT for the time it is empty.
Any time you rent it out, the 6-year absence rule kicks in and you can continue to treat the property as your main residence for another 6 years. If you rent it out for longer, you don’t get the exemption for the additional years, BUT… you don’t lose the exemption you earned so far.
So this is all yours if you are a resident at the time of sale.
If you are a foreign resident on the day you sell, you go through the red door. The ‘No’ door. There is nothing behind that door. No main residence exemption. No indefinite-absence-rule. And certainly no 6-year-absence rule. You are an excluded foreign resident. You pay CGT on the full capital gain, no matter how long you lived in the house before you left. Yes, there is some grandfathering to people who sell before 30 June 2020, but that will be history soon.
There is one exception for non-residents. Let’s call it the 6-year-life-event-rule.
If within the first six year of leaving, a life event happens to you or your spouse – terminal illness, death, divorce, losing a child – and you sell during those first 6 years, then you go through the green door and get everything back – main residence exemption, 6 year absence rule, indefinite absence rule.
But you can’t plan a life event – you definitely don’t want a life event happen to you. So the morale of the story is when you plan to move overseas to become a foreign resident, either sell before you go or wait with selling until you come back.
But now let’s look at estates. What happens when a main residence goes into an estate? The same rules apply. It all depends on the residency status of the deceased at the time of death. Correct
If they are a resident at the time of death, the estate goes through the green door. If they are an excluded foreign resident, they go through the red door. And if the deceased passes the 6-year-life event rule, the estate goes back through the green door.
So this is a short summary of the new rules around the main residence exemption for foreign residents. They are not law yet but likely to pass in its drafted form soon. Please listen to this episode as Andrew Henshaw goes into a lot more details.
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 18 February 2020