Jun 2021 3 Minutes
Changes for Expats Selling Their Former Homes Apply for 2021 and Later Years
After the expiry of the transitional period on 30 June 2020, the main residence exemption is no longer available for “excluded foreign residents” and foreign residents who do not satisfy the “life events test”. If an individual falls into any of these categories, the exemption is not available notwithstanding of the history of the dwelling as a main residence.
An individual is an excluded foreign resident if they are:
- A foreign resident at that time; and
- Have been a foreign resident for a continuous period of more than six years.
For a foreign resident who satisfies the above conditions, the main residence exemption is not available. The fact that their dwelling may have been their main residence while they were a resident is not relevant. That is, no partial exemption would be available to take into account the Australian residency period. If a capital loss is triggered upon the sale of the dwelling, the full capital loss should also be available (i.e. the loss would not be disregarded under the main residence exemption).
If a foreign resident has been a foreign resident for a continuous period of six years or less, the main residence exemption will only be available where they satisfy certain “life event tests” that lead to the sale of their former home.
These tests are as follows:
- The individual or their spouse had a “terminal medical condition” at any time during the foreign residency;
- A child under the age of 18 had a terminal medical condition at any time during the foreign residency;
- The individual’s spouse or child under the age of 18 died during the foreign residency period; or
- The sale of the dwelling involves a marriage or relationship breakdown pursuant to section 126-5(1) of the ITAA 1997.
In summary, if a person is a foreign resident at the time they dispose of a property and they have been a foreign resident a continuous period six years or less, they can only access the main residence exemption if they satisfy any of the life events outlined above.
If they have been a foreign resident for a continuous period of more than six years, the main residence exemption would not be available even if these life events are satisfied.
Whilst COVID-19 may have forced many expats back to Australia and back to their former homes, those who have remained overseas should carefully consider the application of these new rules before they list their former Australian home for sale. The harsh reality of these rules will first be felt in the 2021 financial year and will effectively require expats to defer selling their former home until they return to Australia and resume their Australian tax residency.
If you have any questions on how these new rules might apply, please contact our office and speak to Iggy.