‘Contact your MP’: Main residence exemption pulled for expats out of the country on 30 June 2027

“To the extent that a client is in that situation, I think they need to be aware of it now, simply because this might be the new world that they’re living in, and to the extent that they have a chance to contact their MP, or raise their voice in some way to get some traction on this issue, then I think people need to have that opportunity,” Miniter said.

“In about 2019 or thereabouts, the government changed the law and introduced a condition on the exemption, which basically said that if you’re a foreign resident for tax purposes when you sell, you’ll basically be denied the exemption unless you come within a very narrow set of circumstances. 

“Basically, that means, if there’s been an illness in the family or if there’s been a death in the family or a divorce, that’s called the life events test.

“That’s quite significant, because it’s all nothing. You could own a property for 20 years, and you move overseas, and you sell it in the last year, you own it, and you’ll lose exemption on the whole thing – quite a significant change there. 

“The key point on that test is that you really need to be a resident when you sell the property, because if you aren’t, then you’ll lose the exemption completely.”

The new rule

Miniter noted that the government has now proposed a fix to a carve-out it discovered, which changes the deemed disposal rule to apply to everybody.

“People who have a period of non-residency in their ownership period for the asset are subject to the deemed disposal and reacquisition. If I am overseas on 30 June 2027 and I’m a non-resident, and I have a property left in Australia that I’m treating as my main residence under the absence rule, under these new laws, I will have a deemed disposal on that property on the 30th of June 2027.

“As we read the new law – I think others agree with it too from speaking to others – I’ll have a CGT event on 30 June 2027 in respect of my main residence; however, I will be a non-resident on 30 June 2027, so under the main residence exemption, I will fail that foreign resident person test and so my gain up to 30 June 2027 will not be covered by the main residence exemption.”

Miniter said that this will lead to a big tax bill for people in this situation.

“That’s quite a significant outcome, because otherwise if that rule didn’t exist, people would have a period of time overseas, they would come back, and they would sell as a resident, and they would claim the full gain as exempt; whereas now if they’re overseas on 30 June 2027 and a non-resident, they’re basically going to lose the exemption on their gain up to 30 June. 2027. So it’s going to mean a significant amount of tax for people in that situation.

“The clear outcome for people is that they’re just going to pay tax when they otherwise wouldn’t have. For some people who owned a house for a long period of time and have a significant capital gain on that house, then they’re going to pay a significant amount of money where otherwise they wouldn’t pay any at all. It’s a very adverse outcome for people in the situation.”

A better solution

“Everybody affected needs to be aware of it because it’s a hugely significant outcome that people have gone overseas expecting that they can keep the main residence exemption on their home, whereas now they’re going to lose it,” Miniter said.

“I’m hoping that this is not an intended outcome, and it will be amended before it’s passed into law. But if it’s not [amended before being passed] into law, we’re going to have a whole cohort of Australians who are far significantly worse off than they are under the current law.”

Miniter said that the better solution would be if the main residence exemption were added to the list of deferral exemptions, where it would be tested for at the end when it is sold.

“That would solve this issue, where while you have this deemed CGT event on the way, if the main residence exemption was one of these so-called deferral exemptions, you would basically only test the conditions for the exemption at the end when you sell the asset, and that would basically resolve this problem.”

Miniter said that while it makes sense that everyone is treated consistently, he noted that, however, the way that the legislation is being released is not tenable.

“The folly is that they’re doing big reform in tranches. If you’re not going to do it all at once in the same kind of package, then there’s going to be things that you might have thought, ‘we’ll get to that later’, but it creates this strange outcome in the interim, where people are subject to laws that are yet to take effect and are expected to be amended, but they don’t really know what their position will be in 6 to 12 months’ time when the full package is complete.

“The folly in the government’s approach here is big reform by tranche, because there’s so much complexity in the tax legislation to [just] do a bit-by-bit. It’s going to throw up these situations where you’ve got an unintended consequence that has a really significant impact on lots of people.”