Edited version of private advice

Authorisation Number: 1051992185284

Date of advice: 9 June 2022

Ruling

Subject: Main residence exemption

Question 1

Are you an excluded foreign resident under Section 118(4)?

Answer

Yes.

Question 2

Can the Commissioner exercise discretion to disregard the capital gains?

Answer

No.

Question 3

Will sections 115-105 and 115-115 apply to adjust the discount percentage on any capital gain you make as a foreign resident?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are the owners of the Property.

You purchased the Property in 20XX.

You lived at the Property from the time of purchase until 20XX. At this time, you vacated the Property and rented it out.

You departed Australia in 20XX and returned to Country X.

You are non-residents for taxation purposes.

Person 1 was diagnosed with a medical condition in June 20XX.

You divorced in June 20XX.

You are in the process of selling the Property.

The sale of the Property has been delayed due to divorce proceedings, Person 1's medical condition and COVID-19 restrictions.

You are seeking a private ruling to disregard any capital gains due to these factors

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Subsection 118-110(1)

Income Tax Assessment Act 1997 Subsection 118-110(3)

Income Tax Assessment Act 1997 Subsection 118-110(4)

Income Tax Assessment Act 1997 Subsection 118-110(5)

Income Tax Assessment Act 1997 Section 115-105

Income Tax Assessment Act 1997 Section 115-115

Income Tax Assessment Act 1997 Section 855-15

Income Tax Assessment Act 1997 Section 855-20

Income tax (Transitional Provisions) Act 1997 Subsection 118-110(1)

Reasons for decision

Summary

You are excluded foreign residents as per Section 118-110(4) of the Income Tax Assessment Act 1997 (ITAA 1997) and are not eligible for the main residence exemption. The Commissioner does not have any authority not to apply the law to your circumstances, and the law does not give him any discretion in these matters. Therefore, you are only entitled to a discount capital gain you make as foreign residents as per sections 115-105 and 115-115.

Detailed reasoning

Main residence exemption

A foreign resident or temporary resident is liable to capital gains tax (CGT) when they dispose of taxable Australian property. Taxable Australian property includes real property located in Australia (sections 855-15 and 855-20 ITAA 1997).

Section 118-110 of the ITAA 1997 outlines the rules regarding Capital Gains Tax (CGT) main residence exemptions.

Subsection 118-110(1) states that a capital gain or capital loss you make from a CGT event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if:

(a) you are an individual; and

(b) the dwelling was your main residence throughout your ownership period; and

(c) the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person.

Before 9 May 2017, foreign residents had the same access to the main residence exemption as Australian residents.

Amendments contained in subsections 118-110(3), 118-110(4) and 118-110(5) were added as part of the Reducing Pressure on Housing Affordability Measures by the Federal government of Australia in 2019.

The amendments prevent individuals who are not Australian residents for tax purposes from accessing the main residence exemption.

An exception applies where the person has been a foreign resident for 6 continuous years or less and satisfies a 'life events' test.

Subsection 118-110(3) states:

However, this section does not apply if, at the time the CGT event happens, you:

(a) are an excluded foreign resident; or

(b) are a foreign resident who does not satisfy the life events test.

An 'excluded foreign resident' is defined in subsection 118-110(4):

You are an excluded foreign resident, at a particular time, if:

(a) you are a foreign resident at that time; and

(b) the continuous period ending at that time for which you have been a foreign resident is more than 6 years.

The 'life events' test is defined in subsection 118-110(5):

You satisfy the life events test, at the time a CGT event happens, if:

(a) the continuous period ending at that time for which you have been a foreign resident is 6 years or less; and

(b) you are covered by any of the following subparagraphs:

(i) you or your spouse has had a terminal medical condition that existed at any time during that period of foreign residency;

(ii) your child has had a terminal medical condition that existed at any time during that period of foreign residency, and that child was under 18 years of age at least one such time;

(iii) your spouse, or your child who was under 18 years of age at death, has died during that period of foreign residency;

(iv) the CGT event happens because of a matter referred to in a paragraph of subsection 126-5(1) involving you and your spouse (or former spouse).

To assist those who were foreign residents, the Australian Government introduced a grandfathered provision (subsection 118-110(1) of the Income tax (Transitional Provisions) Act 1997 (ITTPA 1997) to allow affected taxpayers to ignore a capital gain or loss from a dwelling that was their main residence. The legislation allows for foreign residents to be protected from the new legislation for the period between 7.30pm on the 9 May 2017 to on or before 30 June 2020. The original amendments were destined to begin on 30 June 2019, however in 2019 the government extended the grandfathering provision to continue until on or before 30 June 2020.

Subsection 118-110(1) ITTPA 1997:

None of the amendments made by Part 1 of Schedule 1 to the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Act 2019 apply in relation to a capital gain or capital loss you make from a CGT event if:

(a) the CGT event happens on or before 30 June 2020; and

(b) you held an ownership interest in the dwelling to which the CGT event relates throughout the period:

(i) starting just before 7.30 pm, by legal time in the Australian Capital Territory, on 9 May 2017; and

(ii) ending just before the CGT event happens.

In your case, you have been foreign residents continuously for more than six years. You are therefore considered to be excluded foreign residents. As excluded foreign residents, you do not have the opportunity to satisfy the life events test which would apply if you were a foreign resident for six years or less during the period as a foreign resident.

As you are excluded foreign residents you are not entitled to the main residence exemption.

The Commissioner has no discretion to disregard any capital gains that occur or to vary the date you can sell the Property and still qualify for a CGT main residence exemption. There is no provision in the amendments to give the Commissioner the discretion to vary the grandfathering date nor is there any provisions in the existing law which would allow the Commissioner to vary that date.

Discount capital gains

The object of section 115-105 ITAA 1997 (with section 115-115) is to adjust the discount percentage so as to deny you a discount to the extent that you accrued a capital gain while a foreign resident or temporary resident.

You can only apply the discount to part of your capital gain if you acquired the asset on or before 8 May 2012 and you had a period of Australian residency after 8 May 2012.

If the discount testing period starts after 8 May 2012, use the following formula to calculate the discount capital gain or loss where the dwelling was your main residence while you were an Australian resident:

Number of days during discount testing period that you

were an Australian resident (but not a temporary resident)

2 × Number of days in discount testing period

The percentage will be 0% if you were a foreign resident or temporary resident during all of the discount testing period.

To confirm the discount capital gain percentage of your capital gain or loss you can also use the CGT discount worksheet on ato.gov.au by searching for quick code QC 66060.

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