Edited version of private advice

Authorisation Number: 1052110316495

Date of advice: 21 April 2023

Ruling

Subject: CGT - main residence exemption

Question 1

Are you entitled to the main residence exemption on your share of the property?

Answer

No.

Question 2

Can you use the absence rule to get the main residence exemption?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 202X

The scheme commenced on:

1 July 202X

Relevant facts and circumstances

You and your family arrived in Australia a number of years ago.

You are a permanent resident of Australia.

You left Australia for work purposes several years later.

You were a non-resident of Australia from that time onwards and lodged your tax returns as a non-resident.

You are still working overseas and a non-resident.

You and your spouse purchased a property a few years after you left Australia.

The property was registered in your name and your spouse, and you had a 50% share in the property and your spouse had a 50% share in the property.

Your spouse and child moved into the property.

You returned to the property when you came back to Australia for visits.

The property was never used for income producing activities.

Your spouse and child lived in the property as their main residence.

You did not own any other property.

The property was sold a few months ago.

You do not meet the life events test.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-10

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 855-15

Income Tax Assessment Act 1997 section 855-20

Income tax (Transitional Provisions) Act 1997 section 118-10

Reasons for decision

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 of the Income Tax Assessment Act 1997 (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 a foreign resident continuously since you left Australia which is more than six years ago.

You are therefore considered to be an excluded foreign resident. As an excluded foreign resident, 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.

You would not meet the test even if you were a foreign resident for a shorter period than 6 years as you do not meet the life events test.

As you are an excluded foreign resident you are not entitled to the main residence exemption on your share of the property.

Section 118-145 of the ITAA allows a taxpayer to use the absence rule to treat a property as their main residence for up to 6 years if the property is being rented out or indefinitely if the property remains vacant as long as no other property is being treated as their main residence.

As the property is not subject to the main residence exemption due to you being an excluded foreign resident you cannot use the absence rule to treat the property as your main residence under Section 118-145 of the ITAA 1997.