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Changes to the Capital Gains Tax Main Residence Exemption as cost explodes?

capital gains tax

When referring to taxation, the family home is venerated.  It is often the most significant asset a taxpayer will possess, and of course, the main residence exemption from capital gains tax (CGT) applies.  However, record low-interest rates and government stimulus and subsidies have helped save the economy from a COVID-19 recession, but this has also driven an explosion in the cost of federal tax concessions.

Introduction

Figures collated by the Federal Treasury show the main residence exemption from capital gains tax (CGT) will cost a record $64 billion in foregone revenue this financial year.  It is a $9 billion rise on the forgone revenue estimated for 2020-21, which was an $8 billion increase over 2019-20.

The increase was overshadowed by the rise in the cost of concessional tax rates on superannuation, which escalated by $13.5 billion to a record $43.1 billion.  In addition, the 50 per cent concession on CGT available to individual taxpayers or trusts increased by 21 per cent and cost a record $11.8 billion.

Share values and property prices have soared due to the various government and Reserve Bank programs to safeguard the economy amid COVID-19.  That has driven the significant increase in the relative value of the tax concessions around super, the family home and CGT.

COVID-19 has delivered the most significant budget deficits on record.  After an $85.3 billion deficiency in 2019-20, it increased to $134.2 billion last financial year and is predicted to ease down to $99.2 billion in 2021-22.

While the focal point of the federal budget is the cost of new policies,  the only time the ongoing cost of tax concessions to the budget is revealed is in the release of the tax concession report.

Increased disbursement in areas including social security and defence had to come out of the budget, which might require clamping down on tax concessions.

However, the residential property market surge, metropolitan and regionally, continues to attract buyers and sellers in droves.  This acumen has caused many governments to remain cautious about making changes that would lessen the generous concession available to homeowners; the main residence exemption (MRE).

The election effect

As we now prepare for yet another election, the NSW Coalition government has made a compelling argument for rewinding the CGT concession, becase it makes it more difficult for first home buyers to enter the market.

In a submission placed tactily on the federal government’s housing inquiry website in late October 2021, the NSW government argued that housing would be used “more for accommodation needs than investment needs” if they cut the concession.

The income made in capital gains from buying something, holding it, then selling it at a profit, is taxed differently from the income made from work or running a business.  However, only half of it is taxed.

In previous elections, Bill Shorten was proposing to rewind the CGT exemption, for future transactions only.  This would mean, if he was elected and in office, any future transactions  buying and selling real estate and other assets would not be exempt from tax of half of each profit made.

The exemption would remain in place for everything already purchased.

In the face of an exaggerated debate about whether or not it would tank house prices, the Labor leader found himself defending proce modelling rather than outlining what his policy would do.

Morrison’s resistance to it was hard to justify at the time.  It may be even more complicated now.  However, whether the changes come to fruition or not, the best thing you can do for now is ensuring you understand the CGT MRE and seek knowledge and advice from your financial advisors.

What is the Capital Gains Tax Main Residence Exemption?

The MRE provides Australian taxpayers with an exemption from CGT where their property is or has been their “family home”, subject to meeting specific criteria.  These long-established provisions mean that capital gains made concerning a qualifying main residence are typically exempt from Australian CGT.  This exemption applies incessantly to properties that were never rented out for an supplementary period of six years from the time a property was rented out – this is called the “six-year rule”.

The exemption only applies if no other property nominated as the primary residence and, when a property is re-occupied as the primary residence, the six-year exemption period “resets”. 

To qualify for the main residence exemption, the following must apply:

  • the taxpayer is an individual
  • the taxpayer is an Australian tax resident
  • the property was the taxpayer’s primary residence throughout the ‘ownership period’, and
  • the property was not transferred to the taxpayer as a beneficiary, or trustee of, a deceased estate.

Several factors are taken into account when determining whether or not a property is the taxpayer’s primary residence, including:

  • the length of time the taxpayer has lived in the property
  • the place of residence of the taxpayer’s family
  • whether the taxpayer’s personal belongings are located at the residence
  • the taxpayer’s address on the electoral roll
  • the address to which the taxpayer’s mail is delivered
  • the connection of gas, telephone or electricity services
  • the taxpayer’s intention in occupying the property

It is paramount to note that a mere intention to live in a property as your main residence, and not actually doing so, is insufficient to be eligible for the exemption.  The taxpayer must occupy the dwelling.

Main Residence Exemption excludes expatriates since 1 July 2020

On Wednesday, 23 October 2019, the Assistant Treasurer re-introduced legislation that had previously expired to:

“remove the entitlement to the CGT main residence exemption for foreign residents other than where certain life events occur during the period that a person is a foreign resident where that period is six years or less.”

The preceding legislation would have seen the proposed changes come into effect on 1 July 2019.  However, the new legislation had a later effective date of 1 July 2020, and the definition of “foreign residents” included Australian citizens and permanent residents living outside Australia non-resident for Australian tax purposes.

In summary, the focal aspects of the legislation are:

  • Individuals who sell their primary residence and were foreign residents at the time of sale will not be entitled to the MRE – this includes Australian citizens or permanent residents living overseas who were non-residents.
  • For individuals, the date of disposal of their interest in a property will generally be when a contract for sale was entered.
  • The Bill does not provide any “apportionment” of the MRE.  This means that any days the property had been owned by an Australian resident for Australian taxation purposes will not be relevant in calculating any CGT liability,
  • The new legislation provides that a foreign resident may access the CGT main residence exemption if they satisfy the ‘life events test’ unless they have been a foreign resident for more than six years.  Applicable events include terminal illness, death and divorce.

How does the CGT property six-year rule work?

Once a property is regarded as your primary residence, you can move and rent it out for up to six years post leaving without triggering CGT, provided you don’t nominate another house as your primary residence.

Many people end up using the six-year rule in situations where they can’t live in their home for some time, for example, due to relocating for work or other obligations interstate.  Instead of leaving it unoccupied, they use the property to generate extra income for themselves and provide housing for others.

This means an investor in this situation can generate an income while maintaining the property as their primary residence for tax purposes.

Another benefit of claiming the main residence exemption using the six-year rule is that it resets each time the property is re-established as the primary residence, which can occur if you move back in within the six years.  This means that the six-year rule resets each time you move back home.  So, you can claim the MRE exemption, provided you meet the other criteria, and you don’t move away for more than six years at a time.

Vogue Advisory Group – helping you make the most out of your investment

Suppose you are a homeowner or property investor.  In that case, you should seek the advice of your financial advisor to make sure you understand precisely which concessions you may be able to access.

To discuss any matter relating to capital gains tax, the main residence exemption, or the six-year rule, please contact us.  Our team is always happy to help you!

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