Exposure draft: Capital gains tax changes for foreign residents

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1 18 August 2017 The Manager Individuals Tax Unit Individuals and Indirect Tax Division The Treasury Langton Crescent PARKES ACT Dear Sir or Madam Exposure draft: Capital gains tax changes for foreign residents (CA ANZ) welcomes the opportunity to comment on the Exposure Draft (ED) and Explanatory Material (EM) designed to: Remove the entitlement to the capital gains tax (CGT) main residence exemption for foreign residents; and Amend Division 855 of the Income Tax Assessment Act 1997 (the ITAA) to clarify that, for the purpose of determining whether an entity s underlying value is principally derived from taxable Australian real property (TARP), the principal asset test is applied on an associate inclusive basis. Our organisation is made up of over 100,000 diverse, talented and financially astute professionals who utilise their skills every day to make a difference for businesses the world over. Chartered Accountants are known for professional integrity, principled judgment and financial discipline, and a forward-looking approach to business. We focus on the education and lifelong learning of members, and engage in advocacy and thought leadership in areas that impact the economy and domestic and international capital markets. We are represented on the Board of the International Federation of Accountants, and are connected globally through the 800,000-strong Global Accounting Alliance, and Chartered 33 Erskine Street, Sydney NSW 2000 GPO Box 9985, Sydney NSW 2001, Australia T F

2 2 Accountants Worldwide, which brings together leading Institutes in Australia, England and Wales, Ireland, New Zealand, Scotland and South Africa to support and promote over 320,000 Chartered Accountants in more than180 countries. Amendments to principal asset test We do not have any comments on the proposed amendments to the principal asset test in Division 855 of the Income Tax Assessment Act 1997 from either a policy or technical perspective. Removal of the main residence exemption for foreign residents We have concerns regarding the policy underpinning the removal of the main residence exemption for foreign residents which we address in more detail below. In short our concerns are that the proposed amendments: Will act as a disincentive to Australians taking advantage of employment opportunities overseas despite the long term benefits they provide to the Australian economy. Lack fairness and equity as they do not take into account the period of time an individual owned a main residence and was a resident. Despite the above shortcomings, may not make any significant contribution to housing affordability. However, in the event that the proposed amendments proceed in substantially the same form as in the ED then we: Recommend that individuals be given a period of time after they become foreign residents to sell their property and benefit from the main residence exemption. Highlight that determining whether an individual is an Australian or foreign resident is not always clear cut and we predict an increase in the demand for private binding rulings from the ATO to ensure property is not sold when an individual is a foreign resident. The Budget announcement In the 2017 Federal Budget, under the banner of Reducing Pressure on Housing Affordability, the Government announced a package of three measures. These included the extension of the foreign resident CGT regime by denying foreign residents (and initially temporary tax residents) access to the CGT main residence exemption from 9 May As a transitional measure, properties held at 9 May 2017 will continue to qualify for the exemption if sold by a foreign resident on or before 30 June The proposed changes appear to be designed to induce foreign residents to sell before 30 June 2019 property owned at 9 May 2017 and other property owners to seriously consider selling their main residence before becoming foreign residents. While this may increase the supply of residential properties available to those aspiring to become home owners, they may equally be bought by new investors (who may be foreign

3 3 residents). It also means that Australian nationals induced to sell rather than rent - their property before going overseas will return home to join the queue of aspiring home owners. Existing law Generally speaking, under the existing law, a capital gain made by an individual from the disposal of their main residence is exempt from tax if it was their main residence during their period of ownership. However, an individual may choose to treat a dwelling as their main residence (when it is not) for up to six years if income producing or indefinitely if not income producing, e.g. if it is left vacant or occupied by family members during their absence. The main residence exemption applies equally to Australian and foreign nationals. So, a foreign national may be in Australia for a sufficient period of time to establish a main residence, leave permanently and qualify for the full main residence exemption on sale of the dwelling within six years (if rented) or at any time if non-income producing. If rented for more than six years only the part of any capital gain attributable to the period in excess of six years (less any CGT discount) is subject to tax at rates applicable to foreign residents. The same rules applies to an Australian national whose dwelling ceases to be their main residence because of, for example, moving overseas for work. However, the rate of tax on any capital gain (less any discount) will be that applying to residents if, when the dwelling is sold, the Australian national is a resident. In both cases, in determining the amount of capital gain (before the CGT discount) which is subject to tax, it is irrelevant if the foreign or Australian national is, for tax purposes, an Australian or foreign resident at the time their main residence is sold. Our concerns Disincentive to accepting overseas postings Currently, an Australian national contemplating an overseas appointment during which he will be a foreign resident has a number of matters to consider. One is what to do with the family home. Others include the impact on children s education and distance from elderly parents. If the appointment is for up to six years, retaining the family home and renting it out during the period away is an attractive option. They retain an income producing tax free asset and have the family home to move into on return to Australia. In the event something unexpected happens, e.g. the duration of the posting is extended beyond six years or there is a need to sell, the financial consequences are manageable. This is because only a portion of the gain attributable to any period in excess of six years will be subject to tax at rates which vary depending upon whether a resident or foreign resident when the sale occurs. The proposed amendments change the dynamics of the decision making process because the financial consequences of having to sell (or dying) while a foreign resident mean that the entire gain on what is for most families their most significant asset will be subject to tax, without the benefit of the CGT discount and at rates applicable to foreign residents. There is no recognition of the time they were resident. As a consequence, Australian nationals who are risk averse may sell prior to becoming foreign residents and accept that they will need to re-enter the housing market on their return. But we

4 4 predict that others will simply decline the overseas appointment and retain the family home (which in many cases is more than simply a financial asset) and entitlement to the main residence exemption. From a policy perspective we are concerned that: The proposed amendments will be a disincentive for Australian nationals to accept assignments overseas which, in the long term, provide economic benefits to Australia. It is worth noting that one of the reasons for the absence rule, initially four years but subsequently extended to six years, was to allow people to temporarily relocate within or outside Australia without affecting their entitlement to the main residence exemption. Even if the proposed amendments result in an increase in housing stock available to home buyers it may be temporary as Australian nationals returning to Australia will require housing. Preserving in some form entitlement to the main residence exemption attributable to the period an individual is an Australian resident would reduce this disincentive. Equity and fairness More generally, preserving entitlement to the main residence exemption attributable to the period an individual is an Australian resident is also fairer and more equitable than the all or nothing approach proposed. Given that these individuals have funded Australian public spending during their period of residency they should not be denied total access to the main residence exemption simply because, at the time of sale, they are foreign residents. Recommendations/observations should the measure proceed essentially in its current form Determining residency is not clear cut Determining whether an individual is a resident or a foreign resident at a point in time as required by the ED is not clear cut despite the simplicity of the examples in the EM. Because of the stakes involved we envisage that if the proposed measures proceed there will be an increase in the demand for private binding rulings (PBRs) from the ATO. For example: An Australian national who might otherwise accept an overseas appointment on the basis that they will remain an Australian resident while away may be loath to retain and rent their main residence while away in the absence of a PBR just in case they need to sell the property whilst overseas. An Australian national may have accepted an appointment overseas for two years during which time he would be regarded as a resident and retained his home in Australia on this basis. However, he is offered a contract which is likely to result in his becoming a foreign resident and wishes to sell his Australian home. At what point does his residency change?

5 5 The requirement to sell prior to becoming a foreign resident Selling houses takes time which may be why the ED gives a foreign resident who owns a main residence at 9 May 2017 two years in which to sell it and benefit from the main residence exemption. However, on an ongoing basis, to benefit from the main residence exemption a resident who anticipates becoming a foreign resident must sell prior to becoming a foreign resident. This may not be possible in many cases, e.g. Vicki in Example 1.2 of the EM, and may not be desirable in others, e.g. the only offer is below market value. In our view, individuals should be given a period of time after they become a foreign resident in which to sell their property and benefit from the main residence exemption. If you wish to discuss our comments please contact Michael Croker on or by at michael.croker@ or Susan Cantamessa on or by at susan.cantamessa@. Yours sincerely Michael Croker Tax Leader Australia