Talking Tax – Issue 176
Removal of main residence CGT exemption for foreign residents
Surprise, surprise! Once again, the Government is proposing to deny the main residence Capital Gains Tax (CGT) exemption for foreign tax residents. On 23 October 2019, the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 (New Bill) was introduced to give effect to this proposal. This initiative had originally been introduced in an exposure draft for a Bill in August 2017 and again in a Bill in February 2018 but it has never been passed as Law.
If the New Bill is enacted, foreign residents (with limited exceptions) will be ineligible for the main residence CGT exemption if selling their former home at a time when they are not an Australian tax resident. Although there is a transition period, these new rules have the potential to impose significant CGT costs to property owners on the entire capital gain made on the property.
Under this new Bill, the main residence CGT exemption will only apply (in part or in full) in the following circumstances:
- the owner is an Australian tax resident at the time of the sale; or
- the owner is a foreign resident for 6 years or less and a certain life event* occurred during the period of foreign residency.
*Life events include terminal illness or death of a spouse or child, or a family relationship breakdown with a spouse or de facto partner.
The above amendments will apply to:
- homes sold on or after 7:30pm ACT time on 9 May 2017; or
- homes sold on or after 30 June 2020 if acquired before 9 May 2017.
If the owner returns to Australia and is an Australian tax resident at the time of the sale, they will be entitled to the CGT exemption (in part or in full, depending on the application of the ‘absences’ provision in section 118-145 of Income Tax Assessment Act 1997).
Accordingly, if the New Bill becomes Law, foreign tax residents who still own a property in Australia that they once occupied as their main residence may be incentivised to return to Australia as residents prior to selling their former home.
Regardless of whether or not the exemption will be available, we recommend that foreign tax residents who still own a former home in Australia keep a record of their capital costs towards the property to maximise their ‘cost base’ should CGT become payable.
We await with interest to see if any amendments are made to the New Bill in the Senate before receiving Royal Assent.
State taxes - What’s new?
The State Taxation Acts Further Amendment Bill 2019 (Bill) was introduced on 15 October 2019 in the Victorian Legislative Assembly. The Bill provides additional clarification to the operation of Victoria’s taxation and land valuation laws by amending various legislation.
The notable changes in the Bill relate to insurance duty, primary production land exemption, vacant residential land tax (VRLT) and the young farmers duty concession.
Below is a summary of the proposed amendments under the Bill, which at the time of writing is being debated in the Legislative Assembly.
Insurance duty
- Division 2 of Part 2 of the Bill amends the Duties Act 2000 (Vic) to remove any ambiguity about the dutiable nature of insurance provided by an overseas insurer.
- The current definition inadvertently restricts the meaning of insurer to persons registered or authorised under Commonwealth legislation to carry on insurance business in Australia.
- Under this restrictive interpretation, overseas insurers that offer insurance for property or a risk in Victoria may fall beyond the reach of the insurance duty provisions. Additionally, an insured person would have no liability to pay insurance duty on premiums paid to an overseas insurer.
Primary production land exemption
- Division 2 of Part 4 of the Bill amends the Land Tax Act 2005 (Vic) (Land Tax Act) to narrow the primary production land exemption for land in an urban zone in greater Melbourne.
- The Bill requires a connection between the landowner (or all of the landowners) and the business of primary production conducted on the land.
- These changes will make it more difficult in certain situations for land in Greater Melbourne in an urban zone to qualify for the primary production land tax exemption. In particular, the rules have been tightened for farmers that hold multiple parcels of farm land and land that is held by joint owners.
- If passed, the proposed amendments will take effect from the 2020 Land Tax year.
- To align with the other provisions, beneficiaries of implied or constructive trusts are excluded as owners of land for the purpose of this exemption.
- For land held by companies, the ownership requirement for farmers has been reduced from 60% to at least 50% of the dividends or share capital of the company.
Vacant residential land tax
- Division 1 of Part 4 of the Bill amends the Land Tax Act to extend VRLT to properties that remain uninhabitable after 2 years or an extended period approved by the Commissioner.
- Uninhabitable in this context means some condition that makes living in the residence or premises impossible. Some examples include significant water leaks, missing walls or roof, or electrical hazards. Aesthetics such as unfinished painting or worn carpet do not render a property uninhabitable.
- Holiday homes and land used for the purposes of attending a place of business or employment have been exempt from VRLT. The Bill clarifies that a vested beneficiary may benefit from the exemptions but otherwise, beneficiaries or unitholders of a trust are not eligible to benefit from these exemptions.
Young farmers Duty Concession
- The concessional rate of duty is currently available for a transfer of farmland to a ‘trustee for a young farmer’.
- The Bill replaces ‘trustee’ with ‘nominee for a young farmer’, meaning a person who holds farmland on trust for a young farmer but has no other active powers in respect of that land (eg the trustee of a bare trust).
- The new definition of young farmer removes the requirement for the young farmer to carry on (or intend to carry on) a business of primary production. Instead, it provides that a young farmer must be a natural person engaged in (or intending to be engaged in) primary production on farmland.
Loans to shareholders = Dividends?
In Abichandani and FCT [2019] AATA 4296, the Administrative Appeals Tribunal (AAT) held that loans made by a company to shareholders and the transfer of property to an associated entity gave rise to deemed dividends under Division 7A of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).
This case is a reminder for taxpayers to avoid intermingling personal and business expenses in corporate accounts as it could lead to significant tax consequences.
Shareholders are also encouraged to review their loan arrangements to determine whether the loans are deemed dividends under Division 7A. If this is the case, shareholders will be required to pay income tax on the loan amounts.
Loans to shareholders
The taxpayers (registered tax agents and accountants) were shareholders of a company that loaned money to a ‘related’ partnership comprising the taxpayers in the 2011, 2012 and 2013 tax years.
The AAT found no issue in establishing that the company had loaned money to the partnership and further established that the personal expenditures on the company's accounts were also considered ‘loans’.
Given that:
- the loans had not been repaid;
- the loans were not in writing; and
- there was no rate of interest payable,
the loans were deemed by section 109D of the ITAA 1936 to be dividends.
The application of section 109D meant that the taxpayers were required to pay income tax on the amount of the loans
Payment to an associated entity
The taxpayers had also made non-concessional contributions to their self-managed superannuation fund by way of transfer of units in a unit trust, which were valued at $68,370.
The AAT stated that section 109C(3) of the ITAA 1936 makes it clear that a transfer of property is to be regarded as a payment and an ‘associate’ includes the trustee of a trust under which there is a benefit to the shareholder.
The transfer of the units were payments that were caught by the operation of section 109C and were therefore deemed as dividends.
Was it an honest mistake?
In this instance, the ATO was found to be correct not to exercise the discretion to overlook the operation of Division 7A. The AAT was not satisfied that there was an honest mistake or inadvertent omission about matters relevant to Division 7A, its operation or matters affecting its operation.
The matter involved ‘two experienced tax agents and accountants who, both by reasons of their lawyer’s letter had some knowledge of Division 7A but failed to even consider its application in what were reasonably obvious circumstances’.
This article was written with the assistance of Anne Wong, Law Graduate.
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Michael Parker
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Michael is a tax lawyer who specialises in tax disputes, capital gains tax, business sales and acquisitions and restructuring.
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