It is common knowledge that when an individual taxpayer moves overseas, in certain situations, there may be flow on capital gains tax (CGT) consequences. This is particularly so where the individual ceases to be a tax resident of Australia. In such cases, the change in tax residency status may result in the individual taxpayer being denied any main residence exemption (MRE) if they were to sell their former Australian home while being a foreign resident. Additionally, the benefit of the full CGT discount may also be denied for other Australian assets sold whilst non-resident.
It is also widely known that where assets are transferred between spouses, as a result of marriage or relationship breakdown, and if all the conditions are met, the CGT marriage breakdown rollover relief under Subdivision 126-A will automatically apply. One of the effects of the marriage breakdown CGT rollover relief is that the transferee spouse (or ex-spouse) is treated as having acquired the property transferred (or an interest thereof) for the asset’s cost base in the hands of the transferor.
Consider this…
When a family home is being transferred due to a marriage or relationship breakdown the automatic application of the CGT marriage breakdown rollover relief may give rise to unintended tax consequences. In particularly, where for example the family court mandates (or alternatively both parties agree under an acceptable written binding agreement) for the transferee to make a cash payment (reflecting the increase in the value of the property transferred) to their former spouse. The CGT rollover excludes such a payment paid as part of the property settlement from the asset’s cost base. Generally, this should not be a problem where the property (or an interest thereof) acquired by the transferee ex-spouse qualifies for full MRE upon its disposal. However, in the absence of the full MRE, there will be a tax cost to the transferee ex-spouse if the cash payment is excluded.
To illustrate let’s say a couple, Charles and Diana bought a property in Sydney in joint names for $300,000 and that property was their main residence since they purchased it in 2001. In 2014 they separated and a year later they divorced. In 2015 the couple executed an acceptable binding written agreement (that complies with the Family Law Act 1975) under which Diana transferred her 50% interest in the Sydney property to Charles. In return, Charles paid her a sum of $450,000 (representing an increase in her share of the value of the property since 2001). So, Charles has paid a total of $600,000 for the property.
Charles continued to live in the Sydney property up to 2017 when he moved to the United Kingdom permanently.
Scenario 1: Charles sold his Sydney home before ceasing to be a tax resident
Under this scenario Charles sold his Sydney property in 2016 while he is still residing in Australia. If the initial transfer of Diana’s 50% share in the property to Charles qualified for the CGT marriage breakdown rollover relief, Charles would have been taken to have acquired Diana’s 50% interest for her original cost base of $150,000. His cash payment of the $450,000 as part of the property settlement is excluded from the asset’s cost base.
As Diana has also lived in the Sydney property since its acquisition up to 2015, Charles is treated as having lived in that property (in regard to his 50% acquired interest) for the periods that it was Diana’s main residence.
As Charles continued to live in the Sydney property up to when it was sold in 2016, the property qualifies for full MRE (in regard to both his original 50% interest and the acquired 50% interest). So even though the cash payment of the $450,000 is excluded from the asset cost base pursuant to the marriage breakdown CGT rollover relief, the exclusion is not detrimental to Charles from a tax cost perspective because he is able to access full MRE.
Scenario 2: Charles sell his Sydney home after ceasing to be a tax resident
In contrast, upon Charles departure to the United Kingdom, he rented out the Sydney property. In 2022 Charles sold his former Sydney home while he is a foreign resident for $1.15 million.
Broadly, in order to access the MRE at the time the CGT event happens, the individual taxpayer must not have been a foreign resident for more than 6 years and must also satisfy the life events test, which relates to terminal illness, death or the CGT event happens because of divorce or separation in the context of the marriage breakdown CGT rollover relief rules. So, even though Charles has been a foreign resident for less than 6 years, he is unable to access the MRE because he did not satisfy the life events test.
Accordingly, Charles would be liable for tax on the resultant capital gain. The quantum of that capital gain will largely be affected by whether or not the initial property transaction between Charles and Diana qualified for the marriage breakdown CGT rollover relief (as illustrated by the table below):
| Does CGT marriage breakdown rollover relief apply? | ||
| Yes | No | |
| Sale proceeds | $1,150,000 | $1,150,000 |
| Cost base original 50% interest | ($150,000) | ($150,000) |
| Cost base acquired 50% interest | ($150,000) | ($450,000) |
| Assessable capital gain | $850,000 | $550,000 |
As Charles is a non-resident at the time of sale, the full 50% CGT is also unavailable. Charles may be able to access a partial discount for the period that he was an Australian tax resident.
Scenario 3: Charles delays selling his Sydney home until after his return to Australia
Let’s say Charles’ stay in the United Kingdom did not work out and he returned to Australia in 2023 permanently. Let’s say on his return to Australia he also regains his Australian tax residency status. In this case If Charles had sold the property after moving here in 2023 (rather than 2022 while he was a foreign resident) and applied the MRE absence rule Charles would have been able to shelter a sizable portion of the resultant capital gain from tax. As with scenario 2, a partial CGT discount would also apply in this example. However, he also has the cost base difference to consider depending on whether the marriage breakdown CGT rollover relief was applied in 2015.
Some practical considerations
Hindsight is a wonderful thing. If Charles had been made aware of the potential taxation outcomes in relation to the Sydney property in 2015, he may have been able to negotiate the transfer of Diana’s 50% interest in such a manner as to prevent or hinder the marriage breakdown CGT rollover relief provisions from applying automatically. Alternatively, Charles could have sold the property before moving overseas permanently or after he regained his tax resident status. Given the complexity of tax laws and the uniqueness of individual circumstances, it is advisable for individuals facing such situations to seek professional advice from tax experts to ensure proper understanding and planning for their specific case.
——-
Found this article insightful? Subscribe to our newsletter “The Assessment” and receive more articles like this every month!
Need more advice? Contact us via email or on 03 8662 3200
