The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 2) Bill 2018 was introduced in the House of Reps on Thur 8.2.2018. On 15.2.18, the Bill was referred to the Senate Economics Committee, for report by 23 March 2018. On 1 March 2018, the Bill passed the Lower House, without amendment.

It will effect 3 main changes.

  1. Prevent ‘non-residents’ claiming the CGT ‘main residence’ exemption
  2. Inserting a new provision into the Div 855 ‘principal asset’ test (in s855-30 of the ITAA97), so that duplicated ‘membership interests’ are not counted multiple times.
  3. Introducing an additional CGT discount for Low Cost Housing (from 50% up to 55%)

[APH website: Bill Tracker, Bill, EM, Committee Inquiry; FJM; LTN 26, 8/2/18, LTN 31, 15/2/18, LTN ; Tax Month February 2018]

CGT ‘Main Residence’ exemption – no longer available to non-residents

This Bill (Schedule 1, Part 1) will remove access to the CGT ‘main residence’ exemption, for non-residents. The ostensible justification for this revenue saving measure, was to moderate the housing affordability issues, current in Australia. The public’s perception is that housing prices are driven up, at least in part, by the greater demand created by, and perhaps also greater purchasing power, of non-residents.

This amendment will be another fiscal disincentive, for non-residents to buy residences, in Australia (the others being, very considerable land transfer duty and land tax surcharges, imposed by various states, including the two largest: NSW and Victoria).

The CGT ‘main residence’ exemption is to be found in subdivided 118-B of the ITAA97. But there are many facets to this, as the following list of proposed amendments, will demonstrate.

  • The ‘basic case’, for this ‘main residence’ relief, is stated in s118-110. The main exclusion, for non-residents, is effected by inserting a new ss(3), saying: “However, this section does not apply if, at the time the *CGT event happens, you are a foreign resident.” [Item 4]
  • Section 118-110(2) limits this ‘main residence’ relief to certain listed CGT events, which include the I1 & I2 events (which are trigged on ceasing to be resident). However, there is a ‘mis-match’ with their scope and that of the definition of ‘dwelling’ for ‘main residence’ purposes. These events cover all assets except Australian real property (which goes on being taxable, to non-residents, under Div 855 of the ITAA97). However, not all ‘main residences’ are real property (ie. caravans, house boats and other mobile homes). So, to keep the effect of these changes, to the ‘main residence’ exemption, consistent (across dwellings that are and are not real property) the I1 and I2 Events are to be removed, as events which qualify for which a main residence exemption. Otherwise, the main residence exemption might remain available, on non-real property dwellings. [Item 3]
  • Item 6 of the Bill makes changes to s118-155. This is a companion provision to s118-150, which allows a person to treat a reconstructed dwelling as their main residence, including over the period they don’t live in it (because of the works). This is allowed, so long as the person does later live in the residence, for at least 3 months, and the choice, to take this extended relief, does not operate for more than 4 years. Section 118-155 allows this same relief to apply to a person who dies during the period they don’t occupy any dwelling on the land. However, this now only applies to persons who are resident when they die. Again this is achieved by inserting a new ss(5), saying: “However, this section does not apply if, just before the individual’s death, the individual was a foreign resident.” [Item 6]
  • Section 118-185 is a central provision giving an owner only a partial exemption, if the dwelling has not been their ‘main residence’ for the whole of their ownership period (pro-rating the exemption by the proportion of the time it was their main residence). Even this pro-rated exemption will be lost, if the person is a non-resident at the time their ownership period ends. Again, this is achieved by adding a new ss(3), saying: “However, this section does not apply if, at the time the *CGT event happens, you are a foreign resident.” [Item 11]
  • Section 118-195 also extends ‘main residence’ exemption of the deceased, to a person whose interest “passed to them as a beneficiary in a deceased estate”, covering the period between death and the person getting their ownership interest (the main case being a period for the administration of the deceased estate, capped at 2 years). This relief, for the beneficiary, will be only open if the deceased was an Australian resident, at the time of death. This will be achieved by inserting an additional qualification for the relief, into ss(1), as follows: “(c) the deceased was an Australian resident just before the deceased’s death.” [Item 12] Item 13 then makes further changes, by inserting a new ss(1A), which requires certain things to be deemed, when applying a ‘matrix’ requirement in ss(1). Also, Item 14 removes CGT events I1 & I2 from the range of CGT events that can trigger this relief.
  • There are then a range of further amendments covering deceased estates, non-resident beneficiaries of deceased estates and the like. They are complex and beyond the scope of this summary.
  • COMMENCEMENT DATE: These provisions would apply to CGT events that occur after 9 May 2017 (the day on which the Government presented its 2017-18 budget and announced this measure). This retrospective effect, is ameliorated somewhat, by a 2 year extension, for CGT events that occur on or before 30 June 2019, for taxpayers who hold an ownership interest from budget time (2017) through to the relevant CGT event (item 30, inserting a new s118-110 into the 1997 Transitional Provisions Act).

EDITORIAL COMMENT – The way these measures are drafted, has a ‘reach back’ effect, in the following sense.

  • It does not allow the non-resident, to keep the exemption, for the portion, of the ownership period, that the taxpayer was a resident.
  • Rather, a taxpayer loses the entire exemption, if they are non-resident at the time that they dispose of the dwelling.
  • Thus, all ‘expats’ would have to sell their home, before returning home, and ceasing to be resident (otherwise the gain that would, otherwise, be free of Australian CGT, will become taxable).
  • This will also impact Australians, who depart overseas, in circumstances where they become non-resident. They might want to keep their house as a place to return to. But, they might later decide to sell the house, when it became clear they would never return (or for any number of other reasons). This could be a massive loss of exemption, all because they didn’t know whether to sell their house, or not, prior to going overseas. It seems massively unfair and intrudes into the flexibility of Australians, who can’t be sure of their circumstances, when leaving for overseas (for what ever reason).

Study questions (answers below*)

  1. Will Schedule 1, Part 1, of this Bill, exclude individuals claiming the CGT ‘main residence’ exemption, if they are a non-resident, at the time of the CGT event?
  2. Will this provide a further fiscal hurdle for non-residents buying residential dwellings in Australia?
  3. Is the principal amendment (to the ‘basic case’) in s118-115?
  4. Does the removal of CGT events I1 & I2 (about ceasing to be resident), ameliorate the effect of these changes on non-residents?
  5. Does the non-resident keep the exemption for the portion of their ‘ownership period’ when they were resident?





Changes to the Div 855 ‘Principal asset test’ – don’t count ‘duplicated’ membership interests

This Bill (Schedule 1, Part 2) will also amend the ‘principal asset test’ in s855-30 of the ITAA97, so that it is clear that duplicated membership interests are ignored, when calculating whether the principal asset of the group is ‘Taxable Australian Real Property’ (TARP).

The following will assist in explaining this.

  1. Non-residents only pay Australian CGT, on ‘taxable Australian property’ (s855-10).
  2. Taxable Australian Property (s855-15) includes both TARP (s855-20) and ‘indirect Australian real property interests’ (s855-25).
  3. And these ‘indirect’ interests are shares (strictly: ‘membership interests’) that one company holds, in another, that pass two tests. The first is a ‘non-portfolio interest test‘ (10%, or more, of the shares – s960-195) on an ‘associate’ inclusive basis (s855-25(2)). The second is the ‘principal asset test‘ (in s855-30).
  4. The idea behind the ‘principal asset test’ is to see if the principal assets of the company group are TARP (on a ‘more than 50%’ over value basis). Sometimes this is called a ‘land rich’ company or company group. This is done on a value of ‘gross assets’ basis, which I’ll explain.
  5. The ‘indirect’ interests start with companies that own TARP. A shareholder’s holding, is notionally treated as 2 types of assets: ‘TARP assets’ and ‘non-TARP assets’.
  6. To explain this, let’s imagine that a ‘Test Entity’ had total gross assets, with the market value of $10m. TARP might make up $8m of this $10m figure and other assets the remaining $2m.
  7. And, Hold Co’s holding might be only 50% of the shares in the Test Company.
  8. The part of Hold Co’s shareholding, that is deemed to be a ‘TARP asset’ would have a value of $4m (the $8m TARP assets multiplied by its 50% shareholding).
  9. However, it is not quite this simple. A shareholder with sub-10% holding, is deemed to have, also, the holdings of it’s associate, for the purposes of assessing whether it passes the ‘non-portfolio interests test’.
  10. This leads to the possibility that shareholding interests have been counted more than once (which this amendment will rectify).
  11. The ‘Explanatory Memorandum’ (to the Bill) gives this example. A company might have two 100% subsidiaries, one with a 7% holding in TARP Co, and the other with a 9% holding in TARP Co. Because of the way the ‘non-portfolio test’ works (including ‘associates’ holdings) both the 7% and the 9% interests will be double counted.

This Bill proposes to insert a new provision: s855-30(4A) to make it clear that you don’t double count interests, in these circumstances. [see, item 33 of the Bill]

This amendment would apply to CGT events from Budget Time on 9 May 2017.

Study questions (answers below*)

  1. Is the effect of this amendment, to avoid double counting share holdings, in calculating whether the sale of shares satisfies the ‘principal asset test’?
  2. Are non-residents only subject to Australian CGT on TARP assets?
  3. Does the possibility of double counting the value of shareholdings arise because the ‘non-portfolio test’ is assessed on an ‘associate’ inclusive basis?
  4. Will this change apply to CGT events after 30 June 2017?




Increased CGT discount for Low Cost Housing (50% up to 55%)

Schedule 3 to the above Bill amends the ITAA 1997 and the TAA 1953 to provide an additional CGT discount on affordable housing (when a CGT event occurs). There is an additional discount of up to 10 per cent, if a CGT event occurs to an ownership interest, in residential premises, that have been used to provide affordable housing.

  1. This is part of a package of measures, to address housing affordability. This one is to provide an additional incentive for further private investment, in the low end of the rental market.
  2. This incentive applies to individuals, who invest in affordable housing, either directly or through the following interposed entities: (i) trusts (other than super funds and public unit trusts under s102P of the ITAA36);  (ii) Managed Investment Trusts (MITs); or (iii) partnerships. Individuals are entitled to 50% CGT discounts.
  3. To this 50% discount, a further percentage is added, which is 1/5th of this amount, pro-rated by proportion of the time that the  property has been used for ‘affordable housing’. A 100% usage would give the owner the full extra 5%.
  4. The property has to be used for at least 3 years (1095 days) before this extra discount is available.

Study questions (answers below*)

  1. Is the extra discount only available to individuals?
  2. Do they have to invest directly in their own name?
  3. Can individuals get an extra 10% points discount (ie. 50% + 10% = 60%)?
  4. Does the dwelling have to be used to provide low cost housing for at least 3 years before the individual qualifies?




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