In yet another change affecting non-resident taxpayers, amendments have recently been legislated to deny the application of the CGT main residence exemption (‘MRE’) where the owner is a foreign resident at the sale date. Broadly speaking, the denial of the MRE will potentially impact:
- Individuals who dispose of their main residence while they are foreign residents.
- Trustees of deceased estates and beneficiaries to whom a dwelling passed through a deceased’s estate, in some cases, even where the deceased was a resident when they died.
- Trustees of special disability trusts and beneficiaries who have been bequeathed an ownership interest in a main residence held by a special disability trust, based on the residency status of the principal beneficiary of the special disability trust.
Refer to the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019, which received Royal Assent on 12 December 2019. Importantly, these amendments apply retrospectively to CGT events happening at, or after, 7:30pm AEST on 9 May 2017, subject to certain transitional measures that apply for dwellings owned before that time.
All legislative references in this segment of the notes are to the ITAA 1997, unless otherwise stated.
Background to CGT rules for non-residents
Broadly speaking, a person who is not a resident of Australia for tax purposes (i.e., a non-resident or a foreign resident) is subject to Australian CGT on a much narrower range of assets compared to those who are residents of Australia for tax purposes.
Specifically, foreign residents are only subject to CGT in respect of an asset that is classified as ‘taxable Australian property’ (‘TAP’), with any capital gain or loss arising from the disposal of non-TAP assets by a non-resident being completely disregarded. Refer to S.855-10. There are five categories of assets that are listed by S.855-15 as TAP, which includes real property situated in Australia. Consequently, when a foreign resident taxpayer disposes of Australian real property, they are still subject to CGT on any resulting capital gain.
In the past, where the dwelling in question was the individual foreign resident’s main residence, they would generally qualify for the MRE in the same way as a individual resident taxpayer and potentially be able to disregard all, or part, of the capital gain. Unfortunately, following the enactment of these amendments, foreign residents are now generally ineligible for the MRE, even if all other requirements for the MRE have been satisfied.
This segment of the notes will consider the impact of these amendments in more detail.