Foreign Residents And The Removal Of The CGT Main Residence Exemption

By David Foster

28 March 2020

The government announced on 9 May 2017 that there would be changes to CGT legislation whereby access to the CGT main residence exemption for Foreign Residents would be removed.

The original bill lapsed when the 2019 election was called. A new bill was introduced on 23 October 2019 and was passed on 12 December 2019.

The change in the law means that a taxpayer who is a foreign resident at the time of the CGT event can no longer claim the CGT main residence exemption, unless, at the time of the CGT event the taxpayer had been a foreign resident for less than six years and one of the following life events applies:

  • You, your spouse or child under 18 had a terminal medical condition;
  • Your spouse or child under 18 died; and
  • The CGT event was as a consequence of a divorce or separation or similar arrangement.

A foreign resident is someone who is not a tax resident of Australia.

The changes apply to properties as follows:

For property acquired before 9 May 2017:

  • For disposals up to 30 June 2020, the CGT exemption will continue to apply under the normal rules.
  • For disposals made after 30 June 2020, the CGT exemption will not apply unless the taxpayer had been a foreign resident for less than six years and one of the above life events occurred.

For property acquired after 9 May 2017:

  • The CGT exemption will not apply unless the taxpayer had been a foreign resident for less than six years and one of the above life events occurred.

These rules and their application to foreign residents are particularly complex in respect of deceased estates or property that you may have inherited as a foreign resident or from a foreign resident. There are also special rules applicable to surviving joint tenants and special disability trusts.

For those taxpayers affected by the rules who have already lodged income tax returns without including a capital gain, it is integral to seek advice and lodge amended income tax returns.

Care should be taken with regards to outbound expatriates who may seek ‘tax equalisation’ treatment from their employer if a large tax liability arises whilst they are overseas as a result of these changes.

Changes to Duties and Land Tax for discretionary trusts

In 2016, the NSW Government imposed surcharge purchaser duty on acquisitions of residential land purchased in NSW by foreign persons, and surcharge land tax to foreign persons who own land in NSW.

Where an interest in land is acquired by or held by a discretionary trust, the trust may be liable for surcharge purchaser duty or surcharge land tax if any one of the potential beneficiaries is a foreign person. The surcharge is 2% of the unimproved capital value of the land. In general terms, a foreign person is a person who is not an Australian citizen.

The NSW Government has recently introduced The State Revenue Legislation Further Amendment Bill 2019 to Parliament which, if passed, will likely require amendments to be made to your trust deed.

The Bill contains provisions which deem a discretionary trust to be a foreign trust if the trust deed does not explicitly prevent a foreign person from being a beneficiary.

If you have a discretionary trust that is acquiring or holds land in NSW and the trust deed does not prevent a foreign person from being a beneficiary, then the trust will be liable for surcharge purchaser duty when acquiring land and surcharge land tax on land holdings. 

The Bill allows for trust deeds to be amended before 31 December 2019 to be exempted from the proposed changes. The Bill has not yet passed the State Parliament and it is likely that the deadline will be extended. Note, these issues can also result in a higher stamp duty liability upon acquisition of the property.

If your trust holds land in Australia, you should speak to your solicitor and have your trust deeds reviewed and amended to avoid being deemed a foreign trust. Note, other states are expected to follow NSW’s proposed changes.

Vacancy fee for foreign owners

In December 2017, the Australian Government introduced a vacancy fee for foreign owners of residential dwellings. Under the legislation, foreign owners of residential dwellings in Australia are required to pay an annual vacancy fee if their dwelling is not residentially occupied or rented out for more than 183 days (six months) in a year. Generally, this applies to persons who required the Foreign Investment Review Board (FIRB) approval to acquire the Australian property. This vacancy fee should not apply, therefore, to Australian citizens who are resident overseas.

You must lodge a Vacancy fee return with the ATO within 30 days of each vacancy year end. A vacancy year is each successive 12-month period and is specific to each property.

The fee is charged on a sliding scale ranging from $5,700 for properties acquired for less than $1 million to $104,100 for properties acquired for more than $9 million. There are fee waivers available in limited circumstances.

Deductions for vacant land

Changes to legislation seeking to limit deductions for holding vacant land received Royal assent on 28 October 2019. These changes are effective from 1 July 2019 regardless of when the land was acquired.

Holding costs include:

  • Land tax;
  • Council rates;
  • Maintenance; and
  • Interest and borrowing costs.

The rules do not apply to:

  • Corporate entities;
  • Superannuation funds;
  • Public unit trusts; and
  • Unit trust or partnerships where all of the members are entity types listed above.

Farmland and vacant land used in business are generally not impacted by these changes.

Land will be considered vacant if:

  • It doesn’t contain a substantial and permanent structure; and
  • A structure exists that is partially constructed or renovated while the entity held the land and is unable to be lawfully occupied or is able to be lawfully occupied but is not rented or not available to be rented.

Where there are exceptional circumstances such as a natural disaster that results in a permanent structure no longer being on your land then an exemption may apply for up to three years to allow a deduction for holding costs.