New law that removes the entitlement to the capital gains tax main residence exemption for foreign residents, including expats, could have a significant impact on deceased estates.
Among changes in the new law, a trustee of a deceased estate is not entitled to the main residence CGT exemption if the deceased was a foreign resident at the time of the death.
The information memorandum accompanying the act, Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Act 2019, includes a number of case studies, showing how the law will work.
In a typical case, Vicki, an Australian, bought a unit in 2010, moved into it and established it as her main residence.
Several years later she moved to New York and rented the unit while she tried to sell it. A year after her move she signed a contract to sell the unit.
Vicki is a foreign resident at the time the sale contract is signed, so she is not entitled to the main residence exemption.
Expats who acquired their main residence before 9 May 2017 have a transitional window until 20 June this year to dispose of their main residence and still be eligible for the CGT exemption.
The definition of a main residence includes a building (such as a house) or part of a building (a unit) that is mainly used for accommodation; a caravan, houseboat or other mobile home; any land immediately under the unit of accommodation; and any adjacent structures to the extent that they are used mainly for domestic purposes.
The law includes a measure that allows a foreign resident to access the CGT main residence exemption if they satisfy a “life events test”.
The first element of the test requires that at the time of the CGT event, the person has been a foreign resident for six years or less.
The second element is that during the period of foreign residency, one of a number of specified circumstances occurred:
• either they, their spouse or their child (under 18) had a terminal medical condition.
• their spouse or a child under 18 dies.
• the CGT event occurs because of a divorce or separation involving the person and their spouse.
In a note to clients, law firm Russell Kennedy says that, under the new law, where a foreign resident inherits property under an Australian resident’s will, from the deceased’s date of death the foreign resident beneficiary will be unable to accrue any entitlement to the CGT exemption themselves.
Russell Kennedy says: “When a foreign resident beneficiary comes to dispose of the property after the date of death, they may receive a partial concession on CGT based on the deceased’s cost base up until the date of death but thereafter no concession or exemption can apply.”
In cases where a property is inherited under a foreign resident’s will, the beneficiary and the trustee of the estate will not be entitled to any main residence exemption accrued by the deceased.
From the deceased’s date of death, a resident beneficiary will be able to accrue an entitlement to a concession but a foreign resident beneficiary will be unable to accrue any entitlement to a concession.
Any beneficiary who is not entitled to the exemption will be taxed on the full CGT amount.