Capital Gains Tips and Traps for Foreign Residents in Australia
All assets acquired since Capital Gains Tax (CGT) started (on 20 September 1985) are subject to CGT unless specifically excluded.
Some assets are exempt from CGT such as taxpayers' main residence, with some exceptions.
Today, I will discuss the rules that affect the foreign residents in Australia.
Main residence exemption
In the 2017-18 Budget, the government announced that foreign residents will no longer be entitled to claim the main residence exemption when they sell property in Australia. This change is not yet law and is subject to parliamentary process.
If the law is passed and you are a foreign resident when a CGT event happens to your residential property in Australia, you may no longer be entitled to claim the main residence exemption.
For property held prior to 7:30pm (AEST) on 9 May 2017, the exemption will only be able to be claimed for disposals that happen up until 30 June 2019 and only if they meet the requirements for the exemption. For disposals that happen from 1 July 2019 they will no longer be entitled to the exemption.
For property acquired at or after 7:30pm (AEST) 9 May 2017, the exemption will no longer apply to disposals from that date.
If you weren't an Australian resident for tax purposes while living in your property, you are unlikely to satisfy the current requirements for the main residence exemption.
If you are a foreign resident when you die, the changes will also apply to:
- legal personal representatives, trustees and beneficiaries of deceased estates
- surviving joint tenants
- special disability trusts.
Capital gains discount for foreign resident individuals
CGT operates by treating net capital gains as taxable income in the tax year in which an asset is sold or otherwise disposed of. If an asset is held for at least 1 year then any gain is first discounted by 50% for individual taxpayers.
Up to 8 May 2012, the CGT discount of 50% was available to foreign resident individuals who were subject to CGT on taxable Australian property.
For assets acquired after 8 May 2012, the discount is generally not available to foreign and temporary resident individuals (including beneficiaries of trusts and partners in a partnership).
The discount is apportioned where a CGT event happens after 8 May 2012 and:
- you acquired the asset before that date, or
- you had a period of Australian residency after that date.
- CGT events that occurred before 8 May 2012 are not affected.
In case the taxpayer changes residency after this date, we must take into account the time that you were a resident and the time that you were a non-resident. So it's a highly technical issue that is affected by residency rules as well.
Foreign resident capital gains withholding payments
New rules for foreign resident capital gains withholding (FRCGW) apply to vendors disposing of certain taxable property under contracts entered into from 1 July 2016.
The assets subject to the withholding tax are:
- taxable Australian real property with a market value of $750,000 or more
- an indirect Australian real property interest
- an option or right to acquire such property or interest.
Where the seller of these Australian assets is deemed a foreign resident, the buyer must pay 12.5% of the purchase price to the ATO as a foreign resident capital gains withholding payment. Please note that this rate is 10% for the contracts entered in the period between 1st of July 2016 and 13th of June 2017.
The foreign resident seller can claim a credit for the foreign resident capital gains withholding payment by lodging a tax return for the relevant year.
You must always remember that the information here are general in nature and compiled from the extensive information in Australian Taxation Office web site. Anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information's applicability to their particular circumstances. Capital gains tax and tax residency are two major issues blended for the purpose of this article.
by Leo Colgar