Capital Gains Tax (CGT) applies to the capital gain made on the disposal of any asset, with a number of specific exemptions, the most significant one being the family home. If you leave a property to family or friends, and you’re entitled to the main residence exemption, it will still apply. However, if you’re not entitled to the main residence exemption – or you’re entitled to only a partial exemption – CGT will apply.
The CGT main residence exemption means that if you are the beneficiary of a residential property under a Will (depending on the use of the property by both you and the deceased) you may not have to pay CGT on any capital gain made after you sell or dispose of the inherited property.
As the beneficiary of Australian residential property from a foreign resident of six years or less at the time of their death, the main residence exemption is available to the beneficiary; except where it is inherited by a foreign resident (any CGT was accounted for in the deceased’s “date of death” tax return); or tax-advantaged entity such as a church or charity, the trustee of a complying super fund, approved deposit fund or pooled super trust.
The main residence exemption on CGT for foreign residents for tax purposes has recently been amended; from the deceased’s date of death Australian residents will continue to be able to accrue an entitlement to a concession, foreign residents will be unable to do so.
The CGT main residence exemption can only be claimed by Foreign residents for tax purposes who held property prior to 7:30pm (AEST) on 9 May 2017 for disposals that meet the following requirements:
- you, your spouse, or your child under 18, had a terminal medical condition
- your spouse, or your child under 18, died
- the CGT event involved the distribution of assets between you and your spouse as a result of your divorce, separation or similar maintenance agreements.
and occur prior to 30 June 2020.
As a corollary, disposals that happen from 1 July 2020 are no longer entitled to the CGT main residence exemption unless they occur within a continuous period of six years of the individual becoming a foreign resident for tax purposes
Similarly, for property acquired following 7:29pm (AEST) 9 May 2017 the CGT main residence exemption no longer applies to disposals from that date unless the listed life events occur within a continuous period of six years of the individual becoming a foreign resident for tax purposes.
Therefore when the foreign resident beneficiary disposes of the property, they may receive a partial concession on CGT based on the testator’s cost base up until the date of their death, however, no concession applies from the testator’s date of death.
Where a foreign resident is a beneficiary under a foreign resident’s Will; the beneficiary and trustee of the estate will not be entitled to the main residence exemption accrued by the deceased.
Any beneficiary who is not entitled to the exemption will be taxed on the full CGT amount; the cost base is calculated from the date of purchase in determining CGT for a property purchased by the deceased after 20 September 1985.
If a beneficiary inherits a dwelling and later sells it they may be exempt from CGT depending on the date the deceased acquired the property, when they died, if the property has been used to produce income (such as rent) and whether the deceased was an Australian resident at the time of death.
If a beneficiary is not exempt, or only partly exempt, the cost base of the dwelling must be calculated to work out the capital gain. The cost base may be the value of the dwelling when the deceased acquired it or the value when they died, depending on where the beneficiary lives. The same exemptions apply if a CGT event happens to the trustee of a deceased estate.
If you inherit an Australian residential property from a deceased person who had been a foreign resident for more than six years at the time of their death, any main residence exemption that the deceased person may have accrued for that dwelling is not available to you as the beneficiary. This means you may have to pay CGT when you sell or dispose of the property.
If you inherit an Australian residential property and you have been a foreign resident for more than six years when you sell or dispose of the property, you can’t claim the main residence exemption for your ownership period.
What does this mean?
Foreign residents who acquired their main residence before 9 May 2017 and do not satisfy the new criteria for an exemption,have until 30 June 2020 to dispose of their main residence and apply the full main residence exemption will be liable for the full amount of CGT for any capital gain made.