Our international tax series predominantly discusses Federal tax issues relating to non-resident (foreign) beneficiaries or non-resident trustees of a trust. This seventh article of the series focuses on the CGT main residence exemption (CGT MRE) for non-resident beneficiaries of deceased estates.
On 12 December 2019, the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 became law, significantly limiting the ability for foreign residents to claim the CGT MRE on their Australian dwelling. This is subject to some very limited exceptions concerning “life events” or “excluded foreign residents”. Further details can be found here.
The availability of the CGT MRE is based on an individual vendor’s tax residency status at the time of the CGT event (which is usually the time of signing the contract of sale). It is irrelevant that the individual may have been living in the family house as an Australian resident since as far back as 1985.
Implications for deceased estates
The change in law has impacts for beneficiaries of deceased estates.
In general:
beneficiaries who inherit a dwelling from a deceased estate receive a cost base uplift equal to the market value of the dwelling at the time the deceased died; and
no further tax liabilities arise if the beneficiary sells that main residence within 2 years of death.
However, from 1 July 2020, the law changed by introducing the “excluded foreign resident” concept to the CGT MRE analysis, being a person who, at the time of the CGT event, has been a foreign resident for a continuous period of more than six years.
The result is that we have a complex set of provisions to which taxpayers and their advisors should pay careful regard. By way of high-level summary:
The CGT MRE will be available to a dwelling inherited by a beneficiary of a deceased estate if neither the deceased or a beneficiary under the deceased’s will is an “excluded foreign resident” at the time of the deceased death.
The CGT MRE will not be available to a dwelling inherited by a beneficiary of a deceased estate if:
a. the deceased is an excluded foreign resident at the time of death; and
b. the beneficiary is a foreign resident when they dispose of the dwelling (not just an excluded foreign resident).If the deceased was an excluded foreign resident at the time of their death, then the portion of the CGT MRE accrued by the deceased in respect of the dwelling is not available to the beneficiary.
If the deceased was not an excluded foreign resident at the time of their death, the CGT MRE will not apply to any days accrued by the beneficiary while they were a foreign resident.
Where the CGT MRE does not apply, the cost base uplift to the market value on the date of death also does not apply.
Ultimately, beneficiaries who inherit a dwelling from a deceased estate should confirm whether the deceased has been a foreign resident for a continuous period of more than six years at the date of death, as this will impact on their ability to obtain a full CGT MRE. The partial CGT MRE may otherwise be available.
Summary
The CGT main residence exemption rules for dwellings inherited via a will have always been complicated. The new laws introduce an additional tax-residency component to the puzzle, and taxpayers and their advisors should read the rules very carefully. In particular, the timing of testing whether an individual is a foreign resident or an “excluded foreign resident” varies from the date of death of the deceased and the time at which the beneficiary disposes of the dwelling.
We have discussed the tax consequences for non-resident beneficiaries of deceased estates in more details in part 4 of the international tax series.
To discuss or for further information please contact:
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@sladen.com.au
Edward Hennebry
Associate
T +61 3 9611 0113
E: ehennebry@sladen.com.au
Lucy Liang
Graduate Lawyer
E lliang@sladen.com.au
