Proposed changes before parliament in relation to CGT concessions that apply to a principal place of residence, will have significant impacts on deceased estates where the deceased is considered a non-resident as at date of death.
On 9 May 2017 the Federal Government announced, as part of their 2017 budget, a proposal to change the foreign resident capital gains tax regime by denying foreign and temporary tax residents access to the CGT main residence exemption. The change is to apply from the date of announcement, i.e. from 7:30 pm (AEST) on 9 May 2017, and will result in the main residence exemption being removed for non-residents on all new purchases from this date. Existing holdings, acquired prior to 9 May 2017, are to be grandfathered until 30 June 2019.
These proposed changes will significantly impact the CGT treatment and classification of their residence during a deceased’s entire ownership period should they die whilst abroad.
The exposure draft legislation has been included in the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 and forms part of the housing affordability initiative of the current government, and is yet to be enacted.
A comparison of the key features of new law and current law affecting Deceased Estates is as follows:
A trustee of a deceased estate is not entitled to the main residence exemption in respect to an ownership interest in a dwelling of a deceased individual if the deceased was a foreign resident at the time of death.
A trustee of a deceased estate is entitled to the main residence exemption in respect to an ownership interest in a dwelling of a deceased individual who was a foreign resident at the time of death in the same way as if the deceased had been a resident at that time.
A beneficiary of a deceased estate is not entitled to a main residence exemption in respect of to an ownership interest in a dwelling of a deceased individual if the deceased was a foreign resident at the time of death.
A beneficiary of a deceased estate is entitled to a main residence exemption in respect to an ownership interest in a dwelling of a deceased individual who was a foreign resident at the time of death in the same way as if the deceased had been a resident at that time.
Source: Treasury Law Amendment (Housing Tax Integrity) Bill 2017 Explanatory Memorandum
Under section 260-140(2) an executor stands in the same shoes as the deceased and accordingly has the same rights and obligations as the deceased taxpayer prior to their death, such as making tax elections. One such election is the ‘Absence Rule’ relating to the deceased principal place of residence under s118-145 of the ITAA.
Under this provision, a taxpayer, or their legal personal representative has the right to elect to continue to treat a property as their principal place of residence for tax purposes during a period that they are absent from the property.
The Act allows a taxpayer’s principal place of residence to be exempt from CGT indefinitely if it is not being used to produce assessable income, or for a maximum of 6 years if it is income producing. As such, any capital growth during this period would therefore not be taxable on disposal, albeit that the rental income received would be treated as assessable income.
These provisions have historically enabled taxpayers to often utilise the absentee rules when renting out their home and working aboard, whilst living in either rented or employer provided housing. This is because rented or provided accommodation is not considered, for CGT purposes, to be their principal place of residence.
The draft explanatory memorandum (EM) to the ‘Treasury Laws Amendment (Housing Tax Integrity) Bill 2017’, contains examples of how this announcement is intended to apply. The two examples below relate to deceased estates and have been extracted directly from this explanatory material. These examples demonstrate how the already complex area of property in deceased estates is about to become even more so.
Example 1.6 of EM: Foreign resident Beneficiary inherits main residence from a Deceased person — Australian resident at time of death
Con acquired a dwelling on 7 February 2001, moving into it and establishing it as his main residence as soon as it was first practicable to do so. He continued to reside in the property and it was his main residence until his death on 9 August 2017.
Jacqui, Con’s daughter, inherited the dwelling following Con’s death. Upon inheriting the dwelling, Jacqui rented it out. It was not her main residence at any time. On 25 January 2021 Jacqui signs a contract to sell the dwelling and settlement occurs on 23 February 2021.
Jacqui resides in Buenos Aires and is a foreign resident for the whole of the time she has an ownership interest in the dwelling.
Jacqui is entitled to a partial main residence exemption for the ownership interest that she has in the dwelling at the time she sells it, being the exemption that accrued while Con used the residence as his main residence (7 February 2001 until 9 August 2017). She is not entitled to any main residence exemption that she accrued in respect of the dwelling (9 August 2017 until 25 January 2021). This is because she was a foreign resident on 25 June 2021, the day on which she signed the contract to sell her ownership interest, which is the day on which CGT event A1 occurred.
Note: Jacqui will need to apply section 118-200 of the ITAA 1997 to work out the amount of the capital gain or loss that she realises from the sale of the ownership interest in the dwelling.
If Jacqui had instead sold the dwelling on or before 9 August 2019 she would have been entitled to a full main residence exemption. This is because the whole of the main residence exemption would have, or would been taken to have, accrued from Con’s use of the residence. This includes the two year period following Con’s death.
Example 1.7 of EM: Resident Beneficiary inheriting a dwelling from a Deceased person who was a foreign resident at the time of death
Edwina acquired a dwelling on 7 February 2011, moving into it and establishing it as her main residence as soon as it was first practicable to do so. Edwina used the property as follows:
- Residing in the dwelling until 25 September 2016;
- Renting the property out from 26 September 2016 at which time Edwina moved to
Edwina passed away on 20 January 2018. At this time, she was a foreign resident for taxation purposes.
Rebecca inherits the dwelling from Edwina. Rebecca moves into the dwelling and establishes it as her main residence on 21 January 2018. She continues to reside in it and use it as her main residence until she sells it. She signs the contract to sell the dwelling on 2 February 2020 (at which time she is a resident of Australia for taxation purposes) with settlement occurring on 2 March 2020. The deceased estate main residence exemption provisions apply to Rebecca’s sale of the dwelling as follows:
- The period that Edwina owned the dwelling (2,539 days) is treated as non-main residence days (as Edwina was a foreign resident at the time of her death); and
- The period from when Rebecca moved into the property until she signed the contract for sale (the date of CGT event A1) of 742 days are main residence days as she used the property as her main residence for the whole of this time.
The capital gain or loss amount is the amount that the capital gain or loss would be if no main residence exemption applied. Assume, for the purposes of this example, that the capital gain amount for the dwelling is equal to $100,000.
= CG or CL amount * Non-main residence days / Days in ownership period
= $100,000 * 2,539 / 3281
Rebecca must include a capital gain of $77,385 in her assessable income for the 2019-20 income years.
(source: Page 14 Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 – Exposure Draft Explanatory Material).
Section 6(1) of the ITAA 1936, provides the definition of who is considered an Australian Tax Resident. Of note is that an Australian Government employee working abroad would still ordinarily meet the definition of an Australian Tax Resident by their membership of the Commonwealth Superannuation Scheme. This would therefore infer that such an employee may still have access to the ‘absentee rules’ like all Australian tax residents have access to. Accordingly, should they die whist serving abroad, the future sale of their family home in Australia may not fall within these proposed amendments.
Subject to Part IVA [pun intended], it may be prudent for people working abroad, who are feeling unwell, to consider returning to Australia and resuming their Australian Tax Residency as part of their wider estate plan.