Foreign Resident CGT and Non-Resident Tax Issues — Australian Assets, Residency and Withholding

Sally Preston

Australian tax residency is central to how capital gains and other Australian tax obligations are assessed. A person’s tax residency may differ from their citizenship, visa status or where they consider “home” to be. This can create unexpected tax issues when a person moves to or from Australia, sells Australian property, owns assets through a trust or company, or receives Australian-source income while living overseas.

Foreign residents are generally subject to Australian CGT only on taxable Australian property. However, the rules are technical, and the tax cost can be significant where the main residence exemption is unavailable, the CGT discount is denied or apportioned, or foreign resident capital gains withholding applies at settlement.

These issues commonly affect expatriates, inbound migrants, foreign investors, Australian citizens living overseas, beneficiaries of trusts and estates, and family groups with cross-border assets. The rules are not always intuitive. A person can be an Australian citizen but a foreign resident for tax purposes, or hold an Australian property that is no longer eligible for the concessions they expected.

Key message: Foreign resident CGT issues should be reviewed before contracts are signed, before residency changes and before assets are transferred. The timing of the CGT event, the person’s residency status and the asset type can materially change the outcome.

Start with tax residency

Tax residency is not the same as citizenship, nationality or visa status. It is a tax law question based on the person’s facts and circumstances. Where a person leaves Australia, returns to Australia, works remotely, maintains a home in more than one country, or has family and business interests across borders, the residency position should be reviewed carefully.

The residency answer matters because Australian residents are generally taxed on worldwide income and gains, while foreign residents are generally taxed in Australia only on Australian-source income and taxable Australian property. A change in residency can also trigger CGT consequences, alter the availability of concessions and affect withholding obligations.

What assets can Australia tax for foreign residents?

Foreign residents are generally taxed in Australia on capital gains from taxable Australian property. This commonly includes Australian real property, certain indirect interests in Australian real property, mining, quarrying and prospecting rights, and assets used in carrying on a business through an Australian permanent establishment.

Indirect interests can be particularly important. A foreign resident may hold shares or units in an entity that derives most of its value from Australian real property. In that case, the asset may still be within Australia’s CGT net even though the foreign resident is not selling the land directly.

Main residence exemption issues

Foreign residents generally cannot claim the main residence exemption for property sold after 30 June 2020 unless they satisfy the limited life events test. If the exemption is not available, there is no partial or apportioned main residence exemption simply because the property was a main residence while the person was an Australian resident.

This is one of the most common traps for Australians who move overseas. A person may have lived in a home for many years, treated it as their main residence and assumed the gain would be exempt. If they are a foreign resident at the time of the CGT event, the exemption may be denied entirely unless the life events test is satisfied.

For property sales, the timing of the CGT event is generally the contract date, not settlement. This means residency status should be reviewed before contracts are exchanged, not after settlement proceeds are received.

CGT discount and residency changes

Foreign and temporary residents are generally not entitled to the CGT discount for gains accrued after 8 May 2012. Apportionment may be relevant where the person was an Australian resident for part of the ownership period. This makes the timing of acquisition, residency changes and disposal important.

This can require a detailed calculation, particularly where the asset was acquired before the person left Australia or where there were periods of Australian and foreign residency during the ownership period. Valuations, dates of residency change and acquisition records can become important evidence.

Foreign resident capital gains withholding

Foreign resident capital gains withholding can apply when taxable Australian real property is sold. Purchasers may be required to withhold an amount from the purchase price and pay it to the ATO unless the vendor provides a valid clearance certificate or variation notice. This is not necessarily the final tax liability, but it can create a significant cashflow impact at settlement.

Withholding is often misunderstood. It is a collection mechanism, not a final assessment of the vendor’s tax liability. A vendor may still need to lodge an Australian tax return to report the capital gain or claim a refund if the withheld amount exceeds the final tax payable.

Common practical scenarios

Australian citizen living overseas sells the former home. The person may assume the main residence exemption applies because they lived in the property before leaving Australia. The outcome depends on their tax residency at the time of sale and whether any exception applies.

Foreign resident sells Australian investment property. The asset is likely taxable Australian property. The vendor should consider CGT, withholding, availability of any discount and whether a variation is appropriate before settlement.

Non-resident holds interests through a company or trust. The direct asset may be shares or units, but the underlying value may be principally Australian real property. The indirect interest rules should be reviewed before disposal.

Person moves to Australia with foreign assets. Becoming an Australian tax resident can change the tax treatment of future gains. Entry valuations and records may be important for assets that later become subject to Australian tax.

Common non-resident tax issues

·       Whether the person is an Australian tax resident, foreign resident or temporary resident.

·       Whether the asset is taxable Australian property.

·       Whether the main residence exemption is available or denied.

·       Whether foreign resident capital gains withholding applies at settlement.

·       Whether the CGT discount is available, denied or apportioned.

·       Whether a double tax agreement affects Australia’s taxing rights.

·       Whether the asset is held personally, through a company, through a trust or through a foreign structure.

Pre-sale and pre-residency planning

Many foreign resident CGT issues are best addressed before the transaction occurs. Once a contract is signed, the CGT event may already have happened. Once residency changes, the availability of concessions may also change. Early advice can help identify whether a clearance certificate, withholding variation, valuation, residency opinion or restructuring review is required.

For expatriates, the timing of a property sale should be considered before leaving Australia or before signing a sale contract while overseas. For inbound clients, the Australian tax impact of becoming resident should be reviewed before foreign assets are transferred, sold or restructured.

For advisers: do not assume the residency answer

Residency should be treated as a threshold issue, not a background fact. Advisers should confirm the client’s tax residency at the relevant time, identify the precise CGT asset, consider whether it is taxable Australian property, review any available concession and address withholding before settlement. A short pre-transaction review can prevent costly surprises.

Need help?

Smart Solutions Tax Advisory can assist with Australian tax residency reviews, foreign resident CGT advice, property sale reviews, withholding variations, non-resident structuring advice and private ruling applications where appropriate.

Disclaimer: This article contains general information only. It is not tax advice, legal advice or financial advice and should not be relied on as a substitute for advice based on your specific circumstances. You should obtain professional advice before changing tax residency, selling Australian assets or entering into cross-border transactions.

Useful links

ATO — Foreign residents and capital gains tax: Foreign residents and capital gains tax | Australian Taxation Office

ATO — Main residence exemption for foreign residents: Main residence exemption for foreign residents | Australian Taxation Office

ATO — Foreign resident capital gains withholding: Foreign resident capital gains withholding | Australian Taxation Office

 ATO — Foreign resident capital gains withholding variations: Foreign residents capital gains withholding variations | Australian Taxation Office