Foreigners lose capital gains tax exemption on main residence

Foreign investors are facing a tax crackdown under the Budget package.

As of Tuesday's budget, foreign and temporary tax residents will no longer be exempt from a capital gains tax when selling their main residence in Australia.

Capital gains tax rules are being tightened for foreign investors, who will no longer be able to access the main residence exemption.

The new rule starts on budget night but will be grandfathered for existing properties until June 30, 2019, suggesting there might be an exodus arise to avoid paying the extended tax.

The Australian tax law is already complex when it is applied to domestic transactions, but its complexity increases when multiple jurisdictions and foreigner taxpayers are involved.

Accountants advise when evaluating Australian property as an investment, a foreign investor needs to fully understand their taxation obligations in both Australia and their own country of residence, which often requires the engagement of tax specialists in both countries.

It is suggested an individual will be an Australian tax resident if they reside in Australia or in Australia for over 183 days in the year of income.

Even though Australian tax residents will be taxed on worldwide income and the individual top marginal tax rate is relatively higher, there had been benefits of being tax residents until the budget announcement, including:

• Access to the 50 percent CGT discount if the CGT asset is held for greater than 12 months;
• Their main residence will be exempt from CGT upon sale (this would generally not apply to non-residents); and
• There is no foreign stamp duty surcharge.

The withholding rate on capital gains tax that foreigners must pay when they sell property will increase to 12.5 percent from 10 percent beginning from July 1.