Are you an Australian expat thinking about selling the property you own in Australia? You might want to reconsider your options because the Australian Labor Party has voted through new laws with some extreme changes to Capital Gains Tax.
The idea that could sell your home without any Capital Gains Tax has long been a sacred tax principle, and as Australian citizens, we were all granted a 6-year main residence CGT exemption. This meant we could live in a property for 2 years, then decide to rent it out for 6 years, and regardless of whether were living in Australia or overseas, we could sell the property free of CGT liability for that entire 8-year period. This remains true for Australian residents, but sadly it has all changed for Aussie expats!
Australian Foreign Residents previously enjoyed special CGT exemptions for living overseas, but since May 2017, non-residence will now be charged the full Capital Gains Tax. If you sell a property while you’re an Australian Foreign Resident, you will now be denied the main residence exemption and pay tax on the full gain of the property. The grace period ended on June 30th 2019, so if you didn’t sell your primary residence before then and you’re now living overseas, you will have to pay CGT when you do unless you return to Australia.
Many expats are still unaware of these changes
You’re a non-resident for tax purposes because you’re residing outside of Australia and meet conditions, but now the Government is treating you as though you are a tax-paying resident (minus the benefits) if you decide to sell your property, even if your property was previously the home you lived in and is not an investment property.
For example, if you lived in your Australian property for 10 years before moving overseas, then decide to sell your property 5 years later, you would be taxed on the entire 15-year period from your original purchase price. In the past, this would have fallen within the 6-year main residence CGT exemption, and the entire 15-year period would be free of CGT liability.
What if I ‘pass on’?
If you are a foreign resident for tax purposes when you die, these changes will still affect your personal legal representatives, trustees and beneficiaries of deceased estates, surviving joint tenants, and special disability trusts.
Expat property owners must tread carefully
With this legislation now in place, non-resident property owners must tread very carefully. The Government is sending a clear message to Aussie expats: if you want to buy and sell Australian property, you will have to comply with our harsh Capital Gains Tax rules. Interestingly, if you come back to live in Australia, the Government will allow you to sell the same property free of any Capital Gains Tax liability. So this change only applies if you are not an Australian resident for tax purposes when you sign the contract to sell the property.
This does not affect you if…
Anyone who is an Australian tax resident at the time of selling their main residence will not be affected by the change. Even if you become a foreign resident while owning your main residence, you will not be affected as long as you re-establish your Australian tax residency and are an Australian tax resident when you sell the property. The same applies to New Zealanders and other temporary residents.
Given that expats aren’t given preferential tax-resident treatment, such as the tax-free threshold, they will be paying a much higher rate on the first dollar of income. Aussie expats are paying 32.5% from dollar one!
If you’re planning to move overseas, it’s now best to sell your property before you go, while you still have preferential tax treatment.
Buying property from an expat
If you purchase an Australian property with a market value of $750,000 or more from an expat, you are now required to withhold 12.5% of the purchase price and pay it to the Tax Commissioner. Before the recent legislation changes, this only applied to real estate sales over a value of $2 million, and the tax rate was only 10%.
This enormous change increases the number of foreign residents caught by the regime, and it applies to any contract to sell any Australian real estate after July 1st 2017. Expat sellers will receive a final tax assessment when they lodge an income tax return.
There are 3 clear options for expats wanting to sell
- Sell your property by the June 30th 2020 deadline, to avoid paying CGT on the profit made by the property dating back to the day of purchase.
- Return to Australia and take up your Australian residency to become eligible again for the main residency CGT exemption.
- Defer the sale of your property until you are ready to return to Australia.
If you’re an Aussie expat who owns property in Australia and has been caught up in this regime, then your best option is to talk to a tax specialist who really understands property. ABA are much more than your average accountants; we have over 20 years experience in the Property Investment and the Real Estate industry.
Get in touch today and together we’ll asses all of your options before making any major decisions.