Thousands of Australian expats have until 30 June to sell their family homes or face being slapped with a hefty tax after the government reversed its position for exemptions. Pedro Gonçalves reports.
The exemption for Australian expatriates has been available since 20 September 1985, and was applicable so long as the home was rented out for no more than six years at a time.
However, CGT tax exemption on their family home is to be scrapped under the A$581m federal government plan. It is estimated that the change will hit the wallets of up to 100,000 Australians working overseas.
If you're looking to sell your property before 20 June 2020 so that you can still be eligible for the CGT main residence exemption, there are quite a few things you'll have to take care of in a short amount of time"
It means that Australians overseas who have not sold their family homes by June 30 will be hit with capital gains tax — regardless of whether the home was rented out or left vacant — and the tax bill would have dated back from the time the owner purchased their home, not the point at which they moved overseas.
For someone who purchased in the late 1980s, that could mean a hefty tax bill.
"The changes to the capital gains tax main residence exemption will make a huge difference for Aussie expats living overseas that own property anywhere in the country," Carson Teh, data analyst from agent comparison site OpenAgent.com.au told International Investment.
"We can expect to see Aussie expats that own property in Australia considering if they should sell before the changes are imposed," he added.
Australians who live abroad and only come to Australia for temporary periods and foreign nationals who have purchased a home in Australia to live in while staying in the country may consider selling.
Foreign residents who already held property on 9 May 2017 will be able to claim the CGT main residence exemption, if they sell their property on or before 30 June 2020.
Pamela Pointon, director of Australian Taxation Accountants explained:
Take for example a fictional retiree, Jim Perri. In 1995, he bought a property in Sydney. After retiring in 2016, he decided to move to Thailand to live out his retirement. He is now a Thailand resident and therefore considered an Australian expat. Jim rents out his Sydney property under the impression that he will be at least partially exempt from CGT as long as it's not rented for more than six years. However, with the new changes, Jim would have to pay CGT dating back to 1995 unless he sells before June 30, 2020 or comes back to Australia to re-establish Australian residency before he sells the property.
In another example, a foreign national, George Ray, had purchased a similar property at the same time. At the time, he was working in Perth and was an Australian resident for tax purposes. He lived in the property as his main residence for two decades before moving back to his home country, Belgium. He is no longer an Australian resident and would not be exempt from paying CGT unless, like Jim, he sells before 30 June 2020 or comes back to Australia to re-establish Australian residency before he sells the property.
Under the new legislation, Jim and George would need to come back to Australia and re-establish Australian tax residency prior to the sale of the property to be eligible for a partial CGT exemption for the time the property was their Australian principal place of residence.
"As every situation is unique, taxation advice and planning needs to be specific to each taxpayer's circumstances. Be proactive. Seek out good taxation advice before making any decisions and in advance of 30 June in the financial year of the property sale," Pointon said.
"If you're looking to sell your property before 20 June 2020 so that you can still be eligible for the CGT main residence exemption, there are quite a few things you'll have to take care of in a short amount of time," Johanna Seton, COO at OpenAgent.com.au told II.
"Navigating the selling process from overseas can be difficult, especially if you haven't kept tabs on the ebbs and flows of the market, or have a gauge of who the best local real estate agents are," she added.
Seton therefore recommends Australian expats looking to sell should do their research.
"You can access data and other important information on your suburb through online property reports and find the top real estate agents in your area through an online agent comparison tool like OpenAgent.
"A real estate agent can then advise you through the entire home selling process," she said.
There are concerns that a high number of Australian expats are unaware that the previous six-year temporary absence rule is no longer applicable and would be caught out by the new rules.
The Australian Bureau of Statistics data shows that there is one Australian resident leaving Australia to live overseas every minute and 53 seconds.
Case studies
Scenario 1
In June 1995, the taxpayer purchased a property in Sydney for A$500,000. The taxpayer lived in the property as his principal place of residence until June 2016. From June 1995 to June 2016 the taxpayer was a resident of Australia for taxation purposes. The taxpayer elected the property as his principal place of residence for Capital Gains Tax Purposes. The taxpayer then left Australia and became a non-resident of Australia for income tax purposes. The market value of the property at June 2016 was A$900,000. The property was rented from June 2016 until July 2020. A property sale contract was signed July 2020 for A$1m. The sale settled August 2020.
Question:
Can the taxpayer claim CGT exemption using either the days pro rata or market value rule when ceasing to be PPR from June 1995 until June 2016 when the property was his principal place of residence, thus limiting the Australian capital gains tax to the period June 2016 until sale.
Answer:
No, the taxpayer is a non-resident at the date of sale and therefore not entitled to claim any capital gains tax PPR exemption.
Scenario 2
In June 2017, the taxpayer purchased a property in Sydney for A$500,000. The taxpayer lived in the property as his principal place of residence until June 2019. From June 2017 to June 2019 the taxpayer was a resident of Australia for taxation purposes. The taxpayer elected the property as his principal place of residence for Capital Gains Tax Purposes. The taxpayer then left Australia and became a non-resident of Australia for income tax purposes. The market value of the property at June 2019 was A$900,000. The property was rented from June 2019 until July 2020. A property sale contract was signed July 2020 for A$1m. The sale settled August 2020.
Question:
Can the taxpayer claim CGT exemption using either the days prorata or market value rule when ceasing to be PPR from June 2017 until June 2019 when the property was his principal place of residence, thus limiting the Australian capital gains tax to the period June 2019 until sale.
Answer:
No, the taxpayer is a non-resident at the date of sale and therefore not entitled to claim any capital gains tax PPR exemption.
How can a foreign resident calculate how much they have to pay in CGT if they don't sell on or before 30 June 2020?
To calculate a capital gain, firstly add up all the cost items, including purchase price, stamp duty paid at purchase, legal fees associated with purchase and sale, and other purchase and selling costs such as real estate agent fees. Add the cost of capital improvements made during ownership. Add holding costs, such as council rates, during periods the property was not available for rental/income earning. The total cost base is then compared to the sale price to calculate the capital gain. Other adjustments may apply, such as depreciation write-back, or if the property was used as a home during a period of Australian tax residency during ownership. Losses brought forward or from other activities may be applied to reduce the gain. Capital gains calculations can be complicated, and penalties can apply for incorrect lodgements, so it is always best to seek out a professional to assist, according to Pamela Pointon, principal of Australian Taxation Accountants.
Once the net capital gain is calculated, it is added to other taxable income. Total taxable income is then taxed at the taxpayer's marginal tax rate. Currently the marginal tax rates for non-residents individuals are 32.5% for the first A$90,000, then 37% up to A$180,000 and finally 45% is applied to the component of taxable income over A$180,000."
The ATO has produced detailed guidance notes which are available here.
What are the legal ways foreign residents can reduce CGT if they do have to pay it?
Capital Gains may be offset against carried forward prior year revenue and capital losses and current year revenue and capital losses. So, if the seller has other rental properties which are negative geared there may be an opportunity to offset the capital gains against their negative gearing tax revenue losses. Where multiple rental properties are owned, the order in which the properties are sold (capital losses and capital gains realised) will be an important consideration. Realising capital losses first means capital losses may be available to offset later capital gains.
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