For Australian citizens resident in Australia, the government’s 2017 Federal Budget didn’t present too many changes, according to Brett Evans, founder and managing director of Atlas Wealth Management.
But there were some significant changes in store for Australian expats who own property in Australia, as well as for foreigners who own property there, Evans – whose Queensland-based company specialises in looking after Australian expats around the world – points out.
Below, he considers what the removal of the so-called Main Residence Exemption (MRE) for Australian expat property owners will mean for his clients, and other Aussie expatriates – particularly for those who were already living outside of Oz as of 9 May this year, and who have been claiming the MRE.
As we write this, the consultation period for comments on the government’s plans to implement the Main Residence Exemption for Australian expats who own property in Australia has closed, as of yesterday.
As it stands now, barring any changes as a result of the consultation, the key points of this legislation that will affect Australian expat property owners include:
- The Capital Gains Tax (CGT) main residence exemption will be denied from 7:30pm (AEST) as at the 9th of May, 2017, for foreign residents (including Australian expats)
- There will be no apportionment of the Main Residence Exemption that might take into account the number of days of ownership over the whole period of ownership
- Existing properties held by Australian expats as at the 9th of May 2017 will be grandfathered until 30 June, 2019.
Up until this announcement, Australian expats who lived in an Australian property as their “principal place of residence” – PPR – could move overseas, rent the property out while they were away, and have up to 6 years in which they could sell the property without accruing any CGT.
The other option that Australian expats had was to move overseas but not rent the property out, and thus enjoy an unlimited period in which they could sell the property free of CGT. (This rule was called the “absence rule”.)
Examples of the new reg’s effects on expats
Below are a few examples the Australian government has provided to help us understand how these changes may affect Aussie expats:
Example 1 – Main Residence Exemption denied – Australian Property sold while classified as a non-resident for tax purposes:
Vicki acquired a dwelling on 10 September 2010, moving into it and establishing it as her main residence.
On 1 July 2018, Vicki vacated the dwelling and moved to New York. Vicki rented the dwelling out while she tried to sell it. On 15 October, 2019 Vicki finally signs a contract to sell the dwelling with settlement occurring on 13 November 2019. Vicki was a foreign resident for taxation purposes on 15 October 2019.
In this case, the time of the CGT event for the sale of the dwelling is the time the contract for sale was signed, that is, 15 October 2019. As Vicki was a foreign resident at that time, she is not entitled to the main residence exemption in respect of her ownership interest in the dwelling.
Note: This outcome is not affected by:
• Vicki previously using the dwelling as her main residence; and
• the absence rule in section 118-145 that could otherwise have applied to treat the dwelling as Vicki’s main residence from 1 July 2018 to 15 October 2019 (assuming all of the requirements were satisfied).
Example 2 – Main Residence Exemption applies – Australian property sold while owner was classified as a Resident for Tax Purposes
Amita acquired a dwelling on 20 February 2003, moved into it and established it as her main residence soon after.
On 15 August 2020, Amita signs a contract to sell the dwelling, and settlement occurs on 12 September 2020.
Amita used the dwelling as follows during the period of time for which she owned it:
• residing in the dwelling from when she acquired it until 1 October 2007;
• renting it out from 2 October 2007 until 5 March 2011, while she lived in a rented home in Paris as a foreign resident (assume the absence provision applies to treat the dwelling as her main residence);
• residing in the dwelling and using it as a main residence from 6 March 2011 until 15 April 2012;
• renting it out from 16 April 2012 until 10 June 2017 while she lived in a rented home in Hong Kong as a foreign resident (assume the “absence rule” applies, to treat the dwelling as her main residence);
• residing in the dwelling from 11 June 2017 until it was sold.
The time of the CGT event for the sale of the dwelling is the time the contract for sale was signed, that is, 15 August 2020. As Amita was an Australian resident for taxation purposes at that time (as she had re-established her Australian residency), she is entitled to the full main residence exemption for her ownership interest in the dwelling – as it is, or is taken to be, her main residence for the whole of the time that she owned it.
Example 3 – Partial Main Residence Exemption denied – Australian property sold, while owner is classified as a non-resident for tax purposes, before the 30th of June 2019
Terry acquired a dwelling on 20 August 2010. On 13 November, 2019, Terry signs a contract to sell the dwelling, and settlement occurs on 11 December 2019. At this time he was a foreign resident.
Terry used the dwelling as follows during the period of time that he owned it:
• He rented it out from when he acquired the property until 5 June 2011;
• he moved there, and thus established the dwelling as a main residence, from 6 June 2011 until 17 June 2019; and
• he left the property vacant from 18 June 2019 until it was sold. (From 19 June 2019 onwards, Terry resided in London.)
The time of the CGT event for the sale of the dwelling is the time that the sale contract was signed, in this case, 13 November, 2019. As Terry was a foreign resident at that time, he is not entitled to the main residence exemption with respect to his ownership interest in the dwelling, even though he used the dwelling as his main residence for part of the time that he owned it.
Estate Planning Implications of MRE changes
As the above examples suggest, the announced changes to the Main Residence Exemption will also have estate planning implications for Australian expats.
Whether the Main Residence Exemption will or will not apply, in any given situation, will, under the announced changes, depend entirely on when the individual in question sells their Australia property, and what their tax status is at the time of the sale.
As it stands, if an individual is the beneficiary of an Australian estate, and the deceased was a resident of Australia for tax purposes at the time of death, then the beneficiary will receive the benefit of the deceased accruing the main residence exemption.
Below is an example of how an Australian expat might receive a partial benefit of the Main Residence Exemption, as a result of an inheritance:
Con acquired a dwelling in Australia on 7 February 2001, moving into it and establishing it as his main residence straightaway.
He continued to reside in the property, and it remained his main residence, until his death on 9 August, 2017.
Jacqui, Con’s daughter, inherited the dwelling, on his 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 deemed in this instance, under the new regulations, to be 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 herself 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 the CGT event 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 of the above scenario, 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 have been taken to have, accrued from Con’s use of the residence. This includes the two-year period following Con’s death.
The reverse may also apply if an individual property owner were to die while overseas, and their beneficiary(s) were Australian residents. Below is an example of how this might play out:
Edwina acquired a flat in Sydney on 7 February 2011, and moved into it and established it as her main residence soon afterwards. She then used the flat as follows:
• She lived in it until 25 September 2016;
• She rented it out from 26 September 2016 onwards, at which time she moved to Johannesburg.
Edwina passed away on 20 January 2018. At this time she was a foreign resident for taxation purposes.
Edwina’s niece Rebecca inherits the flat from Edwina. Rebecca moves into the flat, and establishes it as her main residence on 21 January 2018.
Edwina continues to live in the flat, and to use it as her main residence until she sells it. She signs the contract to sell the flat 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 flat as follows:
• the period that Edwina owned the flat (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 flat until she signed the contract for sale (the date of the CGT event) of 742 days are “main residence days”, as she used the flat 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 were applied. Assume, for the purposes of this example, that the capital gain amount for the flat is equal to A$100,000.
Therefore Rebecca’s capital gain or capital loss will be equal to:
= CG or CL amount x (Non-main residence days/Days in ownership period)
= A$100,000 x (2,539/3,281)
Rebecca must include a capital gain of A$77,385 in her assessable income for the 2019- 2020 income year.
What Aussie expats must
consider over next 2 years
Australian expat property owners who were already living overseas as of 9 May of this year, and claiming the Main Residence Exemption will urgently need to consider their options, as the expiration of the grandfathering element of the legislation, which occurs on the 30 June 2019, approaches.
Such Australian expats may wish to seek professional financial advice as to whether to keep their property, and any potential estate planning implications, as the new rules come into force.
The government has provided the following example of an Australian expat selling their property before the grandfathering deadline, on 30 June 2019:
Samantha acquired a property in Australia on 13 April 2013, and moved into it, thus establishing her residency there. On 10 January 2019, she signs a contract to sell the property, and settlement occurs on 7 February 2019.
Samantha used the property as follows when she owned it:
• residing there until 15 September 2016; and
• renting it out from 16 September 2016 until it was sold (assume the absence rule applies to treat the property as her main residence during this later period). (Beginning on 16 September 2016, Samantha lived in rented accommodation in Bahrain and was resident there.)
The CGT event for the sale of Samantha’s property is seen to have occured when the contract for sale was signed, that is, 10 January 2019.
As Samantha held her ownership interest in the dwelling on or before 9 May 2017, she continued to own it until it was sold, and it was sold before 1 July 2019, she is entitled to the main residence exemption under the transitional rule.
The takeaway for Aussie
expats with Oz properties
As you can see, the proposed rules don’t take into account the period you owned the property as a resident, just where you are at the time of the sale.
You could have lived in a property for 20 years, moved overseas for 4 years, sold the property while still abroad – and have to pay Capital Gains Tax for the whole 24 year period you owned the property.
The need for a “pre-departure review” for Australian property owners who are about to move overseas is even more important than ever, because the difference in selling a property just before you leave or just after you leave, as you can see from the examples above, is worlds apart.
To see a copy of the Australian government’s explanatory document on this matter, on the Atlas Wealth Management website, click here.