17 Dec Australian Expats Hit Hard with Property Tax Charge
After two years of headlines and confusion, the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 has now been passed by the Senate and is now only awaiting Royal Assent. Simply put, this means that Australian expats and other non-resident Australian property owners will now lose their entitlement to the Main Residence Exemption.
This now means that Australian expats who already live overseas and own Australian property that they previously lived in, or those looking to move offshore in the short term, have some serious decisions to be made with regard to how they manage their property back home. The deadline for the impact of this change is 30 June 2020, whereby if a property is sold after this date, the Main Residence Exemption will not be granted, however if it is sold prior to this, then you could still be eligible for the exemption.
Before we explore some case studies and purpose of this change, let’s consider how the rules currently work for both Australian tax residents and non-tax residents when it comes to tax on Australian property.
Background of the Main Residence Exemption
Until this amendment was initially announced in the 2017/18 Federal Budget, non-Australian tax residents, whether citizens or otherwise, who had lived in a property, then decided to rent it out upon moving offshore were eligible for the 6-year capital gains tax exemption, just as Australian residents currently are. This is known as the Main Residence Exemption. For example, consider that you lived in a property in Australia that was your main residence for a number of years, moved offshore to Singapore for example, and decided that you would rent out your property to provide some rental income to cover the mortgage repayments and costs of holding your property, sold it 3 years later, you could receive the benefit of the 6-year exemption and pay no capital gains tax (CGT) on your property. This is because you would still be within the 6-year window, assuming that you were deemed to have acquired a new primary residence.
Consider the following example; Let’s assume that John lived in his own home in Melbourne from 2012 – 2015. In April 2015, John receives an offer to move to Singapore with his employer and decides that he wants to rent out his Melbourne property rather than sell it. John then later decides at the beginning of 2019 that he’ll sell the Melbourne property as he’d prefer to take advantage of the zero capital gains tax rate in Singapore and invest the money elsewhere. As he is renting a condominium (apartment) in Singapore, he can seek to claim the Main Residence Exemption for his Melbourne property. As John has rented out the Melbourne property for less than 6 years, by claiming the Main Residence exemption he will not be liable for any Capital Gains Tax (CGT).
Rationale for this amendment
The stated rationale for this amendment to the Bill is to reduce pressure on housing affordability, i.e. to reduce house prices to allow for more Australians to enter the market and achieve the ‘Aussie dream’ of owning your own home. It is difficult to see how this outcome will be achieved, as it’s far more likely that Australian expats with property back at home will simply avoid selling while they’re offshore, leading to a lower supply. Given the increasing number of Australian expats in countries all over the world, many will be affected. Let’s consider how the changes will impact Australian expats.
There will be a transitional period for the change, which means that if you owned property prior to the 9 May 2017, and sell the property prior to 30 June 2020, you will still be eligible for the Main Residence Exemption. If you sell the property after 30 June 2020, then the Main Residence Exemption will not apply, and capital gains tax could be triggered to as far back as the 20th September 1985, when Capital Gains Tax (CGT) was first introduced. Further, if you didn’t own the property on or prior to the 9th May 2017, you will also not be eligible for the Main Residence exemption.
It’s important to note that beyond 30 June 2020, if the property is sold by an expat living offshore, then the capital gains tax liability will be calculated from acquisition. Not only is this incredibly punitive, it could also be an administrative nightmare to track down records of purchase prices, renovation costs and any other fees or costs involved that could reduce the tax liability.
Are there any exemptions?
Sadly, there are very few exemptions to this amendment, with the only major one being that if you have been a non-resident of Australia for less than 6 years, and have suffered a serious life event, you may still be eligible for the Main Residence Exemption. This includes the following key events:
– Terminal medical condition
– Death of a spouse of minor child
-Divorce or separation
While not an exemption, there could also be the option for many Australian expats, to wait until they’ve moved back home before selling their property to reduce the potential tax liability.
What should Australian expats do?
Given the complexities of these changes, we would certainly recommend seeking qualified financial and tax advice to consider your options and doing so sooner rather than later. We know that many Australian property owners living offshore will be unaware that these changes have taken place and may be caught facing serious tax consequences beyond 30 June 2020. Seek the right advice and ensure this isn’t you.
Jarrad Brown is an Australian-trained and qualified Financial Planner with Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to Australian expats in Singapore. Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd – No: 200305462G | MAS License No: FA100035-3
General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.
*Please note that neither Jarrad Brown or Global Financial Consultants is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.