Why the need for Professional Tax Advice?
Why are we becoming even more emphatic about the need for expats to obtain prior tax advice before selling property in Australia? It's because:
We are seeing more more examples of expat individuals and families selling properties in Australia and not realising the sometimes awful capital gains tax consequences, detailed below, until after the event.
We are also seeing repeated examples of expats being "advised" that they qualify for "certificates of residency" - with the result that purchasers are not paying foreign residency withholding tax (FRCGW) on the purchase. This is apparently because some advisors do not distinguish between citizenship and tax residency - complicating the tax process significantly and leaving open the possibility of penalties.
Introduction and Background
The "main residence exemption" provides Australian taxpayers with an exemption from capital gains tax (CGT) where their property is, or has been, their "family home", subject to meeting certain criteria. These long-standing provisions mean that capital gains made in relation to a qualifying main residence are typically exempt from Australian CGT.
The exemption applies perpetually to properties that were never rented out, and for a further period of six years from when a property was rented out - this is called the "six year rule". But, the exemption only applies where there is no other property nominated as a main residence and, when a property is re-occupied as a main residence, the six-year exemption period "resets".
Note that new withholding tax rules are scheduled to apply from 1 January, 2025 - with all property owned by tax non-residents subject to Foreign Resident Capital Gains Withholding (FRCGW) provisions at a rate of 15% unless an exemption is available.
Excluding Expatriates from July 1, 2020
On October 23, 2019 the Assistant Treasurer re-introduced legislation which had previously lapsed to:
"remove the entitlement to the CGT main residence exemption for foreign residents other than where certain life events occur during the period that a person is a foreign resident where that period is six years or less"
The previous legislation would have seen the proposed changes come into effect on 1 July 2019 - the new legislation had a later effective date of July 1, 2020 - and the definition of "foreign residents" above included Australian citizens and permanent residents living outside Australia and non-resident for Australian tax purposes.
This is an unnecessary, discriminatory piece of legislation pursued by an LNP Government that was clearly of the view that expats, because they were "disenfranchised" from a voting perspective, could simply be ignored. Australian expatriate groups around the world should take the opportunity when meeting Labor Government representatives to press the view that this is an unfair and inequitable piece of legislation that should be withdrawn although there is no suggestion that a "reset" will occur; indeed, the current Government is continuing with moves to further tighten tax residency rules.
A Summary of the Legislation
The Bill was accompanied by an Explanatory Memorandum (EM), and it summarises some of the key features and impacts of the proposed legislation as follows - and note that the potentially significant impact they can have on an Australian estate where the deceased is a non-resident, or a beneficiary is a non-resident.
| Current Law - applicable from 1/7/2020 | Previous Law | |
|---|---|---|
| Main residence exemption: Individuals | ||
| Generally, individuals who are foreign residents at the time a CGT event occurs to a dwelling (or for a compulsory acquisition, a part of a dwelling) in which they have an ownership interest are not entitled to the CGT main residence exemption. However, individuals who have been foreign residents for a period of six years or less may be able to access the CGT main residence exemption if, during the period of that foreign residency, certain "life events" occurred. | Individuals who are foreign residents are entitled to the CGT main residence exemption in the same way as individuals who are residents of Australia for taxation purposes. | |
| Main residence exemption: Deceased is foreign resident at time of death | ||
| A trustee of a deceased estate is not entitled to the CGT main residence exemption in respect of an ownership interest in a dwelling of a deceased individual if the deceased was an excluded foreign resident at the time of death. A beneficiary of a deceased estate is not entitled to the portion of the CGT main residence exemption in respect of an ownership interest in a dwelling of a deceased individual if the deceased was an excluded foreign resident at the time of death. | A trustee of a deceased estate is entitled to the CGT main residence exemption in respect of an ownership interest in a dwelling of a deceased individual who was a foreign resident at the time of death in the same way as if the deceased had been a resident at that time. A beneficiary of a deceased estate is entitled to the CGT main residence exemption in respect of an ownership interest in a dwelling of a deceased individual who was a foreign resident at the time of death in the same way as if the deceased had been a resident at that time. | |
| Main residence exemption: Beneficiary of deceased estate is a foreign resident | ||
| A beneficiary of a deceased estate is entitled to the portion of the CGT main residence exemption in respect of an ownership interest in a dwelling of a deceased individual if the deceased was not an excluded foreign resident at the time of death. This applies even if the beneficiary is a foreign resident at the time a CGT event occurs to the dwelling. However, the beneficiary is denied any additional component of the main residence exemption that they are otherwise entitled to it in their own right if they are a foreign resident at the time a CGT event occurs to the dwelling. | A beneficiary of a deceased estate is entitled to the CGT main residence exemption in respect of an ownership interest in a dwelling of a deceased individual if the beneficiary is a foreign resident in the same way as individuals who are residents of Australia for taxation purposes. | |
Just to summarise the main aspects of the legislation:
- Individuals who sell their main residence and who were foreign residents at the time of disposal will not be entitled to the main residence exemption - this includes Australian citizens or permanent residents living overseas who were non-residents
- For individuals, the date of the disposal of their interest in a property will generally be the time a contract for sale was entered into.
- The Bill does not provide for any "apportionment" of the main residence exemption. This means that any days the dwelling had been owned as an Australian resident for Australian taxation purposes would be irrelevant in calculating any CGT liability,
- The new legislation provides that a foreign resident may - unless they have been a foreign resident for more than 6 years - nevertheless be able to access the CGT main residence exemption if they satisfy the ‘life events test’ - applicable events include terminal illness, death and divorce.
An example of how the "life events" test is intended to apply is contained within the EM below and note that it may be a very important consideration when it comes to divorces involving Australian expats with main residences in Australia. Subject to meeting all the requirements, it would probably be desirable to have an Australian, rather than foreign, court order requiring the sale of the property to ensure access to the CGT exemption.
| Example 1.8 - Main Residence Exemption – Life Events Test |
|---|
Joan acquired a dwelling on 7 February 2015, moving into it with her spouse John and establishing it as their main residence as soon as it was first practicable to do so. Joan and John are residents of Australia at the time of the purchase of the property. In 2020 they retire to live in the Bahamas and acquire a new residence there. They become foreign residents at this time.They rent out their former Australian residence after they leave Australia and it is not maintained as their main residence in the rental period. In 2021 John dies and Joan decides to sell their former residence. As Joan has been a foreign resident for less than six years at the time of entering into the CGT event for the sale and her spouse has passed away during the period of her foreign residency, she is entitled to a partial main residence exemption for the sale of the residence based on the period that it was her main residence. |
Clear Inequities
In effect, the timing of any sale is of crucial concern, and to illustrate just how inequitable and extreme those timing issues could be, consider Example 1.2 provided in the Explanatory Memorandum below - and note that this Example is almost a complete copy of that which accompanied the original (lapsed) legislation nearly 2 years earlier.
| Example 1.2 - Main Residence Exemption Denied |
|---|
Vicki acquired a dwelling in Australia on 10 September 2010, moving into it and establishing it as her main residence as soon as it was first practicable to do so. 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 15October2020Vicki finally signs a contract to sell the dwelling with settlement occurring on13 November 2020. Vicki was a foreign resident for taxation purposes on 15 October 2020. The time of CGT event A1 for the sale of the dwelling is the time the contract for sale was signed, that is 15 October 2020. 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
|
This example demonstrated that the Government was comfortable with policies which introduced significant "cliff" effects, and to blithely penalise individuals who relocated internationally rather than domestically for work or personal reasons. Remember in this context that any capital gain which occurs whilst you are non-resident will attract "non-resident" tax rates - which start at 32.5% with no tax free allowance.
And what about the option of simply returning to Australia, re-establishing yourself as a resident, and then selling the property - and thereby qualifying for the main residence exemption?
Rather extraordinarily, Paragraph 1.24 of the Explanatory Memorandum to the Act indicates that the general anti-avoidance rules in Part IVA may apply to arrangements that have, "been entered into by a person for the sole or dominant purpose of enabling that person or another person to obtain the [main residence exemption]". How this would apply in practice is hard to understand; there is no prescribed period that an individual would need to return to Australia in order to re-establish residency, it is determined on the facts.
Looking Ahead
We have always supported the continued investment by Australian expatriates in Australian residential property because it represents both a hedge against movements in the local Australian real estate market and adverse currency movements. However, the CGT changes above, together with the withdrawal of the 50% CGT discount for non-residents in 2012, significantly impact any analysis of whether property should continue to be held in Australia.
For expats aged 55 years of age and over selling their Australian main residence remember that it is possible to make "downsizer" contributions of up to $300,000 each into superannuation - subject to meeting certain eligibility requirements. This may introduce significant flexibility in a small number of situations, given recent restrictions on making super non-concessional contributions.
In summary, the Government effectively continues to support domestic mobility while penalising international mobility for its own citizens. The major parties seem to work on the basis that there are "no votes" in the Australian expat community. From a practical perspective, all the Australian expatriates maintaining a main residence property in Australia should consider their position in detail regarding the disposal, or otherwise, of this property, in concert with their tax advisor - and no sale should be made without comprehensive tax advice. Additionally, and it is not immediately obvious, but the lack of the main residence exemption and discount can even make it uneconomic for expats to renovate their Australian properties prior to their becoming tax resident again - again, seek prior advice.
If you would like to arrange professional advice please complete the Inquiry form below providing details and you will be contacted promptly.
