Legislation has now passed the Australian Parliament that will significantly affect many individuals who are not resident in Australia and who sell a former home in Australia while living overseas.
The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 cleared both House of Parliament yesterday and will now proceed to Royal Assent.
This legislation affects a “foreign resident” – meaning an individual who is not a tax resident of Australia – who sells a property in Australia, and includes Australian citizens and permanent residents who are foreign residents.
As many know already, the sale of a taxpayer’s main residence is exempt from Capital Gains Tax (CGT) when a gain is made on the disposal of a dwelling that has been the individual’s main residence throughout the period of ownership.
There is also a partial CGT exemption if a residential property was the individual’s main residence for only part of their ownership period, or if it was also used to produce assessable income such as rental income during their ownership period.
In addition an individual who does not treat any other dwelling as their main residence can treat a dwelling as their main residence for CGT purposes for up to six years if it is let, or for an unlimited period where the property is not rented out.
Under the new legislation an individual who is a foreign resident and who sells a former Australian main residence at the time of the disposal will no longer be entitled to the main residence CGT exemption, subject to two limited exceptions:
- Where the individual is a foreign resident for six years or less for certain disposals as a result of a “life event”, or
- The disposal takes place during a transitional period, which ends on the 30th of June, 2020.
To qualify for the life event exception the individual must have been a foreign resident for a period of six years or less, and one of the following circumstances has occurred:
- A terminal medical condition of the individual, their spouse or a minor child;
- Death of the individual’s spouse or the individual’s minor children; or
- Divorce or separation of spouse (or former spouse).
Consider Jamie and Vicky, who bought a property in Sydney in March 2000 for A$600,000.
They lived in the property for 15 years until March 2015 when they departed to live and work in Singapore.
They have been letting their Sydney property while living in Singapore.
It is now December 2019. Jamie and Vicky are still in Singapore. They are planning to sell the property which is now worth A$2.6m, and would like to know how the new legislation will affect them.
- If the property is sold in March 2020 the period in which they occupied the property as their main residence will be factored into the capital gains tax calculation.
- The property has appreciated in value by A$2m over a 20 year period.
- It is probable that in addition to the 15 years in which the property was their main residence a period of up to 6 years is available to be treated as a CGT free period of ownership.
- Thus none of the A$2m capital gain will be subject to tax in Australia if the property is sold in March 2020.
- By contrast a disposal of the Sydney property after the end of June 2020 while not tax resident in Australia will mean the gain to be taxed is A$2m – none of the ownership period when the property was occupied as their main residence can be treated as a CGT free period of ownership. Ditto for the subsequent period of up to 6 years.
- Tax on the A$2m is likely to be charged almost wholly at 45% – which amounts to A$900k. This is the additional cost arising from selling the Sydney property after the 30th of June 2020 while non resident.
Steps that might be considered to mitigate the tax payable and to retain the CGT exempt period of ownership include:
- Selling the property before the end of June 2020 – maybe accepting a lower price for the sale, recognising that additional tax approaching A$900k will be payable if the sale takes place at a later date.
- Resuming tax residency in Australia before the property is sold. Note that occupation of the property that is being sold is not required.
- The date on which a contract of sale is signed is usually the disposal date for CGT purposes.
- If neither of the above options is available it might be possible to mitigate the tax payable to a small extent by making concessional contributions to the taxpayer’s superannuation fund in Australia.
In spite of lobbying by many concerned parties the legislation affecting expatriate Australians has not been altered materially and will now affect disposals taking place after the end of June 2020.
Persons likely to be affected may want to have clarity on the tax payable if they sell a property in Australia:
- If not resident in Australia during the current tax year, compared with a sale when not resident after the end of June 2020
- After 30th June 2020 while not resident in Australia compared with a sale having resumed tax residency in Australia.
Foreign residents may also want to establish the steps they should take to resume tax residency in Australia, while also having regard to what a resumption of residency will mean for the taxation of other sources of income.
If you are concerned by the above please feel able to complete the enquiry form on this page. bdh Tax will be pleased to have a no obligation initial chat with you, and to advise our fixed fee for reviewing and advising you.