Latest Update: 5th December 2019 – Unfortunately today the Federal Government passed the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 into law without amendment, resulting in the scrapping of the main residence exemption for non-resident Australian expats.
To read more about this disappointing turn of events click here: Death of the Main Residence Exemption for Australian expats
Original Article Below:
Transitioning from living in Australia to becoming an expat in an overseas posting is fraught with many decisions, and one that faces every expat is what to do with the life they leave behind.
While concerns like completing your Australian tax return whilst overseas can be handled simply with the help from an expatriate tax firm like ourselves, because of the emotion involved, the idea of selling your home isn’t so straight forward.
No one can best decide whether you should sell your home but you; however, in this article we have put together the pros and cons of selling your home upon becoming an expat living and working overseas.
Pro: You have somewhere to come home to
When you become an expat, it’s unrealistic to expect that you will never return home to Australia. The vast majority of Australian expats eventually intend to return to live in Australia at the conclusion of their overseas adventure, no matter how long that may be.
With the home you already own, you will maintain a foothold in the Australian property market and will have a comfortable, familiar space to return to, saving you money on Capital Gains Tax (CGT) as none is triggered until you actually sell your property. On this note, you may not be liable for any CGT at all if your property is subject to the Main Residence Exemption and if your property is sold within six years of when it first generated income for you (i.e. such as when it was first leased to tenants). Beyond the six years, your main residence is likely to be partially CGT-free and partially subject to tax based on the length of time that you have owned the property as your main residence (the time you have lived in the property plus 6 years if applicable) versus the total time owned.
Caution: Please note that if you leave your home vacant, and regularly or semi-regularly return home to Australia and stay in your home, this increases the risk of you remaining as a tax resident of Australia, thus subject to Australian tax on your worldwide income (not always a good idea).
Maintaining a home in Australia that is always available for you to use (regardless of the extent to which you use it), maintaining and storing all of your furniture and personal effects in the home are strong factors for tax residency in Australia.
It should also be noted that returning to Australia and staying in your home will be seen to be ‘returning home’ as opposed to ‘returning to Australia to visit’ such as is the case when you travel to Australia and stay in temporary accommodation or with family and friends.
The Takeaway: Think carefully about what you intend to do with your home so that you minimise your taxes (both income taxes and capital gains taxes), and so that you minimise the risk of remaining an Australian tax resident where you wish to be a non-resident.
Con: Keeping the property can have unintended tax conseuqences
Moving overseas with the entire family can be an expensive exercise, both in terms of the cost of the move itself and of the resultant tax consequences.
On this note it is not only important to consider the Australian tax consequences of your move, but of the tax consequences for the country that you are moving to. For example, when an Australian expat moves to the United States and becomes a Resident Alien for US tax purposes, US capital gains tax laws allow the US to tax the person on the disposal of their Australian main residence, even if 100% of the gain was made prior to the person entering the US.
This can be costly because although the Australian government may allow a 100% CGT Main Residence Exemption meaning the property may be completely tax free in Australia (as at the dat of this article), the US only allows a Main Residence CGT exemption of up to USD $250,000 per person (listed on the title).
So if you were the sole title-holder and owned a property with USD$1m of gains, although that gain may be totally exempt for Australian CGT purposes, you would be required to pay CGT in the US on USD$750k of those gains . . . not a brilliant result!
Additionally, in recent times, the Australian government has sought to impose more punitive legislation on non-resident Australian expats (such as the removal of the 50% CGT exemption from 8th May 2012 and in more recent times, the government has proposed, but as of the date of this article, have not passed legislation, to remove the Main Residents Exemption for non-resident Australian expats. With all that in mind, in some cases, it is better to seek advice from a specialist expatriate tax firm and consider whether you should sell your property before you go.
Pro: You can transform your home into an investment property
Selling your home isn’t your only option as an expat, and the advantages of transforming your home into an investment property are highly alluring.
With consultation with real estate agents and investment property managers, your home may be rented out during your stay, allowing you the flexibility to return home when the time is right. Additional income is a bonus and something you can legally incorporate into your Australian tax return as an expat.
Bear in mind however that the income that you earn from your family home may be subject to tax, not only in Australia but in the country that you are moving to. In this instance it is important to understand not only the income tax consequences for both countries, but the potential Capital Gains tax consequences for both countries, and the effect of any Double Taxation Agreement (where applicable). Before making such a decision, it’s highly recommended that you professional advice.
Con: No timeframe for your return
Some expats are lucky enough to know how long their overseas adventure as an expat will last for and have defined time frame for their return to Australia.
However, most expats don’t have this luxury and can’t always predict when they will be ready to move home and resume their Australian life.
It’s this type of unpredictability that poses some difficulties. Generally the longer that a person lives away from Australia, the greater are the tax consequences for any future sale of their family home and or other investments. As mentioned above, the loss of the 50% CGT discount when a person is a non-resident has the effect of ramping up the ultimate CGT liability when the person sell’s their Australian property. Similarly, as the government have scrapped the main residence CGT exemption if your home is sold whilst you are a non-resident you will be slugged with capital gains tax on the total gain that you have made on that property from the very first day that you purchased the property!
To read more about the scrapping of the main residence exemption for non-resident Australian expats, click here: Death of the Main Residence Exemption for Australian expats
As you can see, there is a lot to consider and sometimes, when becoming an expat, making the right choice for you isn’t always clear.
It’s for these reasons and more, that we highly recommend that any Australian that is considering becoming an expat in the near future, invest some time and money by booking an ‘Outbound Expat’ tax consultation with a specialist expatriate tax firm like ours or others. Regardless of which firm you choose to seek advice from, booking an ‘Outbound Expat’ consultation will assist you to work through all the issues above and more, and will set you up for success from the get-go!
If you are interested in booking an ‘Outbound Expat’ tax consultation with us, contact us today, or alternatively navigate to our book an appointment page where you can book that appointment (and others) online.