Unfortunately for non-resident Australian expats and non-residents generally, some two and a half years after first being proposed in the May 2017 Federal Budget (refer 2017 Federal Budget – Expats clear losers), today sees the death knell of the main residence exemption for non-resident Australian expats.
The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 seeking to scrap the main residence exemption for Australian expats was passed into law today by the Senate, without even so much of a peep (from either party).
The Labor spokesperson in the Senate, Senator Brown from Tasmania stated that Labor supports the Bill, thus removing the main residence exemption for Australian expats effective from 9th May 2017 and from 1st July 2020 for those expats who owned their property just prior to 9th May 2017.
Disappointingly however, Senator Brown stated that although Labor supports the bill, that it won’t actually do much to solve the problem of housing affordability in Australia, which was the very purposes of the bill.
She stated “Labor will support these measures. We believe that they are worthy of our support, but they’re not going to do anything meaningful to reduce pressure on housing affordability”.
It’s disappointing therefore that Labor supported the Bill, particularly as they believe son’t actually solve the very problem that the Bill was introduced to resolve!
So now that the Bill has been passed by the Australian government without amendment, it now awaits Royal Assent. This will of course be a formality and so these atrocious new rules are here to stay.
What are the changes?
In our last article on this topic we outlined the changes to the Main Residence Exemption – see link below:
Main residence CGT exemption abolished for Aussie expats
But a brief summary of the changes are as follows:
Non-residents will be denied the main residence exemption on the gains made from the sale of their former homes from 9th May 2017, resulting in capital gains tax being levied at high non-resident tax rates, on the full gain made on the sale of their home from the date they purchased the property to the date of sale.
For those non-residents who owned their property prior to 9th May 2017, the rules will take effect from 1st July 2019, meaning that you will still be eligible for a main residence exemption if you sell your property prior to 30th June 2020.
However, for those non-residents who purchased their main residence AFTER 9th May 2017, the rules take effect already. This means that you are not eligible for any main residence exemption, even where you sell your property before 30 June 2020.
The government will allow a departure from these rules but only in limited cases where one of the following life events occurs to a person within a continuous period of six years from when they became a non-resident. If one of the following life events occurs within that 6 year period, they will be entitled to a capital gains tax excemption on the disposal of their main residence if:
- The expat, their spouse or child (under 18 years of age) is diagnosed with a terminal illness
- The expat, their spouse or child (under 18 years of age) dies
- The expat divorces or separates from their spouse and asset is distributed between both parties
How will I be affected?
Sadly, this denial of the main residence exemption will punitively affect the vast majority of our clients, and many hundreds of thousands of Australian expats more who are living and working around the world because if you sell that property whilst you are a non-resident, you will now be taxed on the sale of your former home back to the date that you originally purchased the property, you won’t have access to the 6-year absence rule like before and nor will you be able to utilise any other allowable adjustments to reduce your taxable gain.
As such, these new rules are fundamentally unfair resulting in harsh outcomes for Australian expats. We believe that as a result, these rules now will force many long-term Australian expats into making major life changes and financial decisions much sooner than they ever anticipated as the consequences of this legislation are potentially so harsh.
For example, many non-resident Australian expats will now need to consider:
- selling their family homes much earlier than planned before 30th June 2020 (but only if they owned that home just prior to the original announcement of this legislation on 9th May 2017),
- cutting short their overseas expatriate role and returning home to Australia much earlier than they originally anticipated, particularly where they are forced by circumstance to consider selling their former home (e.g. in the case where they need the funds for an emergency etc); or
- deferring the sale of their family home until they eventually return to Australia, even where this is not convenient.
Additionally, with the introduction of this legislation, it’s also possible that overseas and Australian employers may find it more difficult to hire and relocate Australians to work overseas, particularly if those Australians believe that they may be required to sell their properties whilst they live and work overseas.
It’s also worth noting that for those Australian expats who are forced by circumstance to sell their former homes in Australia, at a minimum they can expect to be slugged a huge amount of tax of at least 32.5% and realistically they’ll be slugged even more where they’ve made significant gains due to recent increases in Australian property prices.
What are our views about the scrapping of the main residence exemption for Aussie expats?
In our view, this legislation has been poorly considered and poorly written as it in effect taxes non-residents retrospectively back to the date that they purchased the property and because it creates inequitable outcomes for taxpayers – take a look below:
The law is highly punitive because of it’s retrospective application
The explanatory memorandum to this legislation stated that the bill was drafted to take ensure that taxpayers were not adversely affected by a retrospective change to the main residence exemption before, being made public.
However in our opinion, this is disingenuous because the practical consequence of scrapping the main residence exemption is a retrospective denial of the exemption dating to as far back as the start of CGT in September 1985.
Why? Because government fails to understand is that by abolishing the main residence exemption for non-resident Australian expats, the gain will be calculated all the way back to the original cost of the asset, potentially to as far back as 1985.
Thus, in effect, this legislation does exactly what the government said that it would not do, and that is, adversely affecting Australian expats retrospectively. Given that Australian expats will be taxed on the gains dating back to the date that the property was originally purchased, the effect is indeed retrospective!
Following on from this, an unintended consequence of this legislation is that expats will now be required to keep meticulous records of their purchase costs and annual holding costs of the property in order to minimise any potential gains.
The problem however is that, as there was not the same need to keep these records to the same degree previously, many expats simply will no longer have these records and so it’s the capital gains tax levied on the sale of main residence will be much larger than should otherwise be the case because they won’t be able do deduct their holding costs and other costs as they noo longer have their receipts!
Inconsistent outcomes
As this legislation does not allow any recognition for the usage of your home as your main residence, the legislation unfairly results in inconsistent outcomes for similar scenarios.
Consider this.
Scenario 1: Imagine that you purchased a property in Sydney, whilst you were living overseas as a non-resident. You rented that property out in Australia for 1 year before returning to Australia and moving into that property for a further 4 years. Assume that you then sold that property (whilst you were a resident of Australia) at exactly year 5, making a $500k capital gain. Based on that example you would be entitled to a 80% exemption from tax under the main residence exemption and so $400k would be tax free, leaving you with a $100k taxable gain.
Scenario 2: Now, assume the opposite. Imagine that you acquired that very same property whilst you were a tax resident of Australia, you lived in the property as your main residence for 4 years before leaving Australia to take up a permanent role overseas at which time you became a non-resident. Assume that you then sold your property after 1 year at exactly year 10) and made the same capital gain of $500k.
Under the legislation passed today, you would NOT be entitled to any main residence exemption exemption under the proposed measure and so the full $500k would be taxable at non-resident rates resulting in whopping $173,600 of additional, unexpected tax payable!
As you can see, this is extremely harsh and punitive. Each scenario involved the exact same usage and length of time that the property was used as the person’s main residence, albeit in reverse.
In our view, the outcome should not be any different. However due to the lack of consideration by the government and the poor drafting of the legislation, the results are inconsistent, unfair and vastly different.
What the government should have done
This new legislation is both unfair and ill-considered as it retrospectively taxes Aussie expats back to the date that they acquired their property. It also produces inconsistent and inequitable results and in so doing, it punishes Australian expats, simply for pursuing a life and a career overseas, sometimes not even of their own undertaking but because their employer’s required them to move overseas for their jobs.
As such, we and others in the Australian tax and accounting industry believe that the government should have recognised the historical usage of your main residence by prorating the exemption to recognise the period that you lived in the property and the period that you remained a tax resident of Australia.
Robyn Jacobson, a tax expert from the tax training company, Tax Banter (whose services we use here at Expat Tax Services to train our team), agrees and stated in a recent article, Government called to consider apportionment for CGT main residence exemption bill that:
“This could either be done by prorating the days that you are a resident versus the days you’re a non-resident, or by resetting the cost base to market value so that only the gain that arises from the days of non-residency would be taxed,” she said.
“Both of those suggestions are based on existing provisions in the tax law.”
We agree with Robyn. We believe that the government should allow the taxable gains to be pro-rated as it is would produce the fair outcomes by eliminating the retrospective effect of these measures and by eliminating the inconsistent and inequitable results generated by the legislation as have been passed today.
Here’s some case studies to explain how these rules will affect non-resident Australian expats
Example 1 – CGT applies
James purchased his new home on 15 September 2007 for $550,000. He moved into his home as soon as he could after settlement.
On 5 May 2017 James moved overseas to take up a new job in Singapore and although he tried to sell his property before he left to take up his new role overseas, he was not able to sell the property in time before he left.
Based on James’ circumstances (not explained here) he met the criteria for being a non-resident for Australian tax purposes from 5 May 2017.
Finally, a few years later, on 15 August 2020, while resident in Singapore, he sold his home for $1,550,000.
Sadly, as James was a non-resident when the property was sold, the whole profit (totalling $1,000,000) was subject to capital gains tax at Australia’s non-resident tax rates of up to 45%. Had James sold the property before 30 June 2020, the whole of the profit would have been tax-free.
Unfortunately, although the property was James’ main residence for most of the period, that fact is totally ignored because CGT applies on the full amount of the gain.
This is a very harsh result.
Example 2 – CGT does not apply
Christine bought her home in March 2004 and moved straight in. She lived in her home until September 2008 when she moved to the United States.
From September 2008 until June 2013 she lived in a rented apartment in San Francisco before moving back to Australia
In June 2013 Christine returned to Australia and again lived in her house from that date until she moved overseas again to Dubai until 16 August 2017. While she was in Dubai, she again leased her home to tenants.
When she returned to Australia in August 2017 she lived in her house again until she sold her home in July 2020.
There is no CGT on the sale because at the time of the sale, Christine was a tax resident in Australia and for each period that she lived overseas she was temporarily absent from her property for less than 6 years (each time).
Want to learn how you will be affected?
It would be an absolute tragedy if you were to inadvertently be slugged with a massive capital gains tax bill simply because you did not understand how these rules apply.
If you’re an Australian expat who own a property that was your main residence in Australia, or if you are considering taking up a new role overseas, then it’s critically important that you understand how these new rules will affect you.
If you want to understand how these rules will apply to you, we highly recommend that you book a tax consultation with us, or with any other specialist expatriate tax firm so that you are not at risk. If you wish to book an appointment with us, please feel free to do so via our Book an Appointment page so that you can learn how these changes will affect you.
Need some assistance?
Navigating tax and other obligations can be a time-consuming and difficult process even when you are living in Australia, but even more so when you are living and working overseas! If you’d like some assistance with your taxes or advice about any other tax issue that may affect you, please reach out to our team today.
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Comments 2
Hi Shane
Thanks so much for writing this! Depressing as it is, I really appreciate knowing it.
Could you possibly clarify if / how this affects the sale of investment properties owned by Australians living abroad?
Many thanks!
Author
Hi Nikki,
Thanks for your message – I’m sorry to be the bearer of bad news on this topic.
Regarding investment properties, this new legislation won’t affect how your investment property (i.e. a property that was not your main residence) is taxed. So let’s perhaps run through a quick refresher – see the three scenarios below:
Scenario 1 – investment property purchased and sold whilst you were a non-resident
If you purchased your Australian investment property whilst you were a non-resident, and subsequently sold that property as a non-resident, there are no discounts, no exemptions available to you. The full amount of the gain will be taxable at non-resident rates.
Scenario 2 – investment property purchased while you were a resident and sold whilst you were a non-resident
If you purchased your Australian investment property whilst you were a tax resident of Australia, and subsequently sold that property as a non-resident, you may be entitled to a partial 50% CGT discount on the gain. Usually, if a tax resident of Australia sells an asset that they have held for at least 12 months, they will be entitled to reduce the taxable gain by 50%, meaning that they will only pay tax on half of the total amount of the gains.
In the case where you purchased your Australian investment property whilst you were a tax resident of Australia, and subsequently sold that property as a non-resident, you will only be entitled to the 50% discount for the period that you were a resident butt there will be no entitlement for any period that you are a non-resident.
So, if you were a resident for 2 years and a non-resident for 3 years at the time that you sold the property, 40% of the time you were a resident so therefore, you will be entitled to only 40% of the 50% discount. Thus in this example, your CGT discount would be 20% meaning that if you had made a $200k capital gain, 20% of that (i.e. $40k) amount would be exempt from tax with the balance of $160k to be included in your return and taxed at non-resident rates.
Scenario 3 – investment property purchased while you were a resident, leased to tenants whilst you lived overseas as a non-resident and then sold when you were a resident (after you had returned to Australia)
In this example, let’s assume that you purchased the property and that you were a resident for the first 2 years. Let’s assume that you were a non-resident for the next three years, and that you returned to Australia, regained your Australian tax residency status and exactly 1 year after that date, you sold the property (whilst you were a resident).
In this example, similar to Scenario 2, you would again be entitled to a pro-rata CGT discount based on the days of residency out of the entire time you owned the property. So, in this example we had 2 plus 1 years (i.e. 3 years) of tax residency versus 3 years of non-residency. Since you were a resident for half the time, you will be entitled to half of the 50% discount. Thus you will be entitled to reduce the taxable gain by half of the 50% CGT discount, so by 25%. Thus, if the gain was $200k, 25%, or $50k would be tax-free, with $150k taxable to be included in your return and taxed at resident rates.
As you can see, the main residence exemption and these new rules simply do not apply to any property that was NOT your main residence. But hopefully the explanations above, assist you to understand how your investment properties are taxed for Australian CGT purposes.
Thanks again for your message Nikki.
Cheers
Shane