Expats to lose CGT exemption

Australian expats living overseas are set to lose the capital gains tax exemptions on their family home after new legislation made its way through Parliament.

Australian expatriate holding coin over piggy bank
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Australian expats living overseas are set to lose the capital gains tax exemptions on their family home after new legislation made its way through Parliament.

The changes will see gains that were formerly tax free either in full or pro rata on the period of actual residence, now become fully taxable between 32.5% and 45% if the former residence is sold while the owner is still living overseas at the time of sale.

Leading taxation expert and SMATS Executive Chairman, Mr. Steve Douglas reveals that "this will further compound the tax woes of expats as the former Labour Government had already removed the 50% Capital Gains Tax discount for general assets held more than 12 months since May 2012, meaning any gains made since then are taxable in full."

"There is a grandfathering period in place until June 30, 2020.  So any Expats who decide to sell their property before this date, however,  will hold on to the exemption entitling them to a capital gains tax free allowance for the period the property was their residence and up to an additional 6 years of being a rental property," said Mr. Douglas.

The move is expected to negatively impact more than 100,000 Australian’s working overseas and will generate $581 million for the Government.

The changes have been made under the watch of the Morrison Government, in a bid to ease housing affordability. After the steep price rises in the last five years in cities such as Sydney and Melbourne, there were growing concerns that locals were being priced out of the housing market.

Principal of Prudentia Legal, Fei Wang suggested that the changes put in motion by the Federal Government are short-sighted and may only lead to a very short term boost to housing supply.

“The measures are draconian and may force expats to return to Australia or sell their homes before 30 June 2020,” said Fei Wang.

“This means the property market in the next 4-6 months may see a lift in supply. As a result, property prices in the next six months could be affected negatively.”

Although the legislation has been in the works for a number of years, Mr. Wang believes that the new rules will force many expats who currently qualify for the CGT exemption to quickly make a decision on how to deal with their property. 

“The new changes to the law will be critical for expats who always maintain their properties as their principal residence while they are overseas. For these expats, they may need to take action prior to 1 July 2020,” said Mr. Wang.

“The idea to exclude foreign residents from CGT exemption for the sale of their former Australian family home while living outside Australia emerged in the May 2017 Federal Budget, but the original bill lapsed when the 2019 election was called.”

“The Government’s main intention is to ensure that only Australian residents for tax purposes can access the exemption, and to improve housing affordability by implementing stronger rules for foreign residents owning Australian housing.”

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Serious life event exceptions

The changes mean that taxpayers who are worried about their eligibility for CGT exemptions will be forced to either sell their dwelling before 30 June 2020 and claim CGT exemptions or sell after 30 June 2020 and pay CGT on the full amount, unless a “life event” occurs within six years.

According to Mr. Wang, a life event is considered to be a terminal medical condition, death or a divorce or separation. However, not all expats will be able to meet the criteria in the case of such an event.

“To qualify, the individual must have been a foreign resident for a period of six years or less.”

“A person who, at the time of the CGT event, has been a foreign resident for a continuous period of more than six years is considered an excluded foreign resident and is not eligible for the exemption even if such life events occur.”

Additional cost burden

Another issue facing expats is that if they choose to sell their property prior to 30 June 2020, they will be required to work out the cost base and running costs of owning the property, which could potentially date back to when CGT was first introduced in the 1980s.

“Australians who acquired their property during the 1990s or 1980s will have a difficult time collecting all the records of costs for the property when they work out their cost base,” said Mr. Wang.

“Therefore, practically speaking, for property owners who decide not to sell before the end of the grandfathering period, may face the hardship of establishing their cost base. Acquisition costs might be easy to work out, but the maintenance and improvements costs to the dwellings might be hard to establish.”

New rules outlined

SMATS Executive Chairman, Steve Douglas outlines the new rules below:

Circumstance Previous Law Impact of New Changes
You have never lived in the property and it was always rented No capital gains tax free concession for principal residence No change
You previously lived in the property as a tax resident before moving overseas and becoming non resident for tax purposes and don’t sell the property until AFTER YOU RETURN TO LIVE IN AUSTRALIA PERMANENTLY Period of time lived in the property plus up to six years of rental period is tax free as your principal residence. You may need a valuation of the property at the time you moved overseas if you do not move back in within 6 years. No change PROVIDED you ensure you have genuinely moved back to Australia as a tax resident prior to selling the property.
You previously lived in the property as a tax resident before moving overseas and becoming non-resident for tax purposes and you sell the property prior to 30th June 2020 (date of signing of contract) The property would be capital gains tax free as your principal residence. Note, if rented for a period before you moved in then some capital gains tax would apply. No change if the property was originally acquired prior to 9th May 2017. If acquired between 9th May 2017 and 30th June 2020, and sold while living overseas then no principal residence exemption applies and the capital gain is fully taxable.
You previously lived in the property as a tax resident before moving overseas and becoming non-resident for tax purposes and you sell the property AFTER 1st July 2020 and BEFORE you return to live in Australia The property would have been capital gains tax free on a pro rata basis for the period you lived in it plus up to six years rented. If sold while living overseas, no capital gains tax free period applies UNLESS any one of the following life events occurs within 6 years of departure from Australia:
a You, your spouse or any children under 18 years of age have been diagnosed with a terminal illness;
b You, your spouse or any children under 18 years of age dies;
c The property is sold or transferred in accordance with a formal family divorce or separation agreement

N.B Changes will only affect expats choosing to sell their property, and only if the sale occurs whilst living permanently out of Australia.

In all cases, property owners will be entitled to the capital gains tax free residence concession if they decide to sell their property before 30 June 2020 while living overseas or after returning to live in Australia.

What you should do:

For expat property owners finding themselves affected by the changes, Mr. Douglas suggests the following:

Situation Action to Consider
You intend to sell your former family home sometime during the period you live overseas. Bring forward the sale to prior to 30th June 2020 or wait until your permanent return to Australia. Get your accountant to provide an estimate of the capital gains tax cost if sold while living overseas where no concession applies so you can properly assess the merit of early or deferred sale taking into account market risk, opportunity and requirements you may have for the sale proceeds.
You want to acquire another property as a potential residence on return and sell the former family home to assist with the purchase. Discuss lending options with your bank or finance broker to assess whether you have the capacity to purchase the n

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