Australian Expats, Property and CGT
Navigating the complexities of financial obligations and opportunities across borders is a nuanced task, especially for Australian expats. The landscape of taxes, particularly Capital Gains Tax (CGT), has undergone significant changes over the years, affecting Australians living abroad in profound ways. This blog post delves into the intricacies of CGT for Australian expatriates, focusing on the Main Residence Exemption and the CGT 50% Discount, and how recent legislative changes impact these areas. Understanding these changes is crucial for making informed decisions about property investments back home, ensuring financial health and compliance with Australian tax laws.
For Australians who never leave their home country, the sale of their real estate can generally enjoy unfettered access to both the 50% CGT discount and, in the case of main residences, the complete main residence exemption.
That was once also the case for Aussie expats. Since 2012 however, these tax breaks have been stripped back for those who spend time overseas. Here we look at
Main Residence Exemption
For those living in Australia, there is an exemption from tax for the gains made on the sale of your main residence. Australia residents are entitled to exemption for the time in residence of the property plus either
a) 6 years of subsequent renting out of that property
b) an indefinite period after moving out
Note however that only one property can ever be treated as your main residence at any given time, so if you move out to another Australian property you will have to select between the two.
Previously the above could also be enjoyed by those selling Australian property whilst living overseas, but that was removed by the Govt by 2020.
Since 2020, if you are non-resident in Australia at the time of a property sale, the CGT main residence exemption will not be available at all. This is regardless of whether the property was previously your main residence.
See ATO Main Residence Exemption
The above can create a situation in which it makes financial sense to delay the sale of your previous Australian residence until you return to the country. The tax saving for doing so could be substantial.
CGT 50% Discount
Capital gains (the profit from the sale of an asset) are added to your Australian income when calculating the tax that you are due to pay in any given year. For assets held for longer than 1 year however, the taxpayer may cut that gain in half before adding to income.
Until 2012 this was the case when selling Australian assets regardless of where you lived, but in that year the discount was removed for periods of non-residence during asset ownership.
The ATO website, in seeking to make concise statements, seems a little misleading on the application of the new rule. At ATO 1 it states as below:
Foreign and temporary resident individuals, including beneficiaries of trusts and partners in a partnership:
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are subject to CGT on taxable Australian property
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aren’t entitled to the 50% capital gains tax (CGT) discount for assets acquired after 8 May 2012.
However, more clarity is given on the application of the law for those who spend time overseas at Treasury 1, where it states that the effect of the new law is to:
‘apportion the CGT discount for discount capital gains where an individual has been an Australian resident and, a foreign or temporary resident, during the period after 8 May 2012. The discount percentage will be apportioned to ensure the full 50 per cent discount percentage is applied to periods where the individual was an Australian resident.’
The latter is confirmed via the calculator that the ATO provides here – ATO 2
You will also be entitled to the full discount in respect of periods of ownership up until 5th May 2012
For those who were non-resident in 2012, there is also scope to use the market value of their property as at 5th May 2012 to calculate their gain instead of using the apportionment method. For brevity, we will not explore these calculation methods in any more depth herein. Suffice to say that the most tax-efficient method will depend on your circumstances, and you should check with us prior to making an election on your tax return (or ideally before selling the property)
Tax Rates
Your effective Capital gains tax rate as a non-resident could also be different when compared to what it will be once you return to Australia, and that can also play a part in establishing your best route forward.
Assuming that you return to Australia and are still working, it is possible that your marginal tax rate will be 45%, and that all chargeable capital gains will thus be taxed at that rate if released once you are home. This would be the case if your annual income sits above $180k
As a non-resident, it is more likely that your marginal tax rate in Australia is 32.5%. Up to $180k of gains could be taxed at a rate lower than 45%, adding one possible reason to favour selling prior to your return.
Conclusion
For Aussie expats who are considering selling their Australian real estate, we would strongly advise you to contact us to discuss the tax implications. That is particularly true in the case of the possible sale of any property that was once your main home.
The financial landscape for Australian expats regarding property investment and capital gains tax is fraught with complexities that require careful navigation. Changes to the Main Residence Exemption and the CGT 50% Discount have significant implications for expatriates’ tax obligations and financial planning strategies. As such, it’s imperative for Australian expatriates to stay informed and seek professional advice tailored to their unique circumstances.
At Chartwell Associates, we specialize in providing comprehensive financial guidance for expatriates, ensuring you’re well-equipped to navigate the intricacies of cross-border taxation and investment. Whether you’re contemplating the sale of your Australian property or seeking to optimize your tax position, our team is here to support you every step of the way.
Don’t navigate these complex waters alone. Contact Chartwell Associates today to discuss your situation and explore your options. Together, we can devise a strategy that aligns with your financial goals and ensures compliance with the evolving tax landscape. Visit our website or reach out directly to schedule a consultation and take the first step towards securing your financial future as an Australian expat.
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