Australian Expat Property Owners To Feel Pain From Budget Changes
04/08/2017 – The 2017 Australian Federal Budget didn’t present too many changes for Australian residents however there was a big change that was announced as part of the governments reforms to improve housing affordability that affects Australian expat property owners and that is the removal of the Main Residence Exemption (MRE). We covered off on the announced changes as part of our Australian Federal Budget Aussie Expat Edition webinar and now the government has released an Exposure Draft of a bill to implement these measures. The exposure draft is open for consultation and the closing date for submissions is August the 15th, 2017.
The key points of the Exposure Draft which will affect Australian expat property owners include:
- The Capital Gains Tax (CGT) main residence exemption will be denied from 7:30pm (AEST) as at the 9th of May 2017 for foreign residents (including Australian expats).
- There will be no apportionment of the Main Residence Exemption taking into account the number of days of ownership over the whole period of ownership.
- Existing properties held by Australian expats as at the 9th of May 2017 will be grandfathered until the 30th of June 2019.
Up until this announcement Australian expats who lived in a Australian property as their principal place of residence (PPR) could move overseas, rent the property out and had up to 6 years in which they could sell the property without accruing any capital gains tax (CGT). The other option that Australian expats had was they could move overseas, not rent the property out and they received an unlimited period in which they could sell the property free of CGT. This rule was called the absence rule.
Examples Of How This May Affect Australian Expat Property Owners
Lets look at a couple of examples provided by the government of how these changes may affect Aussie expats:
Example 1 – Main Residence Exemption Denied – Australian Property Sold Whilst Classified As a Non-Resident for Tax Purposes
Vicki acquired a dwelling on 10 September 2010, moving into it and establishing it as her main residence as soon as it was first practicable to do so.
On 1 July 2018 Vicki vacated the dwelling and moved to New York. Vicki rented the dwelling out while she tried to sell it. On 15 October 2019 Vicki finally signs a contract to sell the dwelling with settlement occurring on 13 November 2019. Vicki was a foreign resident for taxation purposes on 15 October 2019.
The time of the CGT event for the sale of the dwelling is the time the contract for sale was signed, that is 15 October 2019. As Vicki was a foreign resident at that time she is not entitled to the main residence exemption in respect of her ownership interest in the dwelling.
Note: This outcome is not affected by:
• Vicki previously using the dwelling as her main residence; and
• the absence rule in section 118-145 that could otherwise have applied to treat the dwelling as Vicki’s main residence from 1 July 2018 to 15 October 2019 (assuming all of the requirements were satisfied).
Example 2 – Main Residence Exemption Applies – Australian Property Sold Whilst Classified As a Resident for Tax Purposes
Amita acquired a dwelling on 20 February 2003, moving into it and establishing it as her main residence as soon as it was first practicable to do so. On 15 August 2020 Amita signs a contract to sell the dwelling and settlement occurs on 12 September 2020.
Amita used the dwelling as follows during the period of time for which she owned it:
• residing in the dwelling from when she acquired it until 1 October 2007;
• renting it out from 2 October 2007 until 5 March 2011 while she lived in a rented home in Paris as a foreign resident (assume the absence provision applies to treat the dwelling as her main residence);
• residing in the dwelling and using it as a main residence from 6 March 2011 until 15 April 2012;
• renting it out from 16 April 2012 until 10 June 2017 while she lived in a rented home in Hong Kong as a foreign resident (assume the absence provision applies to treat the dwelling as her main residence);
• residing in the dwelling from 11 June 2017 until it was sold.
The time of the CGT event for the sale of the dwelling is the time the contract for sale was signed, that is 15 August 2020. As Amita was an Australian resident for taxation purposes at that time (as she had re-established her Australian residency) she is entitled to the full main residence exemption for her ownership interest in the dwelling as it is, or is taken to be, her main residence for the whole of the time that she owned it.
Example 3 – Partial Main Residence Exemption Denied – Australian Property Sold Whilst Classified As a Non-Resident for Tax Purposes Before the 30th of June 2019
Terry acquired a dwelling on 20 August 2010. On 13 November 2019 Terry signs a contract to sell the dwelling and settlement occurs on 11 December 2019. At this time he was a foreign resident.
Terry used the dwelling as follows during the period of time for which he owned it:
• renting it out from when he acquired the property until 5 June 2011;
• establishing the dwelling as a main residence and residing there from 6 June 2011 until 17 June 2019; and
• leaving the property vacant from 18 June 2019 until it was sold. From 19 June 2019 Terry resided in London.
The time of the CGT event for the sale of the dwelling is the time the contract for sale was signed, that is 13 November 2019. As Terry was a foreign resident at that time he is not entitled to the main residence exemption in respect of his ownership interest in the dwelling, even though he used the dwelling as his main residence for part of the time that he owned it.
What Are The Estate Planning Implications From The Announced Changes
The announced changes to the Main Residence Exemption (MRE) will also have estate planning implications for Australian expats. As it stands, if you are the beneficiary of an estate and the deceased was a resident of Australia for taxation purposes at the time of death then the beneficiary will receive the benefit of the deceased accruing the main residence exemption. Under the announced changes, all depending on if and when you sell the property, and what your tax status is at the time, will determine whether the Main Residence Exemption in full may or may not apply.
An example of where an Australian expat may receive a partial benefit of the Main Residence Exemption as a result of an inheritance is as follows:
Con acquired a dwelling on 7 February 2001, moving into it and establishing it as his main residence as soon as it was first practicable to do so. He continued to reside in the property and it was his main residence until his death on 9 August 2017.
Jacqui, Con’s daughter, inherited the dwelling following Con’s death. Upon inheriting the dwelling, Jacqui rented it out. It was not her main residence at any time. On 25 January 2021 Jacqui signs a contract to sell the dwelling and settlement occurs on 23 February 2021.
Jacqui resides in Buenos Aires and is a foreign resident for the whole of the time she has an ownership interest in the dwelling. Jacqui is entitled to a partial main residence exemption for the ownership interest that she has in the dwelling at the time she sells it, being the exemption that accrued while Con used the residence as his main residence (7 February 2001 until 9 August 2017).
She is not entitled to any main residence exemption that she accrued in respect of the dwelling (9 August 2017 until 25 January 2021). This is because she was a foreign resident on 25 June 2021, the day on which she signed the contract to sell her ownership interest, which is the day on which the CGT event occurred.
Note: Jacqui will need to apply section 118-200 of the ITAA 1997 to work out the amount of the capital gain or loss that she realises from the sale of the ownership interest in the dwelling.
If Jacqui had instead sold the dwelling on or before 9 August 2019 she would have been entitled to a full main residence exemption. This is because the whole of the main residence exemption would have, or would been taken to have, accrued from Con’s use of the residence. This includes the two year period following Con’s death.
The reverse may also apply if you were to die overseas and your beneficiary(s) were Australian residents as can be seen in this example:
Edwina acquired a dwelling on 7 February 2011, moving into it and establishing it as her main residence as soon as it was first practicable to do so. Edwina used the property as follows:
• residing in the dwelling until 25 September 2016;
• renting the property out from 26 September 2016 at which time Edwina moved to Johannesburg.
Edwina passed away on 20 January 2018. At this time she was a foreign resident for taxation purposes. Rebecca inherits the dwelling from Edwina. Rebecca moves into the dwelling and establishes it as her main residence on 21 January 2018. She continues to reside in it and use it as her main residence until she sells it. She signs the contract to sell the dwelling on 2 February 2020 (at which time she is a resident of Australia for taxation purposes) with settlement occurring on 2 March 2020.
The deceased estate main residence exemption provisions apply to Rebecca’s sale of the dwelling as follows:
• the period that Edwina owned the dwelling (2,539 days) is treated as non-main residence days (as Edwina was a foreign resident at the time of her death); and
• the period from when Rebecca moved into the property until she signed the contract for sale (the date of the CGT event) of 742 days are main residence days as she used the property as her main residence for the whole of this time.
The capital gain or loss amount is the amount that the capital gain or loss would be if no main residence exemption applied. Assume, for the purposes of this example, that the capital gain amount for the dwelling is equal to $100,000.
Therefore Rebecca’s capital gain or capital loss will be equal to:
= CG or CL amount x (Non-main residence days/Days in ownership period)
= $100,000 x (2,539/3,281)
Rebecca must include a capital gain of $77,385 in her assessable income for the 2019-20 income year.
What Do Australian Expats Need to Consider Over The Next Two Years
Australian expat property owners who already live overseas as of the 9th of May 2017, and claiming the Main Residence Exemption, you will need to consider your options leading into the expiry of the grandfathering which occurs on the 30th of June 2019. Australian expats will need to seek professional financial advice as to whether to keep your property, and any potential estate planning implications, as the property transitions into the new rules.
The government has provided the following example of an Australian expat selling their property before the 30th of June 2019 to take advantage of the rule change:
Samantha acquired a dwelling on 13 April 2013 moving into it and establishing it as her main residence as soon as it was first practicable to do so. On 10 January 2019 Samantha signs a contract to sell the dwelling and settlement occurs on 7 February 2019.
Samantha used the dwelling as follows when she owned it:
• residing there until 15 September 2016; and
• renting the property out from 16 September 2016 until it was sold (assume the absence provision applies to treat the dwelling as her main residence during this later period).
From 16 September 2016 Samantha resided in rented accommodation in Bahrain and was a foreign resident.
The CGT event for the sale of the dwelling occurs when the contract for sale was signed, that is 10 January 2019. As Samantha held her ownership interest in the dwelling on or before 9 May 2017, she continued to own it until it was sold and it was sold before 1 July 2019 she is entitled to the main residence exemption under the transitional rule.
The Takeaway For Australian Expat Property Owners
As you can see from the above article, the proposed rules don’t take into account the period you owned the property as a resident, just where you are at the time of the sale. You could have lived in the property for 20 years, moved overseas for 4 years, sold the property whilst living overseas and have to pay Capital Gains Tax for the whole 24 years – ouch!! The need for a Pre-Departure review for new expats is even more important than ever because the difference in selling a property just before you leave or just after you leave is world’s apart.
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