D-Day for Australian Expat Homeowners is Nigh!
Well as the title reads, Doomsday has finally been set for Australian Expat homeowners. We have been covering this draft legislation amendment for months since its introduction in last year’s budget and such an amendment along with others contained in the housing affordability bill are set to raise $570m in revenue.
The Senate is set to sit down on Monday 18th June 2018 to decide the fate of such proposed legislative change, which is set to have everlasting impacts on Australian expat homeowners by abolishing the main residence exemption (MRE). The transition arrangements allow for such properties currently covered by the MRE to be sold prior to 30 June 2019 without having to pay capital gains tax (CGT).
To read up on the run of events surrounding this extreme legislative change, please see the below links:
The great concern for many is that if such legislation does get passed, there is such a short time period given to do tax planning and sell relevant properties without capital gains tax being attached to such previous main residences. What is also alarming is that they will also abolish the partial main residence exemptions, meaning the time you lived in such a property will count for nothing from a capital gains tax liability perspective.
There is also a layer of complexity when looking at whether to sell and the type of reportable gain that might be due. Currently, previous main residences are technically treated as a different type of asset class to investment properties due to the MRE.
Example – Legislation is put through with no changes.
Jane is an Australian Expat homeowner who sells her previous main residence on 5th March 2020. Jane first purchased her house on 22 August 2009 and became an expat on 25th February 2017. The house was purchased for $350,000 and was sold recently for $865,000. Therefore, her capital gain is $515,000. The new legislation does not allow a partial main residence exemption; therefore this is so far her reportable gain. We also need to consider whether the new legislation accounts for applying the 50% CGT discount on capital gains on assets held over 12 months. At present the 50% CGT discount on property was removed for expats as of 8th May 2012.
So we can now do a situational analysis from two POV’s, firstly we can apply the CGT discount for the first period prior to 8th May 2012 and the respective apportioned gained thereafter. The second situation is that because a main residence isn’t technically an investment property this might mean the 50% CGT discount can’t be applied to the years prior to 8th May 2012.
|Scenario 1||Scenario 2|
|Net Reportable Gain||$448,771.00||$515,000.00|
|Capital Gains Tax *||$183,631.50||$213,434.60|
*Calculated at 2018FY non-resident marginal tax rates assuming no other income.
The first scenario yields an apportionment factor of 87.14%, which can be applied to the total capital gain of the property. This is allowing the 50% CGT discount for the apportionment of years prior to 8th May 2012. As can be seen from the above able this results in $448,771 reportable capital gain, costing Jane $183,631.50 in tax. Compared to scenario 2 which does not take into account the 50% CGT discount which results in $213,434.60 tax liability. Overall the difference is $29,803.10 with scenario 2 taking just under 25% of the sale proceeds, which is a very large bite out of previous tax-free event.
Legislation like this is meant to act in a prospective manner not a retrospective manner, otherwise it challenges the general rule of law. It has been a year since the proposed changes were announced yet still no enactment and the transition period is closing fast. With the date set, regardless of the outcome it will be great to have clarity on the above so Australian expat homeowners can plan for their future without this rain cloud on the horizon.
In times like this it is crucial you look at a review with a qualified Financial Planner or Accountant and you’ll need to decide whether it will pay to hold or sell the property.