Do Returning Australian Expats Pay Tax on Their Overseas Property?
Returning Australian expats face hard decisions when it comes time to repatriate, especially if they are leaving assets overseas. A hard decision is choosing to sell or rent your current overseas main residence upon your repatriation. What is commonly misunderstood, is how will this sale be treated from a tax point of view by the Australian Taxation Office.
If you were to rent out the property, then you will create a future tax administration burden in two countries. Firstly, you will be required to declare the income on a tax return in the overseas country and pay whatever relevant tax is due and then we are also required to declare the rental income on your Australian tax return.
As a returning Australian expat if you pay any tax in the foreign country you will receive a foreign tax credit, therefore any extra tax you pay on the income source is due to your marginal tax rate being higher. If holding the property is part of your wealth creation strategy and diversifying your assets, then please seek advice prior to treading this path. It’s important to have a clear understanding of the tax rules around this.
If you sell the property after you have returned to Australia then how the sale of the overseas property is taxed will depend on whether you have purchased a new property.
Let’s look at an example:
Susan and John have lived over in the UK for 8 years and have both been non-residents for tax purposes while away. They decide that it’s time to come back to Australia and they return on 5th February 2018. Before they leave, they place their house in Leeds on the market but it does not sell immediately. When they return to Australia they choose to move into a rental first as they don’t know where they want to buy their new main residence. On the 5th of November 2018 their UK home is sold.
When they sold their house, they sought UK tax advice and luckily they are not required to pay any tax to the HMRC for the sale of their previous home, as it is covered under the UK’s ‘Private Residence Relief’.
Now because when they moved back to Australia they hadn’t established (purchased) a new Main Residence/Principal place of Residence they therefore are covered by the Main Residence Exemption as outlined by the ATO on the sale of the UK property as they are currently renting.
The ATO’s legal database provides a great example of this which is contained in Tax Determination 95/7. The TD 95/7 referenced that Sect.118-145 of the Income Tax Assessment Act 1997 applied and therefore relief is given. This would be different had they purchased and established a new Main Residence in Australia.
Let’s look at a slightly different example:
Susan and John have lived over in the UK for 8 years and have both been non-residents for tax purposes while away. They decide that it’s time to come back to Australia and they return on 5th February 2018. Before they leave, they place their house in Leeds on the market but it does not sell immediately. When they return to Australia they choose to BUY a new home in Sydney. On the 5th of November 2018 their old UK home is sold.
When they sold their house, they sought UK tax advice and luckily they are not required to pay any tax to the HMRC for the sale of their previous home, as it is covered under the UK’s 18 Month rule for previous homes.
The ATO’s treatment however is very different as Susan and John established a new Main Residence as of the 5th February 2018. This means that there is a period of 9 months where technically the ATO treats the UK property as an investment property and the period in which they lived in this property they are entitled to the normal Main Residence Exemption. Their Australian accountant would work out the ‘Apportionment Factor’ to apply to the capital gain of the UK property and this is what will be added into their Australian tax return that financial year.
There is still a lot of controversy around the decision to abolish the main residence exemption for Australian Expats and we are hoping we have a final result on the piece of draft legislation in the coming weeks. As returning Australian expats looking to sell an asset in a foreign country it is always recommended you seek advice from both domiciles on how it is going to be treated from a tax point of view.