The Australian Government is considering new housing affordability laws which could indicate that Australian expats may see a jump in tax liability on the sale of their Australian homes.
Homeowners, who sell while they’re living overseas, could lose the capital gains tax exemption on a home which used to be their main residence in reforms targeted at foreign investors to safeguard the opportunity for Australian buyers to purchase.
The reforms announced as part of the 2017-18 Federal Budget in May. are a part of a host of changes to policy investment rules aimed at improving housing affordability,
Under current laws, Australian residents get a full exemption from capital gains tax on the sale of a home, that was their main residence, throughout the ownership period. Capital gains tax is a tax on the profits earned on an asset in the time that a person buys, then disposes of it. It’s not a separate tax but rather the capital gain is included in a person’s taxable income in the year when the sale was made, then calculated as part of income tax.
Australian residents also receive a partial exemption if the home was their main residence for only part of the ownership period. And they benefit from an “absence rule,” which allows them to treat a dwelling as their main residence for capital gains tax purposes for an unlimited period of time, as long as they keep it empty and don’t rent it out.
Australian expats potentially impacted by proposed changes
Australians who move overseas for work opportunities can qualify as “non-tax residents,” effectively removing their Australian tax liability for the period they live abroad. It is this group of Australian citizens who are most likely to be affected by the changes to capital gains tax rules if they own an Australian home. The new rule will no longer grant them the “absence rule” nor will it offer a partial exemption for the period during which their home was their main residence.
PricewaterhouseCoopers has warned that the proposed measures reinstating capital gains taxes may make it harder for employers to get Australians to accept overseas assignments. Employers may also have to consider the effect on tax equalisation arrangements for their staff, where salaries and bonuses are adjusted to the tax regime of another country to ensure the employee earns the same net yearly amount.
Tony Kofkin, Managing Partner at Kofkin Bond & Co, an Australian, diversified wealth and asset management practice has stated that “The measures will have an unreasonably sudden impact on the tax status for owners of Australian homes. It doesn’t seem fair to me that someone who has owned their main residence for the last 30 years pays tax on the full gain of those last 30 years because they became a non-resident a few days or a week before the time they sell it, that seems like an overly severe outcome from what they are trying to achieve from this policy”.
Mr Kofkin provided a hypothetical example of how the legislation would affect someone “Mr and Mrs B., who owns a Sydney house worth A$2.5 million (US$1.99 million), has seen the appreciation in the home’s value “from its $500,000 purchase price in 1990” Kofkin suggests “this is a reasonable assumption for an inner-city home given Sydney’s house price growth in recent decades.
Over the years the husband and wife have bought the house and raised their children in it, then move overseas in December 2019 for a job opportunity as empty nesters. They sell it in January 2020, after the tax exemption is no longer in effect, for $2.5 million after a period of negotiation” Kofkin continues.
Assuming that they became non-residents of Australia on Jan. 1, 2020, according to the new proposal, they will pay tax on the full $2 million capital gain, despite only having been non-residents for two weeks at the time that they sell.”
Mr Kofkin believes a fairer approach would be to tax the capital gain proportionately based on the period of non-residency as a fraction of the entire ownership period, rather than looking simply at whether someone is a tax resident at the time a contract is signed.
Housing affordability is an increasingly heated issue in Australia. The latest Housing Affordability data found Sydney was the second least affordable major housing market behind Hong Kong, and all five of Australia’s major housing markets were “severely unaffordable.”
Sydney house values have risen by a cumulative 110% since 2009, while Melbourne values are up 101%, according to data company CoreLogic.
The proposed amendments apply to properties purchased from budget night, May 9, however owners of property purchased before that time would have until June 30, 2019, to sell before losing the exemption.
As it stands now, the capital gains tax exemption doesn’t just apply to the main residence. Investors who hold a home for more than 12 months, which isn’t their main residence are entitled to a 50% deduction on their capital gains tax. However, investors who are non-residents are not entitled to this discount.
Anhe capital gains tax exemption is just one of a number of generous tax incentives for owners of Australian property. Tax breaks for “negatively geared” properties allow homeowners to claim a tax deduction against their other income for losses made on a property where expenses, including interest repayments, are higher than incoming rent.
According to these proposals, Foreign investors or property owned by Australian residents living abroad, will be most hit by the Governments new capital gains rules. The government is ensuring to maintain the privileges for what it describes as ‘mum and dad investors trying to get ahead’.
To find out more
If you are an Australian living abroad and want to know how you can minimise your tax liability on your Australian home, call us today to discuss how we can minimise your exposure.
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