Australian Expats Targeted Again Under Changes to Property Tax – In what has been a on again-off again saga for Australian expats the Australian government has announced that they have reintroduced the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 today in parliament with the aim to amend the Main Residence Exemption (MRE) which would exclude Australian expats from receiving access to this important tax exemption.
While the Federal government has applauded themselves for 12 month extension of the previous bill from a deadline of the 30th of June 2019 to the 30th of June 2020 given the fact that they have announced this today means that Australian expats have just over 8 months to determine their best course of action and how these changes may affect the tax on their Australian property.
As a side note we find a comment in the Explanatory Memorandum quite telling of the governments lack of understanding on the financial ramifications of this bill when they were asked about the overall compliance costs on Australian expats and they state:
These measures are expected to result in a minor overall compliance cost impact, comprising a small implementation impact and a small increase in on‑going costs for taxpayers that are foreign residents.
Revisiting The Previous Australian Expat Property Tax Requirements
Prior to this bill being announced as part of the 2017-18 Federal Budget Australian expats have been able to gain access to the Main Residence Exemption (MRE) when moving overseas.
What this means is that if you bought a property in Australia, and lived in it as your Principal Place of Residence (PPR) as a Australian tax resident and were to then move overseas, you were able to rent this property out for a period of up to 6 years and in that time frame if you chose to sell this property whilst living overseas then you would not be liable to any Capital Gains Tax should that property have appreciated in value.
Even if you sold the property after 6 years as an Australian expat you were still able to access a partial main residence exemption.
How Do The New Proposals Affect Australian Expat Property Tax Obligations?
Even though we have extensively covered the proposed changes to the Main Residence Exemption previously there are a number of changes that were released today.
Under the revised changes to the previous bill, as well as the extension of time, we have seen two main changes that Australian expats will need to consider:
- The inclusion of the term excluded foreign resident
- The inclusion of the term life events test
What is an Excluded Foreign Resident?
When determining whether you are an excluded foreign resident you will need to take into account whether you are a foreign resident at the time that the capital gains tax event occurs and whether you have been a foreign resident for a continuous period of greater than 6 years.
What is the Life Events Test?
In order to obtain access to either a partial or full Main Residence Exemption as a foreign resident you need to satisfy the life events test at the time that the capital gains tax (CGT) event occurs. This test is satisfied if:
- The continuous period ending at that time for which you have been a foreign resident is 6 years or less; and
- You are covered by any of the following situations:
- You or your spouse has had a terminal medical condition that existed at any time during that period of foreign residency;
- Your child has had a terminal medical condition that existed at any time during that period of foreign residency, and that child was under 18 years of age at least one such time;
- Your spouse, or your child who was under 18 years of age at death, has died during that period of foreign residency;
- The CGT event happens because of either divorce or separation involving you and your spouse (or former spouse) and there is a distribution of assets in a family law context.
What Do These New Terms Mean to An Australian Expat Who Owns Property?
If you are an Australian expat and were to sell a property in Australia that was formerly your Principal Place of Residence then you will need to determine on what basis that property is sold and your length of time overseas.
To determine if the Main Residence Exemption applies to you will first need to work out if you are a foreign resident at the time that the Capital Gains Tax event occurs.
Put simply where were you living at the time that you sold the property and were you deemed a resident or non-resident for tax purposes.
Secondly you will need to determine whether any of the life events mentioned above apply to you.
Resident for Taxation Purposes in Australia
If at the time of the sale of the property you are a resident for taxation purposes in Australia then you will continue to be eligible for the Main Residence Exemption provided you satisfy the other existing requirements.
Non-Resident For Taxation Purposes (Overseas For Less Than 6 Years)
If at the time of the sale of the property you are classified as a non-resident for taxation purposes, and have been overseas for less than 6 years, you may be able to gain access to the Main Residence Exemption if certain life events mentioned above occur during your period of living overseas.
Should none of the life events mentioned apply to your situation then under the proposed changes you will no longer be able to access the tax relief provided by the MRE.
The following example provided by the government outlines a scenario where an Australian expat sells a property two years after moving overseas however as she didn’t pass the life event test no main residence exemption is applicable to her.
Vicki acquired a dwelling in Australia 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 2020 Vicki finally signs a contract to sell the dwelling with settlement occurring on 13 November 2020. Vicki was a foreign resident for taxation purposes on 15 October 2020.
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 2020. 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 2020 (assuming all of the requirements were satisfied).
Non-Resident For Taxation Purposes (Overseas For Longer Than 6 Years)
Should you have been living overseas for longer than 6 years when you sell your former principal place of residence in Australia then you no longer are able to access the tax relief provided by the MRE even if one of the life events mentioned above apply to you.
How Do The Proposed Property Tax Changes Affect Deceased Estates?
The proposed MRE changes, and the inclusion of the new excluded foreign resident term and life events test, also have an affect on deceased estates.
Whether the deceased or beneficiary is either a tax resident of Australia or a foreign resident will have a major bearing on whether or not the beneficiary or beneficiaries will be able to access the MRE.
Deceased Was a Australian Tax Resident
If the deceased was a tax resident of Australia or a was a foreign resident for less than six years then the MRE accrued by the deceased will be available to the beneficiary or beneficiaries of the estate. This is so long as the CGT event (if the property is sold) occurs within two years of the deceased death.
Applying this to examples that we see all the time with Australian expats if the beneficiary were to sell the property greater than 2 years after inheriting the property and that person was classified as a excluded foreign resident because they had lived overseas for greater than 6 years then they would receive what is called a partial main residence exemption.
What this means is that they would receive the benefit of the MRE for the period that the deceased held the property as their principal place of residence however would not be able to access the main residence exemption for the period after the deceased’s death.
Deceased Was A Foreign Resident (Overseas for Less Than 6 Years)
As we discussed above the life events test will play a major part in calculating whether there is any applicable tax that a beneficiary will have to pay when they are inheriting a property from a deceased estate.
The following example is provided by the government whereby an Australian expat passes away overseas and the important distinction of whether or not the deceased is an excluded foreign resident can have on the ability to access the MRE.
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 whilst an Australian resident; and
• renting the property out from 26 September 2016 at which time Edwina moved to Johannesburg.
Edwina passed away on 20 January 2018. At the time of her death, Edwina was a foreign resident for taxation purposes. However, as Edwina was a foreign resident for less than six years, she is not an excluded foreign resident.
Rebecca, an Australian resident, inherits the dwelling from Edwina. Rebecca moves into the dwelling and establishes it as her main residence on 21 April 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 2021 with settlement occurring on 2 March 2021.
Rebecca is able to access the main residence exception for the whole period of ownership because:
• Edwina was not an excluded foreign resident at the time of her death. This means that the main residence exemption she accrued while she used the dwelling as her main residence is available to Rebecca; and
• the whole period between when Edwina passed away and when Rebecca moved into the dwelling and established it as her main residence is less than two years.
Rebecca is also able to access the main residence exemption for the period from when she moved into the property until she signed the contract for sale as she used the property as her main residence at all times and was an Australian resident at the time of the sale.
Therefore Rebecca is able to access the main residence exemption for the entire ownership period.
Deceased Was A Foreign Resident (Overseas for More Than 6 Years)
If the deceased was a excluded foreign resident (e.g. had lived overseas for greater than 6 years) then the beneficiary would not receive the benefit of the MRE for the time that the deceased held the property.
How Is Tax on Property Calculated If An Australian Expat Were to Divorce or Separate?
Should an Australian expat either divorce or separate, and there is a distribution of assets in a family law context, then this will satisfy the life event test enabling those parties to gain access to the Main Residence Exemption.
What Happens If I Sell My Australian Property Before the 30th of June 2020
If you owned your current or former Principal Place of Residence before the 9th of May 2017, and were to sell if before the 30th of June 2020, then you are entitled to receive the full benefit of the Main Residence exemption under the transitional rule announced.
The following example highlights the milestone events in both the acquisition and disposal of the property as well as the Australian expat’s changing tax residency status from resident to non-resident.
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 as it was sold before 1 July 2020 she is entitled to the main residence exemption under the transitional rule.
What Happens If An Australian Expat Moves Back Into Their Australian Property?
The Explanatory Memorandum has provided the following example of how an Australian expat can move into and out of a current/former principal place of residence over a period of time but as long as the contract for the sale of property was signed whilst the expat is an Australian resident for taxation purposes then they are entitled to receive the full benefit of the main residence exemption.
Amita acquired a dwelling in Australia 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 2021 Amita signs a contract to sell the dwelling and settlement occurs on 12 September 2021.
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); and
- residing in the dwelling from 11 June 2017 until it was sold.
The time of CGT event for the sale of the dwelling is the time the contract for sale was signed, that is 15 August 2021. 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.
What’s Our Take On How The MRE Changes Will Affect Australian Expats & Their Property Tax
From the moment that this proposal was announced in 2017 we have been vocal on our disapproval and have gone to great lengths to highlight the inadequacies of these changes.
While it is a step in the right direction to include carve out for life events due estate planning and family law considerations the greatest risk that we see for Australian expats and in turn the amount of property tax that they will pay has not been addressed.
Our greatest concern was always been that no protection measures are in place for Australian expats who have owned an Australian property as a PPR for a significant amount of time and have then moved overseas.
Whilst it is nice to say that its another good reason why it is important to obtain Australian expat tax and financial advice before they move, as well as whilst they’re overseas, every day we meet people overseas who haven’t heard of the last 5 major changes that the Australian government has imposed on Australian expats so what’s to say they are going to hear about this one (of course our clients will).
Think of this scenario. A young couple buy a small house or apartment in Sydney in 1998 (I know, we all wish we did as well) and then in 2010 they decide to move overseas. Whilst overseas they decide to start a family. As time passes they realise that their small place in Sydney is not going to fit their growing brood when they move home so they decide to sell it and use the proceeds to buy a larger property.
Under the proposed changes if that sale were to occur after the 30th of June 2020 then more than likely they will have to pay Capital Gains Tax at the non-resident marginal tax rate all the way back to 1998. To date I have never met a person who has thought this is reasonable and neither do we.
The updated Bill does not go far enough to protect Australian citizens living and working abroad. I know Canberra believe they’re targeting Australian expats earning big salaries but in fact the ones that will feel this the most will be the people that Canberra say they’re trying to help – the teachers, nurses, hospitality workers, those who can least afford a hit this size to the hip pocket.