Difference Between TAP and Non-TAP Assets & Why Expats Should Care – when you live and manage your assets as a Australian resident most assets are treated the same however when you jump on a plane and become a Australian expat that’s where things become very different.
In this article we explain the difference between a TAP and non-TAP asset and why you may want to manage your financial affairs differently when you become a Australian expat.
What Is Taxable Australian Property (TAP)?
Once you become an Australian expat your assets are classified as either TAP and Non-TAP.
TAP refers to taxable Australian property and is defined by the ATO to include:
- Australian real property, such as a house, apartment, commercial building or land
- An indirect interest in Australian real property
- A mining, quarrying or prospecting right in Australia
- A CGT asset that you have used to carry on a business through a permanent establishment in Australia
- An option or right over one of the above – for example, a contract to purchase property off the plan.
Non-TAP describes the assets that fall outside of the aforementioned TAP definitions. These include:
- Direct shares and equities listed on the ASX.
- Exchange-Traded Funds (ETFs) listed on the ASX
- Managed Funds domiciled in Australia
It is vital to understand the differences between these two as they can have major tax benefits and implications for Aussie expats.
Isolating this statement, we differentiate the two by their individual tax treatment.
Which is more tax efficient?
Foreign and temporary residents are subject to only the CGT from a TAP asset such as an apartment. Upon disposal of a TAP asset, it will be subject to Australian capital gains tax even if the property owner is not a resident of Australia.
Previously expats were entitled to the main residence exemption (MRE) rule, however under the new rules you may be liable to pay hefty tax on the capital gain from your assets.
Prior to 8 May 2012, non-residents, partnerships and trusts were eligible to discount capital gains by 50% however the Australian Government announced the removal of this in the May 2012 federal budget. Any capital gain made after 8th May 2012 will not be able to utilise the discount.
A capital gain made before 8th May 2012 and disposed of after will be entailed to the CGT discount proportionally. The removal of this rule has dealt a nasty sting to many expats.
See the example below on the possible implications.
Bazza and Bec bought a property on the Gold Coast in 2008 for $500k. In 2015 they became expats and relocated to the UK for Bazza’s new job opportunity which they chose to remain indefinitely. Bazza and Bec made the decision to sell their property as non-residents for a value of 800k. They will be able to use the CGT 50% discount for the years they were Australian residents until they became non-residents (2008-2015), however after 2015 they will not be able to receive this discount and the entire capital gain from that point will be taxable.
As stated above Australian expats are liable to pay tax on any capital gain made on TAP assets, however foreign and temporary residents do not have to pay any tax on a capital gain that is made on non-TAP assets.
For example, if you have recently expatriated and declared deemed disposal on your Australian ETFs, direct shares and managed funds, the total capital gains tax you pay from the date of disposal until you return as a tax resident is zero and completely tax free in the eyes of the ATO.
This ultimately creates a great opportunity for expats to increase their wealth through non-TAP investments. You will have the ability to grow your investments in a tax favoured environment and only once you return and deemed acquisition kicks in, will you be liable to pay tax on the capital gains moving forward.
Moreover, if you choose to disregard your capital gain or loss and do not elect deemed disposal the ATO will treat your assets as TAP assets.
Overall, here at Atlas we encourage our clients to have a well-diversified portfolio inclusive of TAP assets however this decision is dependent on the individual circumstances of our clients.
If you have any questions, please reach out to our experienced Atlas Advisers who will be more than happy to assist you.