Australian expats may not be out of the woods with the removal of the main residence exemption Bill just yet. It was hoped for that the previous Bill would have been scrapped to remove the exemption for Australian expats in the most recent Budget, however this was not the case. Further to this, Treasurer Frydenberg has highlighted that it remains the policy of the Coalition to seek to remove this exemption, and the issue would be revisited in the near future.
Let’s first explore the recent history
Within the 2017 Australian Federal Budget, it was indicated that the main residence exemption was set to be removed for Australian expats. This was not positive news at the time and certainly hasn’t improved. Here I’ve outlined the implications for foreign residents, which includes Australian expats like you or I, who either currently own property in Australia or are considering investing in property there. The aim of this change in the rules was stated as being implemented to combat the housing affordability issue in Australia. How effective this change will be in addressing this issue remains to be seen.
It’s important to note that the legislation is not currently in force, and that the current rules apply if you were to sell property that you own in Australia, whether while you’re living offshore or while you’re back in Australia as a tax resident.
What are the current rules for the Main Residence Exemption?
Until the proposed changes that were announced in the 2017 Federal Budget, Australian foreign residents (expats) who had lived in a property, and then rented it out upon moving offshore were eligible for the 6-year capital gains tax exemption, just as Australian residents are. This meant, for example, that if you lived in a property in Australia that was your primary residence for a number of years, then moved offshore to Singapore and rented out your property, selling it 3 years later, you could fall within the 6-year exemption and pay no capital gains tax on your property.
For example, let’s assume that Tom lived in his own home in Sydney from 2013 – 2016. In March 2016, Tom receives an offer to move to Singapore with his role and decides that he wants to rent out his Sydney property rather than sell it. Tom later decides at the beginning of 2019 that he’ll sell the Sydney property, and as he is renting in Singapore, he can seek to claim his Sydney property as his main residence and therefore fall within the rules of the Main Residence Exemption. Simply put, as Tom has rented out the property for less than 6 years, by claiming the exemption he will not be liable for any Capital Gains Tax (CGT).
What happens under the proposed new rules?
Under the previously proposed legislation, this meant that for Australian expats who sold their property while living offshore they would not receive the 6-year exemption and would be taxed on the capital gain of their property. Given that there is no tax-free threshold for Australian non-residents, the tax rates would apply as follows:
Following the announcement of the proposed change in the Budget, a further slight amendment has been made making the Bill that much worse for Australian expats.
The new draft Bill not only states that the main residence exemption will not be available to Australian expats and foreign resident property owners, but that they would also be denied any partial Capital Gains Tax exemption even for the period when they lived in the property before departing Australia. To put this into perspective, this could mean that if you purchased a property while living in Australia and remained living in this property as your home for 5 years, moved offshore for 2 years and sold the property, you would be liable for capital gains tax on the gain for the entire 7-year period. Australian expats owning property may be able to move back into the property upon their repatriation to Australia, once again becoming residents for tax purposes of Australia and then sell the property on a Capital Gains Tax free basis.
What happens next?
At this stage, it remains unclear when the Bill may be re-introduced and in what format, so there is no specific draft legislation to be reviewed. We will be watching this space closely given the potential impact that it could have on Australian expats across the globe.
If you do own property in Australia and are considering how this could impact you, given the number of variables and considerations, we would certainly recommend receiving professional advice to review your own situation from an accountant and/or financial planner who has direct experience and knowledge of the Australian landscape.
To Your Financial Success!
Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Adviser with Australian Expatriate Group, specialist division of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to Australian expats in Singapore.
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Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd – No: 200305462G | MAS License No: FA100035-3
General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.
*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.