Given our particular affinity to Australian property, the latest update to the Main Residence Exemption may not come as welcome news to most Australian expats.
Last year in the 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, however given that the last opportunity for lobby groups to petition the change has now past it’s unlikely that we will see any substantial changes and the new Bill will be passed.
What are the current rules for the Main Residence Exemption?
Until the proposed changes that were announced in the last 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.
What happens under the proposed new rules?
This is all set to change, as the proposed legislation 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 last 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.
There are currently transition rules in place that state that if a property was owned prior to 9 May 2017 and is disposed of by 30 June 2019, then the current rules with the 6-year exemption eligibility would be applied. The simplest way to escape the proposed changes is to either sell your property prior to the 30th June 2019 deadline, or to not sell it at all while living offshore as an Australian expat.
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.