Australian Property Tips And Traps
Did you know?
Negative Gearing
Should your tax deductions exceed your rental income and you make a tax loss in Australia, then you can carry forward indefinitely offsetting the loss against future rental income, capital gain on sale or salary income on your return to Australia.
If you become a non-resident for Australian tax purposes, you can still “negatively gear” (if rented) your primary residence (or other residence).
Foreign Resident Capital Gains Tax (taxable Australian property) “first rule”
For assets acquired after 8 May 2012, the 50% Capital Gains Tax” CGT “discount rule (only 50% of net capital gain taxable if asset held more than 12 months) does not apply (on a pro-rata basis) to the number of days of non-residency in the ownership period.
This rule applies regardless of whether or not the sale happens when you are a resident or non-resident. For assets acquired on or before 8 May 2012, there are two methods to choose from. If you had a period of residency after 8 May 2012 you may choose pro-rata of resident days in ownership period. If non-resident on that day, you may claim 50% CGT discount of accrued gain provided the market value exceeds cost base as at 8 May 2012.
Foreign Resident Capital Gains Tax (taxable Australian property) (“second rule”)
On 12 December 2019 the Government legislated more changes so that all non-residents (and including Australian citizens) may no longer be exempt from capital gains tax if they sell their main residence. The purchaser is subject to a 12.5% withholding of sales price.
The effective date for individuals who held property at 7.30 pm (AEST) on 9 May 2017 is from after 30 June 2020 (ie, they continue to enjoy the exemption in respect of sales/disposals while non-resident until 30 June 2020). For non-residents who acquired property after 7.30 pm (AEST) on 9 May 2017, any sale/disposal while non-resident thereafter will not qualify for the main residence exemption. By concession there is also an exemption available for certain “life events” (eg death/divorce etc) which happen within the first 6-years of non-residency (and see further on). Of course if you repatriate and sell while resident, the full gambit of CGT main residence exemption rules are available.
Australian Real Estate
Negative Gearing
An Australian investment property is a popular investment choice for many expatriates, an attractive tax planning tool whilst overseas and is a wise way for forced savings. Australian property is the most tangible and has demonstrated itself as one of the most consistent markets in the world.
As an expatriate, you can rent out your primary residence while living overseas, potentially generating significant income. It will also allow you to claim numerous costs as rental property tax deductions.
Potential rental property deductions include “cash deductions” (ie, rental expenses) and non-cash deductions (depreciation of fittings etc and building allowances for construction costs).
Generally, the following are all allowable tax deductions if you rent out your primary residence (and other rental properties) but note travel costs are not deductible.
• Interest on the loan used to purchase the primary residence.
• Property management expenses.
• Maintenance and repair costs.
• Depreciation of the building, fixtures and fittings.
• Depreciation of any capital improvements you make to the house whilst renting.
• Water rates, council rates, strata levies and utility costs etc.
• Land tax.
Australians are familiar with the “negative gearing” tax benefits whilst working in Australia, the excess tax deductions over income can legally help reduce income tax on your salary or other income, a most cost effective tax planning strategy.
As an expatriate, this annual deficit often has no Australian income to offset so losses continue to accumulate each year you are away to be used at some future time. These losses can be carried forward indefinitely until such time you need them to offset either future rental surplus, capital gains on sale or to offset Australian taxable income when you return to Australia.
When in Australia, you can negatively gear into any type of asset including equities, however as you are living abroad, and Australian non-resident tax is limited to rental property activities, you will not be able to claim your interest costs on equities while you are overseas and therefore you cannot accumulate tax losses.
Capital Gains Tax
Most people are aware that their family home (or main residence) is exempt from capital gains tax in Australia. What this means is that any money you make from the sale of your family home through capital appreciation is not subject to capital gains tax in Australia. However, most people believe that when they move out of the property, then any further capital appreciation of their house will be subject to capital gains tax.
This is not necessarily the case.
As long as you do not claim an alternative house as your main residence, then you are entitled to continue to claim your previous residence as your main residence for capital gains tax purposes for up to an additional six years (6 year absentee rule).
So, if you plan is to move overseas for only 4 or 5 years then, as long as you do not claim an alternative house as your main residence, then your capital appreciation during your time abroad should remain Capital Gains Tax free. Note also that you do not have to move back into your former home to claim the main residence exemption under the absentee rule.
New (ADVERSE) Foreign Resident (“main residence CGT”) rules
A change in law on 12 December 2019 means if you are a non-resident at the time you dispose of your former home in Australia, you will not qualify for exemption under CGT rules unless you satisfy the life events test.
You satisfy the life events test if, at time of disposal, you were a non-resident for a continuous period of six years or less and, during that time one of the following must have occurred;
(1) You, or your spouse, or your child under 18, had a terminal medical condition
(2) Your spouse, or your child under 18, died
(3) The CGT event happened because of a formal agreement following the breakdown of your marriage or relationship.
If you are a non-resident when you die, the changes also apply to legal personal representatives, trustees and beneficiaries of your estate; surviving joint tenants and special disability trusts.
When the change applies
For property held prior to 7.30pm (AEST) on 9 May 2017, you can only claim the CGT main residence exemption for disposals that happen up until 30 June 2020. Disposals that happen from 1 July 2020 are no longer entitled to the CGT main residence exemption unless you satisfy the life events (above).
For property acquired at or after 7.30pm (AEST) on 9 May 2017, the CGT main residence exemption no longer applies to disposals from that date unless you satisfy the life events (above).
The changes only apply if you are not a tax resident of Australia at the time of disposal (being date of contract or settlement date where there is no contract). Where you repatriate and commence residency, the CGT main residence exemption rules are available.
Foreign Resident CGT Withholding rules
The Government legislated earlier changes requiring purchasers of Australian property from a non-resident vendor to withhold (under PAYG rules) 12.5% of the gross sales price and to remit the withholding to the ATO for crediting against the vendor’s CGT liability (if any) in the relevant income tax return for the year of disposal. The ATO may provide a clearance certificate for resident vendors and a variation system is in place for non-resident vendors recognizing the preservation of main residence exemptions where life events occur (and actual CGT liability).
Case Study
The Australian Treasury website provided the following example regarding the proposed new Capital Gains Tax rules for non-residents selling their main residence.
Facts
Anita acquired a dwelling on 20th February 2003, moving into it and establishing it as her main residence as soon as it was first practicable to do so.
On 15th August 2021, Anita signs a contract to sell the dwelling and settlement occurred on 12th September 2021.
Anita used the dwelling as follows during the time she owned it:
• residing in the dwelling from when she acquired it until 1st October 2007;
• renting it out from 2nd October, 2007 to 5th 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 6th March 2011 until 15th April, 2012;
• renting it out from 16th April, 2012 until 10th June, 2017 while she lived in a rented home in Hong Kong as a Foreign Resident (assuming the absence provision applies to treat the dwelling as her main residence);
• residing in the dwelling from 11th June, 2017 until it was sold. The time of the CAPITAL GAINS event “CGT” event for the sale of the dwelling is the time the contact of sale was signed, that is 15th August, 2020
As Anita 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.
This example shows that although Anita lived overseas for a period of time, she was still entitled to the main residence CGT exemption when she sold it, as she was an Australian resident for tax purposes at the time of sale. Had Anita sold the property before returning to Australia, then she would not be entitled to any CGT exemption, and would have paid full CGT on the sale of property. Furthermore, she would have been denied the 50% CGT discount concession from 9 May 2012.
Critical Issues
As a non-resident for Australian tax purposes generating rental income in Australia, you as an expatriate are only obliged to file a tax return in Australia if you have an overall rental profit. However, it is wise to lodge returns reporting rental losses in order to maintain continuity. Of more importance is that filing “nil returns” can serve to limit how many years the Tax Commissioner can audit (it is usually last four years if you are working overseas, albeit there is no time limitation for “fraud or evasion”).
As an expatriate Australian real estate owner, ensure all cash and non-cash deductions are claimed against rental income on your principal or other Australian investment properties (enabling future tax losses to be carried forward and available to reduce future taxable rental income, capital gains or against salary income on return to Australia).
As an expatriate, if you wish to sell your former main residence, ensure the sale is undertaken as an Australian tax resident, minimizing or eliminating Australian capital gains tax (see above again).
Adverse State Land Tax/Stamp Duty surcharge rules (the problem of the “foreign spouse”)
This is an uncomfortable issue if either you and/or your spouse is a foreign national and has either Australian Permanent Residency or New Zealand citizenship. The “foreign spouse” may purchase Australian real estate free of the “triple Stamp Duty” surcharge and Land Tax surcharges only where you are “ordinarily resident” in Australia. This is a particularly harsh scenario should you decide to move offshore later with the “foreign spouse” share of ownership being subject to Land Tax Surcharge (NSW rate 4% from 1 January 2023).
How InterRetire Can Help You
If you’re an Australian expatriate who is considering moving back to Australia, we can help you maximise your assets, minimise your tax obligations and help you transition smoothly.
Disclaimer: This article provides general information on avoiding double taxation in Australia and should not be considered as professional tax advice. It is recommended to consult with a qualified tax advisor or accountant for personalised guidance based on your specific circumstances.
