The opportunity to live and work overseas is arguably the new Australian dream. But for Australian citizens considered to be foreigners for tax purposes, changes to existing tax exemptions after June 30th could see your family home subject to Capital Gains Tax (CGT); not just for the time you have lived overseas, but for the entire duration of owning the property.
Since 1985 Australian property owners living overseas could claim a tax exemption on any capital gains made from the sale of a primary residence they owned in Australia, if the property was sold within six years of departure. Now, for those Australians considered to be a foreigners for tax purposes, selling the family home after June 30th 2020 while living overseas could put you out of pocket for hundreds of thousands of dollars in additional tax. To rub salt into the wound, the CGT is not calculated on just the capital gains made since relocating overseas, but for the entire time you have owned the property. For example, somebody who purchased a home in 1990, moved overseas in 2016 and sold after June 30th, would lose the CGT exemption not just for the four years they had been away, but for the entire 30-year period. In an interview with the ABC, tax expert Robyn Jacobson raises another hurdle faced by taxpayers, namely that those who have owned their property for a long time may not have adequate records of expenses relating to the property- not just the original purchase price, but costs of any renovations or improvements, acquisition costs and holding costs- which could leave expats exposed to the risk of being unfairly over taxed.
So who will the amendments affect? In short, anyone who owns a property that is their primary residence in Australia and is considered a foreign resident for tax purposes. This includes Australian citizens who live and work overseas but could also affect a non-Australian citizen who has purchased and lived in an Australian property, then returned to their home country and attempted to sell the property after leaving. Unfortunately, there is no one clear test as to who is considered a foreign resident for tax purposes, but some factors (among others) can include:
- Your citizenship
- The amount of time spent overseas
- Whether you have a settled residence or ongoing employment overseas
- Whether your family have relocated overseas with you or remained in Australia
- Whether the ticket you bought to go overseas is a one-way or return ticket
- Any other relevant indicators of your intention to re-locate permanently, or return to Australia.
In order to avoid paying CGT, some expats have opted to sell their Australian property prior to the deadline, essentially sacrificing their Australian home in the name of avoiding being heavily taxed. As one expat put it, the changes are “completely disincentivis[ing] expat Australians from having a financial exposure to Australia”. Other experts have criticised the move, in particular the retroactive taxing of the entire period of ownership beyond the time spent as a foreign tax resident, claiming that forcing people to sell as a result of changing tax implications is skewing market behaviour. For those unable to sell before the deadline, the only way to avoid the tax will be selling the property whilst in Australia. Unfortunately, it’s not as simple as merely coming back, selling the property, and leaving again. The property owner must live in the property again prior to selling and regain their tax residency status- if done for the sole purpose of avoiding CGT, this can quickly spiral into a logistical nightmare.
The new bill is supposedly in the interest of reducing pressure on housing affordability and follows a pattern that has emerged over the past few years of tax policy aimed at dissuading people from either owning property that they do not live in, or owning ‘underutilised’ land. The underlying principle of these changes- which include the vacant residential land tax, removal of tax incentives on vacant land, and applying land tax to contiguous parcels of land, among others- seems to be an attempt to force investors to either put their land up for sale, or keep their properties habitable and occupied. These changes to CGT definitely fall into the former category, but at the cost of dissuading Australian expats from keeping a financial interest in Australia. However, with housing costs on a seemingly endless upward trajectory, the question can be asked whether any of these measures are appropriately addressing the underlying issues of housing affordability, or whether they’re just a cash grab thinly veiled by political posturing. Only time will tell.
By Georgia Wilby
