Tuesday 16^th October 2018 was marked as the day that Australian expat property owners across the globe would finally discover whether the changes to the Main Residence Exemption would be passed. In positive news for Australian expats, the Senate has decided to delay debating the proposed Bill pending further consideration based on advice from tax advisers and the broader expat community.

What has actually been proposed in the Bill?

The Bill, announced in the Federal Budget, seeks to deny Australians living abroad from the main residence tax exemption that currently applies. You can read more about whether your property is your Main Residence and the relevant requirements from the Australian Tax Office (ATO) here. Under the proposed Bill, Australian property owners who are living abroad, and who have lived in a property in Australia, then rented it out upon moving offshore were eligible for the 6-year capital gains tax exemption. The same 6-year exemption also applies to Australian residents who have continued to rent out their former residence.

To illustrate this, if you lived in a property in Australia that was your primary residence for a number of years, then moved offshore to Hong Kong and rented out your property, selling it 3 years later, this would therefore fall within the 6-year period and you would be eligible for the 6-year exemption and therefore not pay capital gains tax (CGT). Under the proposed draconian new rules, not only would you be liable for tax on the 3 years you’d rented out the property, but for the full capital gain from your original purchase price.

What tax rates would apply to the sale of the property?

As non-residents of Australia for tax purposes, the rates that would apply to the capital gain on a property sold would be different to those for residents. The specific rates are outlined in the table below:

It’s important to point out here that there is no specific or separate capital gains tax rate that applies, it is simply added to your marginal income and taxed accordingly. Therefore, under the proposed rules, you could be losing nearly half of your capital gain in the form of a tax liability.

Let’s consider an example

Harry and Sally are Australian citizens who have lived and worked abroad for the last 3 years. They bought their home in the eastern suburbs of Sydney back in 1995 for $500,000, which they lived in before relocating to Dubai in 2015. The property is currently valued at approximately $4,000,000, representing a positive capital gain of $3,500,000.

Under the current rules, Harry and Sally could elect to apply the 6-year exemption to their capital gain, sell the property before 2021 (6 years after they’ve rented out the property) and then realise the gain without any tax liability.

Under the proposed rules, however, they could be liable for the entire gain of $3,500,000, which would result in a tax liability (ignoring the Medicare levy) of more than $1,550,000. You can quickly see why this proposed Bill is receiving so much attention from the Australian expat community and why it’s important that you seek professional advice.

Is there a transition period for property owners?

If the Bill is in fact passed by the Senate and the new rules to apply, then it’s important to consider the transition period that you would be eligible for. Firstly, if the particular property was owned prior to 9^th May 2017 and is sold by 30^th June 2019, then you would be eligible for the 6-year exemption on the capital gain. If the property was purchased after the 9^th May 2017, then there would be no 6-year exemption for non-residents of Australia and the full gain would be taxable. If you do own property in Australia that you’re considering selling in the short-term, it’s important to seek professional advice and consider your various options, particularly if you’re currently an expat.

How could I mitigate these proposed changes?

As the Bill has not yet been passed and may in fact be changed before it does, it’s important to first understand that there is no certainty on how the impact of this proposed change could be mitigated. One clear option that may be available is to repatriate to Australia prior to selling your property. This would therefore mean that the property would be sold by an Australian resident and therefore taxed accordingly and potentially eligible for the 6-year exemption also. If you own the property with others, or in the form of other legal structures such as a trust or company, then it’s important to seek professional tax advice to review your options and appropriate strategies.

What happens next?

We remain hopefully that common sense will in fact prevail and the Bill will be scrapped, or at the very least significantly revised. However, there is still the very real chance that it will be passed. The key options include; Passing the proposed Bill in its current form, amend the deadlines in the current Bill particularly given that the date of 30^th June 2019 is rapidly approaching, amend the Bill totally to create further exclusions such as Australian passport holders or simply scrap the Bill entirely. Obviously, we would all prefer the latter outcome.

We will continue to keep our clients and the Australian expat community updated on these proposed changes. If you would like to discuss your own situation and how this might impact you, feel free to reach out and book a complimentary discussion with our Aussie expat team.

Ally Home Loans Pty Ltd is your ally in finance for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.

Book an obligation-free, complimentary consultation here today.

Ally Home Loans Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.