Australians who work or retire abroad face higher – and possibly retrospective – tax bills if they sell their Australian homes. Accountants may need to warn clients.
By James Dunn
Is it still worth taking a foreign posting? Australian employers wanting to send staffers abroad are already getting push-back following proposed measures to retrospectively tax expatriates who sell their home in Australia.
A measure intended to improve local housing affordability runs the risk of penalising Australians taking postings abroad and migrants who return to their countries of origin, by stripping from them the main residence exemption (MRE) from capital gains tax (CGT).
A bill before the Senate seeks to retrospectively remove the main residence exemption from CGT for non-residents from the time the property became the taxpayer’s main residence, instead of from the time they became a non-resident.
Expatriates caught in housing affordability net
The Senate is still considering Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No.2) Bill 2018.
“The government’s position is that if you’re from overseas and you buy property in Australia, but you remain a non-resident for tax purposes, you won’t get the CGT MRE,” says Robyn Jacobson FCPA, senior tax trainer at TaxBanter. “They’re trying to make it less attractive for foreigners to buy houses here, trying to make more houses available to Australians, and trying to improve housing affordability.
“I get that. But as the proposed legislation stands, it also applies to Australian expatriates who have taken a job posting overseas and are non-residents for tax purposes, as well as Australian citizens who have chosen to retire overseas,” says Jacobson.
If someone from either of these groups sells the dwelling that was their home for many years, and they happen to be a non-resident at the time of the CGT event – that is, when they sign a contract to sell the property – they will not be entitled to the MRE for the entire period they owned the home.
Retrospective laws on expat homes
Moreover, the loss of the MRE for these groups is retrospective, says Jacobson.
“When you change tax policy, it should start from the date it is announced or a future date. But as this proposed amendment currently stands, the loss of the MRE potentially goes all the way back to the date from which CGT has applied, which is 20 September 1985,” she says.
Jacobsen believes the retrospectivity is unfair.
People were not to know when they bought their home that when they sold it, as a non-resident, they would have a taxable capital gain going back to when they bought it.
The proposed measures do not allow for any pro-rating of the period during which the person was a tax resident and lived in the home.
They cannot use the market value of the home on the date they became a non-resident, and confine the taxable capital gain to that which arose since that date, nor can they apply the six-year absence rule.
Tax laws currently allow people to maintain the CGT exemption on their main residence if they have a temporary absence of up to six years, as long as they are not claiming another property as their main residence at the same time.
Robyn Jacobson FCPA, Director, Tax Banter, will speak at CPA Congress 2018 on the topic of taxation. Learn more.
Thousands of expats affected by tax on homes
Inadvertently or not, the Bill affects “hundreds of thousands of Australians living and working offshore,” says Jacinta Reddan, chief executive of the Australian Chamber of Commerce in Hong Kong and Macau.
“This simply has not been thought through. Firstly, we’re living in an increasingly globalised world, and the expatriate diaspora is both an enormous benefit to the Australian economy, because people return bringing with them increased skills, and to the nation’s engagement with the world.”
Secondly, she says, being an expatriate does not mean immunity from unexpected life events such as divorce or loss of a job, illness or death.
“These can hit us all regardless of where we live, and we often don’t have a choice about when to sell our homes. Making all of the gains from a property sale taxable just because the person is a non-resident at the time of disposal is penalising Australians for living and working offshore, which is manifestly unfair,” says Reddan.
The Chamber is seeing a backlash from corporate members who report resistance from staff offered critical offshore postings.
New tax rules hit estate administration
Ian Raspin FCPA, director at estate taxation advice specialist BNR Partners, says the amendment “opens up Pandora’s box” in terms of estate administration.
“It certainly can catch a property that’s been left in a will to adult children, if they inherit it from a non-tax resident. It’s bad legislation, not only because it’s retrospective, but because it becomes highly subjective as to whether a person is a tax resident or not. There is a lot of case law in Australia whereby it’s just not clear,” he says.
While various groups continue to lobby the government against the Bill, Jacobson says there are two strategies available to people who believe they might be affected by the new measures.
“First, the rules start for property sales after 9 May 2017. But a transitional rule says that if you held the property at that date and you sell it before 1 July 2019 – in other words, sell it by 30 June next year – the new rules don’t apply to you. You would have had to have held the property in May last year, and you have to enter into a contract to sell it, by 30 June.”
Expat homes for sale
Jacobson expects such selling to intensify over 2018 and 2019.
“It might not be the best time to sell the property but if they’re going to save millions of dollars in tax, in some cases, they may want to. These will be people who are overseas and have no intention of coming back.”
Another strategy may suit non-residents who don’t want to sell before 30 June 2019. “They would need to genuinely re-establish their tax residency back in Australia, before they sell,” she says.
This is where Raspin’s concerns on subjectivity come into play. “We’re concerned that this could potentially bring Part IVA (of the Income Tax Assessment Act) into consideration, where it is at least open to the Tax Commissioner to say that a person, in trying to re-establish tax residency in Australia, only moved back here to try to avoid income tax,” he says.
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