Australians now living overseas – beware! Legislation has been put before Parliament that will mean that an Australian living overseas who sells their former Australian family home will pay tax on the entire gain!
This will equate to tax in the hundreds of thousands of dollars!
Even though some of the backlog of legislation before the Senate was passed last week, the bill covering this has yet to be passed. I believe Parliament ceases sitting this week. One could expect that political games will continue and it may be some time before this is passed (if it is indeed it is ever passed).
Separate tax laws apply to non-residents. Non residency is not determined by your passport or visa therein. It is determined by tax law. Generally speaking, someone living outside Australia for more than two years is presumed to have become a non-resident of Australia for income tax purposes. Many other factors are taken into account which are beyond the scope of this blog.
This became more important following the 2012 Federal Budget when non-residents ceased to be entitled to claim the 50% capital gains tax discount.
The proposed law to take effect from July 2019 will fully tax the capital gain on a former family home located in Australia. It will not matter how long the property was used as a home (remembering that one’s home is exempt from capital gains tax). That seems most unfair as per the following example.
Bob & Sally bought a family home in 2005 for $500,000. They live in it for 12 years until moving to take up a 2 year position in London. They enjoy it so much they decide to stay and buy a home in London. To do so, they have to sell their former Melbourne home. They sell it for $1,200,000 in 2020. Under existing law, they would pay no tax as their home was initially their principal residence and the gain thereafter is also disregarded under a six-year absence rule. Under the proposed new law, they would pay tax on the full gain of $700,000. Furthermore, there is no tax free threshold for non-residents so they would pay tax from the first dollar at 32.5% and thereafter at progressively higher marginal tax rates. We are talking tax in the hundreds of thousands of dollars.
In order not to pay tax, Bob and Sally would have to either:-
- Sell it before July 2019.
- Sell it upon their return to Australia (which may not be possible if they need to release equity to finance the new London home).
The legislation is yet to be passed by the Senate. It is not law. In my view this is not acceptable particularly with July not being that far away. All we can continue to do is monitor the situation and continue to raise it with clients as we meet with them.
In the meantime, we welcome any question you have.
We also encourage of you to think of any family, neighbour or friend who may be affected by this.
And don’t start me on the other tax changes stuck in Parliament!
At MRS, we will spend today planning for your success.