Australian Expats Selling Real Estate in Australia – The Tax Trap
By David Baruffi, Financial Advisor
There are two historic changes in Australian Tax Law that have wide reaching effects on Australian Expats (Australian Non-residents for tax Purposes) selling real estate in Australia.
On the 8/5/2012 the Australian Government removed the 50% Capital Gains Discount that applied on the sale of residential property (and other CGT assets) owned by an individual (or trust) where the individual is a non-resident for tax purposes.
On the 9/5/2017 the Government removed the Main Residence Exemption for the sale of a family home where the owner is a non-resident for tax purposes at the time of the signing of the sale contract (limited exceptions may apply).
With the current Australian residential property market in boom times Australian Non-Residents for Tax Purposes (ANRFTP) who take advantage of the current market could end up with an unpleasant surprise.
There are a number of strategies that you can use to reduce your tax like offsetting previous tax losses against capital gains, and/or bringing forward tax deductible expenses into the year the gains have been realised etc.
One often overlooked tax benefit is the use of superannuation in Australia as a tax effective retirement wealth accumulation vehicle.
Many Australian expats are unaware that they can contribute to an Australian based Superannuation Fund even though they are not domiciled in Australia. Furthermore, they can claim a tax deduction against their Australian income for certain contributions.
Superannuation is a very good vehicle for building an Australian retirement nest egg. It provides a low tax environment to hold pre-retirement savings, possibility of tax deductions for contributions and the option of paying a tax-free pension in retirement on or after age 60 even if you are an ANRFTP.
The complexities of making superannuation contributions can be daunting. There are a number of steps that need to be undertaken to allow you to access the great tax benefits that the Australian superannuation system has to offer.
Case Study
John & Julie live in Singapore. They own a family home in Sydney which has been rented out for the past ten years while they have been in Singapore. They purchased the home for $1m and it is now worth $2.5m. They also bought a rental property they purchased three years ago for $1m which is now worth $1.5m.
As the Australian market has boomed in recent years, they have decided to sell both properties as they will one day retire to Australia but don’t wish to live in either home.
They have Super funds in Australia with $100,000 balance in each.
Tax consequences of the sale.
Capital gain on the sale of their home $2.5m-$1m = $1.5m
Capital Gain on their sale of their investment property $1.5m-$1m =$500,000
Total Gain (50% $1m to John & 50% $1m to Julie) $2m
Tax Calculations
Tax on $1m profit $61,200 + 45% over $180,000 = $430,200 each! That is of the gain of $2m they will pay up to $860,900 in tax.
(Adjustments to the cost bases may be available which may reduce the taxable gain and the tax assessed).
Options
- Retain the properties until they return to live in Australia. They would then be eligible for the 50% CGT% discount on the capital gain, plus some discount on the sale of the home depending on how long they have been absent from the property.
- As they have superannuation balances below $500,000 each, they can take advantage of the catch-up contributions and make up to $102,500 contribution to super and claim a tax deduction for the contribution. Although there is ingoing tax paid on the super contribution it is at a lower rate than the ANRFTP rate of tax.
Source: Income Tax Assessment Act 1997
The case study is illustrative only and does not account for investment returns you will receive or fees and costs you will incur.
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider you financial situation and needs before making any decisions based on this information. It is recommended you contact your tax and super professional for advice.
Blueprint Planning Pty Limited (ABN 78 097 264 554) trading as Blueprint Wealth. Authorised Representative and Credit Representative of AMP Financial Planning, Australian Financial Services Licensee and Australian Credit Licensee.
