Australian Expats Targeted Again Under Changes to Property Tax

Discussion in 'Accounting & Tax' started by Dean Collins, 24th Oct, 2019.

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  1. Dean Collins

    Dean Collins Well-Known Member

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    Great summary of the proposed 20th of June 2020 "Main Residence Exemption" MRE tax changes that the Australian Liberal Government/ATO is proposing to implement :(

    - Australian Expats Targeted Again Under Changes to Property Tax

    The fact that if you sell your property while living overseas that you would have to pay capital gains for the entire period you owned it is abhorrent and a money grab by politicians when they know we have no political representation.

    This strongly discourages Australian property owners from moving/living/working overseas to advance their careers resulting in Australia becoming a backwater with no foreign management experience adding value to our society.
     
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  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Old news. The Govt shelved this when the election was called and had announced it was to be re-tabled without amendment bar the start date. Good news it has been amended.....

    I was drawn to a modern rethink of the term expat. It not valid for tax purposes as such, as a persons tax status is determined by the "tax residency". You can depart Australia and still be a tax resident of Australia. Its a term only used by certain persons who migrate or change country of residence. Its been given media focus that the term expat is generally used in white countries (I quote Sydney Morning Herald and a UK news publication) where expat is seemingly used by persons who leave and migrant is used to describe arrivals. That terminology accordingly has some mild racist and cultural ranking tones. In other countries they describe migrants for in and outbound. The media suggested nobody had ever referred to middle eastern refugees as expats.

    A decision to migrate should always be taken seriously as very few nations on this earth allow lifetime preservation of the tax position of a person based on their country of birth, origin or domicile. US citizens already face this drama since citizenship creates and maintains a tax issue. Its a rare example.

    The proposed law is also akin to other similar laws in the UK, USA and many other nations that have been all considering the tax concerns with migration. Often more generous tax concessions such as exemptions apply to a persons own home (USA it is concessional) They are seemingly seeking to reduce "loopholes" by tapering any exemption.

    The argument regarding skills is likely addressed in the (heavily) modified 6 year period now in the new Bill. This appears to recognise that people may bring back valuable skills in the short to medium term (6 years) . For those outside 6 years I guess it indicates they have made a choice not to bring the skills back and make their absence more permanent in nature.

    The revised law has been heavily modified for its earlier version. The fundamental issues evident seem to relate to allowing the 6 year absence provision to be used. This is a major win and appears to allow for several modified exclusions:
    1. Person who migrate out of Australia may use the costbase reset rules in s118-192 to reset the CGT cost IF they are eligible;
    2. The 6 year absence rule is now allowed and appears to have been broadened so that the 6 year period is used a a test basis for a sale that does occur. If this occurs within 6 years then no impact appears evident;
    3. If a migration occurs and the person returns to Australia and recommences tax residency the changes will NOT apply. The punitive tax outcomes occur when a sale occurs outside 6 years if a owner does not commence tax residency at the time they contract tos ell
    4. There are some life event exclusions not previously evident.


    The explanatory memorandum to the revised Bill provides details

    There is a proposed start date of 30 June 2020 provided the property was owned at the time of the original announced Bill ie May 2017. Non-resident owners of property that was ever a main residence may need to consider how s118-192 and the 6 year period may apply to them and whether they may sell property while absent if the 6 years safety net is not met. They may sell earlier to ensure the gain occurs prior to 30 June 2020 OR may choose to defer a sale until after return OR may seek to consider if the life events will protect a unscheduled event.
     
  3. Dean Collins

    Dean Collins Well-Known Member

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    I noticed in the article and in your comment @Paul@PFI about resetting Long Term Capital Gains

    "3. If a migration occurs and the person returns to Australia and recommences tax residency the changes will NOT apply."

    Obviously pending final wording of the legislation are you saying that as long as the person comes back to Australia and moved back into their main residence that "if they are a tax resident of Australia" the clock resets and the ATO no longer forces them to do a pro-rata on capital gains for the entire time they were away?

    Or are you saying they are still taxed on the current /old pro-rata system?
     
  4. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    No.

    They merely need to return to Australia and become a tax resident again. They could live in a tent if they wish. If they moved back to the house then a pro-rata adjustment for a the days may occur however. They key factor is tax residency. Not merely flying back for a bit to return. The tax impacts are as if you had never been a non-resident. The existing tax laws that pro-rata exempt + taxable days then apply not the new laws. The 6 year absence, the former main residence all apply.
     
  5. Tattler

    Tattler Well-Known Member

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  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Going to be a media issue that just looks fair to most taxpayers. Hard to explain in media other than people who left Australia who want to "rort" the tax system. Reality is very different. Its about taxpayers who had a tax basis as a tax resident that is being stripped IF they sell while non-resident. Most newspaper readers would see no issue with the basis premise.

    Media are already beating it up... $581M....Treasury costings are approx $100-$150m pa. H&R Plop have taken the head in the sand line. The Libs announced immediately after the election an intention to re-introduce this law and the Tax Institute was instrumental in asking that very question. Maybe they missed the article ?
     
    Last edited: 28th Oct, 2019
  7. MichaelW

    MichaelW Well-Known Member

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    Hi Guys,

    This is of particular import to me as I am currently an expat living in Hanoi Vietnam and no longer resident in Australia for taxation purposes. I find the narrative around expat versus migrant interesting and actually completely inaccurate. I believe the definition is simple. Those who live abroad temporarily with the intent to return home at some point are deemed expatriates. Those who move to a country with the intent to make it their new home are deemed to be migrants. Surely that is simple to understand. So, yes, I am an expatriate as I fully intend to return to my country of birth at some stage when the work opportunities in my current country of residency lapse. I haven't migrated to Vietnam. I have no intent to live here for the rest of my days, it is a temporary arrangement that is beneficial at the moment but ultimately I will return to Australia and once again be deemed resident in Australia for taxation purposes. I have no intention of applying for permanent residency in Vietnam. Bringing racism into this definition is ludicrous.

    Fortunately, we just sold our former PPOR in Australia before departing for Vietnam. But to think that it would not be treated as a capital gains tax free sale in the future if we had been non-resident when we had sold it is once again ludicrous and a tax grab by the Australian government. In fact, we reviewed the taxation law as it stands and you can claim continuance of PPOR status for a period of non-occupation under the 6 year absence rule. We didn't need to do that as we sold it before departing. But to change this law would be severely discriminatory to expatriates and totally unfair. They are just another form of non-resident PPOR owners. At least the 6 year absence rule seems now to be remaining in place.

    Just my 2c,
    Michael
     
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  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Emigration = Outbound
    Immigration = Inbound
    describe migration.
    there are various descriptive subsets to each. ie illegal, temporary, perm residency etc.

    Expat fails to address anything whatsoever concerning migration which is the global conventional term for movement across borders. The word derives from latin: expatria. Out of the country. Its arguable that the term may be used by someone out of the country to retain a connection wit h their perceived homeland / fatherland (Dictionary used that term). However it doesnt align at all with tax.

    The media articles have pointed out that just as many other terms have lost their usage in modern times the term expat tends to be retained in use by white people where references to others generally calls them migrants. After all arent those middle eastern refugees ex patria too ? Its like old references to canecutters or cottonpickers were never referred to as migrants either. A far more horrid term was used for that practice

    Expat is also not a relevant term whatsoever for taxation. A persons tax residency must be determined. A person can be an "expat" or even have migrated to another country and still be a tax resident of Australia. The new laws never once mention expat. Nor do any others. Expat is not a legal term.

    The new arbitrary loss of the 6 year rule will be a concern unless the owners can satisfy one of the life events or defer their change of tax residency. That element seems very unfair and may hamper some peoples options. When they clearly intend to return then they can do so and later sell without tax concerns. But many people may sell after they depart. I believe a change in behaviour will push pressure on offshore employers to give the illusion of a shorter term engagement that is later extended....After a sale has completed. And for those planning to return they can sell after return BUT if they change their mind it may be harmful outside of 6 years.

    My greater fear is a rewrite of tax residency laws (departing Australia) which are known to be under review.
     
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  9. MichaelW

    MichaelW Well-Known Member

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    That's it. As I said, I'm an expatriate as I am expatria. i.e. out of my country as Australia remains my country. Were I to migrate to another country with the intention to make it my country of permanent residency then I would no longer be expatriate I'd be an emigrant. I'm not referring to tax here at all just personal intention.

    I get the denotation, I was principally talking connotation. I believe Immigration and Emigration are normally used in terms of permanent intentions. Expatria refers to those of us off in another country for a while for whatever reason floats your boat but with the full intention of one day coming home.

    There's lots of non-white expatriates. In fact, most of my expatriate workmates here in Vietnam are not white though they are most definitely expatriate Australians abroad.

    Again, just my 2c,
    Michael
     
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  10. FredBear

    FredBear Well-Known Member

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    Exactly! We have owned our PPOR in Sydney for 22 years, most of that time living in the property as tax residents and paying tax to Australia. If we sell while abroad, we would have a 7 figure CGT bill with this new legislation that we didn't have before.
    To say just sell before leaving, unfortunately it is not so simple. I've changed tax residency many times in my working life, and the time from initial contact to actually being on the ground working abroad can vary from months to as little as two weeks. Often opportunities are not confirmed or can disappear at the last minute. You also have to co-ordinate spouse's work, children's schooling, obtaining possible work permits or visas etc so getting the timing right for all these things is challenging, and then to add a house sale into that mix... Also always at the back of your mind is is this new job going to work out? What about the wife & children, are they going to adapt? Sickness of family back in Australia or something else that might force a return?
     
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  11. Dean Collins

    Dean Collins Well-Known Member

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    Well looking forward to seeing the final text of the legislation then if this is actually the case.....
     
  12. Appy

    Appy Active Member

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    If you have an IP and are become a non-resident for tax purposes for a period of time, I understand that you lose the tax free threshold, however if the property is negatively geared, will the tax (on the money obtained in rent) owed be zero? And any losses carried forward until tax residency is reinstated? i.e can be used at the time that a CGT event occurs or on future income?
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    If there is a loss the loss can be carried forward and potentially reduce CGT.
    If the property is negative geared with a positive income overall this is not possible (taxpayer might have other assessable income)
     
  14. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes the loss will accumulate and can later offset either a CGT gain or future ordinary income. You could return here and have a tax holiday of sorts. I have a few clients in that position. They do a variation so their employer withholds $0.

    The rental "income" is not assessable as such. The NET income or loss is what is impacted. Often non-residents only have a IP loss that accumulates. Also if you have a HELP debt you may need to pay this while absent.

    The CGT discount reinstates to 50% at the time you return too (no discount while non-resident). The future gain would be apportioned based on exempt use, 50% disc and 0% discount based on the # of days. Although s118-192 may also impact a former home (maybe)

    One trap is loss of the former main residence exemption under new laws just changed. If you are absent 6 years + then the former exemption period is lost. And is replaced with 100% taxable days. Sell when you get back (permanently) and its all reinstated !!
     
  15. Appy

    Appy Active Member

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    I see, thank you so much for clarifying
     
  16. Dean Collins

    Dean Collins Well-Known Member

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    BTW Good timing, Atlas Wealth (an expat service provider), just did a video on the MRE changes yesterday - might interest some of you -
     
  17. Cia

    Cia Well-Known Member

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  18. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    These laws have been known for almost 2.5years. Expats is a white man's word for immigrant and takes a personally first person view while also seeking to ignore the fact of lost tax residency by arguing citizenship. Not a issue any politician will back at present
     
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  19. thesuperman

    thesuperman Well-Known Member

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    I presume this law wouldn't affect someone who has a PPOR as a pre-CGT asset and that PPOR would continue to be CGT free, no matter when they decide to sell it?
     
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  20. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Quite incorrect to be honest. And why I would encourage all affected persons to seek competent tax advice. I just had this very discussion with a client who is a US based former AU resident last week.

    The property may be pre-CGT but the value of the exchange rate variance could be either a CGT or foreign exchange income issue. Typically from the date it ceases to be a tax exempt asset or the date when residency changes and that element can get complex. So while in AUD terms the gain or loss could be exempt from CGT as a exempt pre-CGT asset the fatal issue can be the double taxation rule which could see the exchange rate variance that is realised upon sale as a forex gain / loss rather than a CGT event. And if both apply then the double taxation rule denies the CGT matter in preference to the ordinary income position OR the forex rules which do the same. However the value subject to this issue is the asset value or cost (not its sale value) and the date when this commences must be determined. In these cases I generally recommend a ATO binding private ruling

    eg Francis boys a Sydney property is 1983 at acost of $100,000. It is now worth $1m. Francis departed Australia in 1989. He now seeks to sell the asset. Fortunately the exchange rate now is not vastly different to 1983 and his exchange rate gain may be minimal. However his neigbour who did the same thing in 2010 acquired a property when the exchange rate was .91 and soon moved to the USA. He could face a forex gain of $56K on the cost of $100K also subject to CGT.

    CGT and foreign exchange gains and losses

    US based former Australians who migrate without likely return may also consider US estate taxation laws and death and a bequest of the pre-CGT property can bypass the exchange rate being realised and avoid CGT altogether. In both countries.