Capital Gains Tax exemption for Primary Residence - non-residents changes

Discussion in 'Accounting & Tax' started by Sick_of_scams, 5th Nov, 2018.

Join Australia's most dynamic and respected property investment community
  1. Sick_of_scams

    Sick_of_scams Well-Known Member

    Joined:
    31st Mar, 2018
    Posts:
    121
    Location:
    Gold Coast
    Hello,

    I am in a difficult position regarding my investment property in Sydney. It is my primary residence.

    I have just moved back into it after 4 years of renting it out. I am a retiree and planning long term to move back overseas to reside in a cheaper country and live off rental income and other smaller investments.

    Eventually I will become a non-resident, however that will be a few years off.

    I understand that the Turnbull/Morrison Liberal government announced changes to the Capital Gains Tax laws regarding Primary Residence exemptions for non-residents. The CGT exemption is set to be removed for non-residents from 1 July 2019.
    The Bill has not yet been passed before parliament. This has caused a lot of expats a lot of anxiety as in the current falling property market, they basically have had to make a decision now to sell, rather than keep waiting to see if the bill will be passed and be caught out then unable to sell or selling at possibly a lower market value next year.

    There has been some confusion over the non-resident issue and I have called the Australian Tax Office who referred me to their section dealing with Capital Gains Tax. I got no clear answer and just told to refer to the website again, which I already had done.

    I spoke to a financial adviser about my predicament and advised to sell my property. I have put it on the market and already spent $8000 up front.

    But now it seems that I may have been given advice that may not be in my best interests. From my understanding, if I become a non-resident and therefore lose my CGT exemption entitlements if I sell the property as a non-resident, all I need to do is return to Australia, re-establish my residency status (which I would do every 6 years anyway - need to move back into Primary Residence every 6 years to meet requirements ) and my CGT exemption returns.

    So, in the event I wish to sell, all I need to do is just make sure I have my residency status changed. There is no pro-rata 'non-resident' period calculated with the CGT as I originally thought. That only applies to investment properties that are not Primary Residences. I asked the ATO to clarify this and confirm it but they were clueless. But from what I read on their website there is nothing to indicate otherwise.

    If it is the case then it may well be that I would be better off taking my property off the market, taking the $8000 loss now and moving out so I can re-rent this place, and wait for the market to rebound, so I can then look to sell it several years in the future.

    Would appreciate anyone with experience with CGT as I just cannot find any adviser who understands CGT properly and its implications for non-residents.
     
  2. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    My understanding of the draft law is that if you become a non-resident the main residence exemption 6 year rule can't apply. This means even if you move back in, in say 5 years, it can't be tax free. But I haven't examined in detail because it might change.
     
  3. Sick_of_scams

    Sick_of_scams Well-Known Member

    Joined:
    31st Mar, 2018
    Posts:
    121
    Location:
    Gold Coast
    Thanks Terryw,

    When I look at the ATO website this information is provided:

    "There are special capital gains tax (CGT) rules you need to know if you're a foreign resident. These rules will impact you when you sell residential property in Australia.

    In the 2017-18 Budget, the government announced that foreign residents will no longer be entitled to claim the main residence exemption when they sell property in Australia. This change is not yet law and is subject to parliamentary process.

    If the law is passed and you are a foreign resident when a CGT event happens to your residential property in Australia, you may no longer be entitled to claim the main residence exemption. This will apply to you:

    when you use the exemption as a reason for a variation to your foreign resident capital gains withholding rate
    when you lodge your income tax return. You must declare any net capital gain in your income and you can claim a credit for the foreign resident withholding tax paid to us.
    The change will apply to foreign residents as follows:

    for property held prior to 7:30pm (AEST) on 9 May 2017, the exemption will only be able to be claimed for disposals that happen up until 30 June 2019 and only if they meet the requirements for the exemption. For disposals that happen from 1 July 2019 they will no longer be entitled to the exemption
    for property acquired at or after 7:30pm (AEST) 9 May 2017, the exemption will no longer apply to disposals from that date.
    This change will only apply if you are not an Australian resident at the time of the disposal (contract date).

    If you weren't an Australian resident for tax purposes while living in your property, you are unlikely to satisfy the current requirements for the main residence exemption.
    "

    Link:
    Foreign residents and main residence exemption

    I cannot see any mention of removal of the 6 year main residence exemption? I am literally having to decide whether to pull out of my property sale or continue with it - all hedging on whether I can retain my CGT exemption if I change from resident to non-resident and back to resident before the sale.

    it is so unfair that they cannot even make up their minds in the 12th hour leaving everyone up in the air and having to decide now to sell. Is truly bad form.
     
  4. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    What does the actual draft law say?

    I wouldn't be relying on the ATO vague comments.
     
  5. Sick_of_scams

    Sick_of_scams Well-Known Member

    Joined:
    31st Mar, 2018
    Posts:
    121
    Location:
    Gold Coast
    I have had a look at the Explanatory Memoranda document contained in the website linked from the ATO site:

    Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018 – Parliament of Australia

    'TREASURY LAWS AMENDMENT (REDUCING PRESSURE ON HOUSING AFFORDABILITY NO. 2) BILL 2018
    FOREIGN ACQUISITIONS AND TAKEOVERS FEES IMPOSITION AMENDMENT (NEAR-NEW DWELLING INTERESTS) BILL 2018
    EXPLANATORY MEMORANDUM
    (Circulated by authority of the
    Treasurer, '

    On page 18 - Example 1.3. it explains a scenario of someone purchasing a property as a primary residence, renting it, moving overseas and becoming a foreign resident, then returning to Australia becoming a resident again whilst moving back into it and eventually selling it - is eligible for the CGT exemption because at the time the CGT event took place she was a resident.
    Here is the example provided:

    Example 1.3 — Main residence exemption applies
    Amita acquired a dwelling in Australia on 20 February 2003, moving into it and establishing it as her main residence as soon as it was first practicable to do so. On 15 August 2020 Amita signs a contract to sell the dwelling and settlement occurs on 12 September 2020.
    Amita used the dwelling as follows during the period of time for which she owned it:
    • residing in the dwelling from when she acquired it until 1 October 2007;
    • renting it out from 2 October 2007 until 5 March 2011 while she lived in a rented home in Paris as a foreign resident (assume the absence provision applies to treat the dwelling as her main residence);
    • residing in the dwelling and using it as a main residence from 6 March 2011 until 15 April 2012;
    • renting it out from 16 April 2012 until 10 June 2017 while she lived in a rented home in Hong Kong as a foreign resident (assume the absence provision applies to treat the dwelling as her main residence); and
    • residing in the dwelling from 11 June 2017 until it was sold.
    The time of CGT event A1 for the sale of the dwelling is the time the contract for sale was signed, that is 15 August 2020. As Amita was an Australian resident for taxation purposes at that time (as she had re-established her Australian residency) she is entitled to the full main residence exemption for her ownership interest in the dwelling as it is, or is taken to be, her main residence for the whole of the time that she owned it.

    According to this example it seems I would be exempt if I return back to Australia where I firstly have re-established myself as a resident again (I would have to make it very clear of my intentions that I was a resident again so ATO would agree I in fact was) then when that was established sell my property in that period.
    I cannot see anywhere that suggests otherwise? But I wanted to make sure I was not missing something.
     
  6. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    Yes it appears to be the case from that example

    Check the actual draft legislation
     
  7. Sick_of_scams

    Sick_of_scams Well-Known Member

    Joined:
    31st Mar, 2018
    Posts:
    121
    Location:
    Gold Coast
    Thanks.

    The draft legislation is incomplete and lacks enough details to make any sense. I cannot find a full version anywhere online either. The explanatory memorandum of the draft bill is the only document that interprets it. But I have perused other websites - namely tax sites that have basically concurred the same thing - that re-establishing residency before the capital gains event will enable the CGT exemption to take place for primary residence.
    Maybe for peace of mind I should also apply for a tax ruling as advised by the ATO (the lady truly was extremely vague about the CGT laws).

    Seems more likely that I may be better off withdrawing my property from the market, copping the upfront $8000 loss in costs involved in preparing property for sale - which I doubt any of which I will even be able to claim in next years Tax Return. Damn.


    Regards.
     
  8. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    It is complete and will make sense if you read it with the act it is amending.
    It is on the same page you linked above, here is a PDF version:
    https://parlinfo.aph.gov.au/parlInf...toc_pdf/18002b01.pdf;fileType=application/pdf

    Keep in mind that this Bill may change though.
    For your purposes see para that amends s 118-110 ITAA97

    At the end of section 118-110 15 Add: (3) However, this section does not apply if, at the time the 16 *CGT event 17 happens, you are a foreign resident.

    Then look at the minor amendments made to s 118-145

    I don't know if the ATO would give you a private ruling on draft law.
     
    Sick_of_scams likes this.
  9. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    And don't forget the definition of tax resident will probably change in near future too.
     
    Sick_of_scams likes this.
  10. Sick_of_scams

    Sick_of_scams Well-Known Member

    Joined:
    31st Mar, 2018
    Posts:
    121
    Location:
    Gold Coast
    Thanks - yes something to think about as well. I am guessing eventually the government of the day will change non-resident definition to simplify it - something like a strict 180 day rule only. I have read it being discussed. Will make being a non-resident more of a nightmare.

    So, according to the ITAA97 and the proposed amendments, as long as I re-establish myself as a resident after becoming a non-resident, I can still claim my full CGT exemption on the sale of my primary residence.

    Another thing I wish to seek clarification on is that: each 6 years when one must return to reside in the primary residence to keep it remaining as such, does that occupancy period need to be made whilst a resident?
    That is, not merely returning overseas as a non-resident and moving in for a few months and then moving out and back overseas again. As I know, even though returning to Australia as a citizen, this does not automatically make you a resident again upon arrival. You need to prove that your intentions are of re-establishing yourself as a resident again.

    But looking at Section 118.145 and the amendment proposal, there is no mention or indication that the period where the property is re-occupied by yourself is needed to be made when you are a resident (whether that be from the very beginning part of the residing back in the residence, part way through or at all) - so assuming each 6 years I could still be classified as a non-resident/foreign resident and move in the for accepted period to re-start the 6-year Primary Residence clock again. It is just the Capital Gains event (selling) that I need to well and truly establish myself as a resident again.
     
  11. Paul@PAS

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

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    The proposed law change is still sitting there and could even be dumped if a election occurs. Its not even near a schedule for being reintroduced. All Bills are dropped when a election writ is issued.

    Possibly but unlikely. There are limits to the duration of a main residence exemption. One of these occurs when you cease to be a resident. The proposed laws limit use of the 6 year rule in conjunction with being absent as a tax resident. The 2012 changes also impact IF the duration of absence exceeds the 6 years by even one day.

    These law changes are intended to prevent use of the 6 year rule at all during periods of non-residence. Only factual periods of actual residency would be recognised IF the taxpayer/s return and sell after recommencing residency for 6mths +
     
  12. Sick_of_scams

    Sick_of_scams Well-Known Member

    Joined:
    31st Mar, 2018
    Posts:
    121
    Location:
    Gold Coast
    Well that has completely confused me now. Where is it mentioned in the proposed legislation as I don't know where it is mentioned? So as soon as one becomes a non-resident then the 6 year Primary residence rule is cancelled out completely? If so then I cannot apply for full CGT exemption at all after I become a non-resident?

    And 'factual periods' of residency only counted after I was to return, re-establish residency, then move into the property again for a minimum of 6 months? If the Primary Residency has already become null and void for being a non-resident then returning to become a resident would make no difference to seeking the full CGT exemption - only able to apply for a pro-rata CGT discount on the period of residency (the usual 50% CGT discount) versus period of non-residency (CGT at the Foreign Resident Rate).

    Extremely confused now.
     
  13. Paul@PAS

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

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    That is a key element of the reforms. Yes if you return, regain residency the 6 years may count provided you regain tax residency and sell after at least 6 months. Returning to stay 6 months to sell then depart wont likely meet the requirements however. I have seen many claim they can do this but argue its not correct. But if you returned with intention to remain permanently (or at least the forseeable time) then the 6 years may count. Its not as simple as many think and why I said - its possible.

    Exceeding the 6 years of absence (while non-resident) also imposes other CGT impacts. This then invokes the rules that remove all CGT discount involved in the pro-rata calcs for the taxing period while non-resident.

    The better news is that with only 5 sitting weeks of Parliament left before the next election (18th May 2019 or earlier depending when the writ is issued) that this law has VERY limited change of getting up and the bill will expire and not be capable of being implemented by the next Government without a new start date and a re-write even. I am waiting on the parliamentary schedule for the 5 weeks to come up in the next few days. Political commentators are just starting to realise there is approx 12-15 weeks of potential sitting time needed to deal with existing laws. But 5 or less weeks of sitting time. The schedule of what they plan to deal with will let us know more. And the deadlocked lower house will slow things further.
     
  14. Sick_of_scams

    Sick_of_scams Well-Known Member

    Joined:
    31st Mar, 2018
    Posts:
    121
    Location:
    Gold Coast
    Thanks Paul@PFI. Appreciate all the info. Have a lot to think about.
     
  15. FredBear

    FredBear Well-Known Member

    Joined:
    7th Aug, 2018
    Posts:
    467
    Location:
    Sydney & Abroad
    Similar position for us too - long term PPOR been rented out 4.5 years while abroad, need to see which way this law will go, if it goes through have no option but to sell, the CGT impact if the situation came up that we had to sell after 30th June 2019 and were still abroad is just too big to ignore. Have contacted all the senators pointing out the issues for expats with this legislation, many responded but unfortuately there is a lot of confusion even amoung those who are going to vote this into law - some even think that don't worry this won't affect Australians.
    Bit like watching elephants racing - looking at the senate sitting time remaing before the next election must be held, and matching this to the progress of this bill up the senate list. Will time run out or not?
     
  16. FredBear

    FredBear Well-Known Member

    Joined:
    7th Aug, 2018
    Posts:
    467
    Location:
    Sydney & Abroad
    Wouldn't tax agreements between countries come into play here? If I understand correctly, you are always a tax resident of somewhere, and can't be a tax resident in two countries at once. When for example you move from country A to country B and then after a while back to country A the tax agreement spells out how to determine if you are a tax resident of B or A while in B. The first key determining factor is usually this:
    a) the individual shall be deemed to be a resident only of the State in which a permanent home is available to that individual; but if a permanent home is available in both States, or in neither of them, that individual shall be deemed to be a resident only of the State with which the individual's personal and economic relations are closer (centre of vital interests);
    So if you didn't keep a place to live in A (sold it or rented it out), and moved back to your PPOR in B, then you must be a tax resident of B if the rules of A say you are no longer a tax resident of A. Would this be correct?
     
  17. Sick_of_scams

    Sick_of_scams Well-Known Member

    Joined:
    31st Mar, 2018
    Posts:
    121
    Location:
    Gold Coast
    Sorry that you are going through all this as well. The stress is unbelievable. A total shambles the way it was announced with such a short deadline and on the precipice of a falling market. And such a punitive policy not regarding the complexities of people's life circumstances.

    The confusion has cost me $8000 non-refundable/deductible so far in just set up costs to sell which I will lose if I withdraw from the market - not getting any luck with buyers anyway at the moment in this very quiet market and the clock is ticking to the 'quiet months' post Christmas. Spoke to a real estate acquaintance who said that he has had several very stressed out expats trying to sell as well because of the CGT bill.
    Not good when I am a self funded retiree who is living off a net income less than a pension equivalent - I am also copping the retrospective QLD Land Tax & Absentee Surcharge introduced as well in 2017 just 4 months after I settled my QLD property! Double whammy!

    I just don't get it why the Turnbull/Morrisson government targeted the non-resident Australians who I dare say do not represent a large percentage of the property market and not affect the rising property values - the reason why it was introduced in the first place. Australia is no longer the place it used to be IMO. Doesn't look after its own people.

    [​IMG]
     
  18. Paul@PAS

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

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    No. Australian tax law considers all Australian real property is subject to tax in Australia including a persons home - Tax law may grant a exemption called the main residence exemption. Whether that property has an exemption, a part exemption or any reduction in the taxable amount is determined based on tax law including provisions which govern tax residency. Then common law views on tax residency can also impact this matter. A person could have two properties each in a different country and move between each and have no clear residency. Thats when the DTA may apply.

    A person can be subject to tax in more than one country. Resident or non-resident. Or in the USA based on citizenship meaning dual taxation definitely occurs and provisions often exist to limit that impact. The DTA seeks to assist to eliminate some double taxation. However Australian asserts a right to tax Australian real property based on the property itself. Tax law addresses how the tax is determined incl any exemptions. Residency is another aspect affecting the tax calculation

    The DTA is not tax law. It is a guide to assist which tax law applies when dual taxation concerns occur. With Australian property there is none as far as Australia is concerned. In the DTA the word "home" does not necessarily mean something you own.
     
    Last edited: 8th Nov, 2018
  19. FredBear

    FredBear Well-Known Member

    Joined:
    7th Aug, 2018
    Posts:
    467
    Location:
    Sydney & Abroad
    Thanks for your reply - really feeling the pain and stress of this uncertain situation too. We had taken the approach of putting most of our eggs in the PPOR basket and now are being wacked for that - 21 years of working hard, living frugally and saving is now at risk of a huge tax hit. Currently have the PPOR on a very short term rental at a huge discount so we are ready to press the sell button if this legislation goes through. PM has quite a few other expat owned properties under his management with landlords with the same concerns. Many international companies are located in the CBD, North Sydney, Chatswood, North Ryde area so the number of property owners who are/have/will spend time abroad is probably higher that the national average, so this area will be hit hard.
     
  20. FredBear

    FredBear Well-Known Member

    Joined:
    7th Aug, 2018
    Posts:
    467
    Location:
    Sydney & Abroad
    Thanks for your reply Paul - Sorry if I wasn't clear enough, I certainly know that you can be subject to tax in more that one country (I pay taxes to three countries), the point was that you can be a tax resident in one country only at any point in time, that country taxes you as a resident, the others then tax you as a non-resident. DTAs usually spell out that real property may be taxed by the country in which it is located also for non-residents, and credit given by the country of tax residency for the taxes paid on the real property in the other country.
    Actually DTAs are tax law, they form part of the "International Tax Agreements Act 1953", the legislation is here:
    International Tax Agreements Act 1953