Expats and Main Residence - You Will Probably Lose Your Exemption From This Week

Discussion in 'Accounting & Tax' started by Mike A, 29th Nov, 2019.

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  1. Mike A

    Mike A Accountant

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    The Laws should be passed by the Senate this week.

    Unfortunately the lobbying by the professional bodies and many tax professionals hasn't resulted in what many believe is a fair and equitable outcome.

    Basically the main residence exemption will be denied EVEN if the property was previously used as your main residence for a part of the time.

    What if you lived in the property for 4 years and rented it for 1 year prior to departure and becoming a non resident ? Do i get a partial main residence exemption ? Nope. Explanatory Memorandum states

    "1.29. The partial main residence exemption no longer applies if, at the time a CGT event occurs to the ownership interest in a dwelling, the individual that owns it is a foreign resident."

    Ok so what about the first used to produce income rule ? surely that will help me ?

    Unfortunately no again.

    "1.32 The special rule in section 118-192 where a dwelling that is a main residence is first used to produce income to assist in working out a capital gain or loss made from a dwelling does not apply if at the time a CGT event occurs to the ownership interest in a dwelling, the individual that owns it is a foreign resident.

    Some planning will be critical now.
     
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  2. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    One of the most fundamental strategies is that taxpayers must consider returning to Australia and recommencing tax residency (you cant just arrive for a few months and plan to depart) THEN sell the property. In that case the issue is ignored and unwound.

    The key operative date of 30 June 2020 will need to be considered by taxpayers who have no plans to return.

    The other key issue will be the life events. They can be used as an excuse and shouldnt be ignored.

    The issues concerning death however remain a stumbling issue. Estate planning may need review. An absent person may not want to inherit a share of Australian property for example.
     
    Last edited: 29th Nov, 2019
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  3. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Just found a Committee paper on the proposed law. I dont know why they call it consultation process. They listened and just concluded - that they need to make Australian living overseas aware of the change "so they can plan accordingly". After hearing evidence that explains a number of flaws in the proposed law. Like dying.

    It makes you wonder when they lose touch with the same people who vote them in.

    Chapter 2 – Parliament of Australia
     
  4. Mike A

    Mike A Accountant

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    Was terrible. A lot of people lobbied for greater equity but it seems that once you decide to leave the Australian tax system then you may as well be penalised.
     
  5. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I have a real issue with the inequity

    Dave and Mabel have owned a property in Sydney that cost $400K that was their home between 2001 and 2012. They still rent a home in Hong Kong and were planning to return but with kids now locally established they may sell. They miss the June 2020 deadline due to local troubles with light rail and tollways and endless local traffic issues as well as depressed lending market which hampered selling and a contract is only signed on 10th July 2020 for $1.5m. The value at the date they departed in 2012 was $1m.

    Dave and Mabel will now face a CGT profit of $1.1m that is fully taxable at non-resident tax rates (Tax = $458K). If they had sold with a contract signed on 30th June 2020 the CGT profit would have been approx $125K (Tax = $40,600). But in hindsight if they had sold as late as 2018 the tax could have been $0

    So the extra tax is as much as almost half a million dollars. In two years. Thats $229K a year in tax. I wish I could be the franchise.
    And the issue of third element costs may bite some hard. In the above example in the period 2001 to 2012 Dave and Mabel had paid interest, rates, insurance etc and these would have been third element CGT costs since they were private costs that they couldnt claim a tax deduction for. But they knew back in 2012 when they left that s118-192 refreshed their costbase and so you cant add in those third element costs. So they didnt bother. Now their trusted adviser MikeA tells them - Sorry s118-192 gets stripped away and now you CAN claim these third element costs and every single dollar is a benefit at between 32.5% and 45%. They estimate these costs could be $300K and save them 135K in tax...But they cant access the information. Bank says no. Nobody can help. They can only guess what it may have been. They cant claim costs they cant substantiate.

    Maybe we need a law that taxes all former politicians this same way ?

    So unfair.

     
    Last edited: 29th Nov, 2019
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  6. Mike A

    Mike A Accountant

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    Spot on mate
     
  7. BennEznElle

    BennEznElle Well-Known Member

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    Crazy changes really. The least they could do would be grandfather it like the 2012 changes around CGT discount.

    presumably this will flow through to the ability to access downsizer super contributions as well.
     
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  8. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Only a tax resident can access downsized concessions. I checked the legn and can't work out when they must be resident.
     
  9. BennEznElle

    BennEznElle Well-Known Member

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    There doesn't appear to be any requirement that the individual is a tax resident to access the downsizer contributions, only that they are eligible for a partial main residence exemption under the CGT legislation.

    The current Bill to remove the MRE for non residents will of course tie these 2 together, in that the individual would need to be a resident at contract date as otherwise they would not get the MRE at all (unless they qualify for the proposed 'life events' exception).

    Accordingly, there could be opportunity in this transitional period in my opinion, where a non resident could access the downsizer contribution, so long as they are able to satisfy the other conditions, and could be particularly useful for those that are looking to sell their property to avoid the imposition of the new legislation. . This would need to be considered in conjunction with other rules, and could be dangerous in the case of an SMSF. In that case you may already have a compliance issue due to residency.
     
  10. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes thanks for that. I saw some conflicting issues on this last week and agree it limits the concession to a former or present residence in Australia but not one in a foreign country.

    The strip down of the loss of the CGT concessions MAY have some application to some taxpayers who may lose this concession at 30 June 2020 however if they subsequently return and sell they may only need to meet the 10 year test at that time provided they have recommenced tax residence when they sell OR is within 6 CONTINUAL years of the change of residency then they experience a life event AND the property was a residence at some time in the 10 year + ownership period (ie the full or partial main residence test)

    Lots of ifs.....

    The trap to downsizing and the new CGT rules is that one of the required tests may not be met by a non-resident:

    the proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption, or would be entitled to such an exemption if the home was a CGT rather than a pre-CGT (acquired before 20 September 1985) asset

    The effect of mentioning pre-CGT assets means that they are eligible IF the 10 year rule is also met and the property was also a home at some point. It basically pulls the pre-CGT asset within the CGT asset regime just for the residency test.
     
  11. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    If the person was a non-resident at the time of the sale they cant access downsizer contributions as the main resident test is stripped and this makes the property ineligible. Subject to all the other tests. That complexity could lead to people missing the concessions ie life event limits within 6 years.

    I would have concerns with a person affected by the non-resident contributions issue in a smsf seeking to use the downsizer rules. They really need to resume tax residency. This test is more important than any smsf issue
     
  12. qak

    qak Well-Known Member

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    I'm just pondering how they will collect the tax. Pretty confident most people wouldn't bother ever coming back if they were faced with a debt of hundreds of $000s.
    Will they require 'certificates' from the ATO on sale of a property or else withhold part of the proceeds?
     
  13. FredBear

    FredBear Well-Known Member

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    Actual votes in the house of reps was 76 ayes and 64 noes. Labor party was 100% No and everyone else Yes.

    Now is the time to contact the senators. There are 76 senators: 35 Coalition, 26 Labor, 9 Greens and 6 others. The Greens and the cross-bench are critical.

    Contact details for all senators can be found here:

    Senators – Parliament of Australia

    I will be doing all I can: contacting all of the senators via email and phone, this helped before as the legislation was delayed and finally lapsed: even some of the liberals got cold feet about this.

    Not surprised that it was passed by the Reps, my impression is that they mostly haven't read and understood the legislation that is being voted - just vote as the party says.

    Why my interest in this? after having owned our PPOR for 22 years, we are facing a 1.5 million CGT bill if we sell after 30/6/2020 that we otherwise wouldn't have.
     
  14. Mike A

    Mike A Accountant

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    Phone calls will be better and better get moving as The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 is scheduled for debate by the Senate today, Tuesday 3rd December 2019.
     
  15. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    A sale of most property for $750,000+ already requires a tax clearance. Two years of no lodgement means it is refused. Being non-resident it is refused. There is a implied suggestion of income tax evasion if no returns were lodged and if they had it will confirm the non-residency issue. Withholding tax at 12.5% applies. Note this is withholding and not final tax. The ATO could issue a default assessment which cant be objected to and imposes a 75% shortfall penalty. In some cases that withholding may be a way to evade the final tax but it also acts as a trigger if the taxpayer returned even for a holiday. A DPO (departure prohibition order) can be raised by the Commissioner. Death doesnt evade this tax. The executor would be liable. Or a beneficiary.
     
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  16. Mike A

    Mike A Accountant

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    the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 has just passed the Senate without amendment. The Bill now awaits Royal Assent.
     
  17. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Which will occur
     
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