Foreign resident for tax purposes - capital gains tax / other considerations

Hi all

I wanted to get your thoughts on the following situation - relates to the foreign resident capital gains tax changes. Do you agree with the options and considerations below, or are there further considerations that need to be thought through?

Background:

• Mr A is an Australian citizen but has lived and worked overseas since 2004.
• In 2015, Mr and Mrs A purchased a house in Melbourne VIC for $2m, and it is currently valued at $3.5m. They made it their PPOR and moved back to Melbourne after Mr A took a redundancy package, intending to stay in Melbourne with their family for the longer term.
• However shortly after Mr A's move back he found another role overseas, so the family left Melbourne and have lived overseas since then.
• During this whole period the house has not been rented out and has never derived income.
• Mr & Mrs A would also come back each year to Melbourne, spending a month in June and another month in December at the property.
• Throughout the year Mrs A's parents lived at the property.
• The property has been treated as their primary residence during the whole ownership period and they have received a main residence exemption from the VIC SRO, so land tax has not been paid.
• Mr and Mrs A have not been a resident of Australia for tax purposes since they left Australia in 2004.

Current situation:

• Mr and Mrs A would like to return back to Australia in the next few years, however they do not want to stay in VIC. They may move to NSW or QLD (timing of the move is uncertain).
• As such, they wish to sell the VIC property.

Options and considerations:

1. Sell the house while they are foreign resident for tax purposes: due to the changes to the capital gains tax rules for foreign residents, they lose their main residence exemption back to the day they purchased the property in 2015. Upon sale: a) the foreign resident capital gains tax withholding regime will apply and the purchaser will need to withhold 12.5% of the purchase price and pay it to the Tax Commissioner (as they purchase the asset from a foreign resident). This will equate to ~$438k. As it is a non-final withholding tax, Mr and Mrs A will receive a final tax assessment when they lodge an income tax return. Their final capital gains tax bill will be (simplistically) calculated off their capital gain of $1.5m, at non resident tax rates. As foreign residents they will also not be eligible for the 50% capital gains discount, so their final tax bill will end up being ~$600k in total.
2. Sell the house after they return back to Australia and re-establish Australian tax residency: By being an Australian tax resident at the time of sale of their main residence, the main residence exemption is still available to them, despite Mr and Mrs A having previously been a foreign resident for tax purposes since purchase of the property. In this case, if they sale the property after re-establishing Australian tax residency, they will have a nil capital gains tax bill.
3. If option 2 is adopted, Mr and Mrs A may also chose to rent out the property in the meantime. As this would be the first time the property would be used for income-producing purposes, Mr and Mrs A's will be able to continue to treated the property as their main residence while being used to produce income for six years. Land tax will need to be paid should Mr and Mrs A chose to rent out the property.
4. Land tax since 2016: Given Mr and Mrs A do not live in Australia, and only return to Australia up to 2 months a year, it would appear that they have not satisfied the VIC SRO absences from a principal place of residence requirements. In this case, would they need to advise the VIC SRO of this, and be backdated for charges?

Absences from a principal place of residence (Principal place of residence (PPR) exemption from land tax | State Revenue Office)
A principal place of residence exemption may continue or be granted where the individual owner or vested beneficiary is temporarily absent from their principal place of residence. This may be due, for example, to working interstate or overseas.

For this exemption to apply for a given assessment year, the owner or vested beneficiary must have either obtained a principal place of residence exemption or used the property as their principal place of residence for at least six consecutive months immediately before the absence and must satisfy us that:

• The absence is only temporary.
• The individual owner or vested beneficiary intends to resume occupation of the principal place of residence after their absence.
• No other land in Australia is exempt as their principal place of residence land during their absence.
• The rental requirement is satisfied.

The rental requirement is satisfied if the owner or trustee did not rent out the land for six months or more in the year before the assessment year during the period of absence. This exemption is not available if the individual owner or trustee rents out the land for six months or more in the year before the tax year, for all relevant years being claimed.

From the 2021 land tax year, the rental restriction was replaced with a no income requirement. This means the exemption does not apply to a tax year if any income was derived from the land in the year preceding the tax year. For the 2021 tax year, there was a transitional arrangement whereby the owner or trustee could still qualify for the temporary absence PPR exemption if they rented the land for six months or less in 2020.

This exemption does not apply if the land was unoccupied due to construction or renovation of a residence on the land. However, the owner of land can claim a refund of tax paid on the land after they moved into the residence upon completion of the construction or renovation.

This exemption is limited to six years from the date the absence started.

 

get some solid tax advice and a lawyer for land tax as accountants cant advise on that. maybe a tax lawyer better.

dont think you have accounted for third element costs in your scenario of selling while non resident.

 

The land tax assumptions are flawed. A property cannot be "considered a principal place of residence" if the owners are absent from the country as it is NOT their place of residence. State land tax laws are fairly strict in that regard and consider the use of the property as a principal place of residence so that use test is far more onerous than say the CGT absence rules. Sale will trigger a land tax clearance certificate issue in any event. SRO dont give exemption, the taxpayer may be correctly or incorrectly recorded for that being the property use.

CGT withholding on sale may also be imposed.

The sale after recommencing tax residency may be a preferred choice as all past exemptions are reinstated. The fact the property hasnt been rented may assist continuedCGT exemption without the limit of 6 years perhaps.

I agree some land tax legal advice is warranted. Note also that as the property wasnt rented this may not produce a deduction but may add to the CGT costbase PERHAPS. But if the property is to be rented for the first time this may even be ignored along with all the holding/ownership costs racked up so far. May help to perform a side by side comaprison of what the CGT implications are of 1. Sell while non-res, 2. Sell after 6mths return and 3. Rented then sold.

 

Thanks for your response Paul. Yes I thought the land tax rules are pretty clear regarding absences from the PPOR - I wonder if this happens quite a bit, whereby the owners do not understand the rules in detail and get pinged at some point in the future with backdated land tax and interest charges.

Good idea on the scenario analysis. Always good to understand the consequences before action is taken!

 

Yes. Heaps. Mostly common is assuming that because a CGT exemption may apply that land tax is also not relevant. Such different rules. Land tax has a stricter test of use and even vacancy wont meet the tests let alone other family or rental. All leave the property exposed to tax. Depends on thresholds and valuers too. But since Vic has a low phased in threshold it tends to catch many more out than say NSW where a higher t/hold applies. Land tax clearance cert process catches many out.

Basic rules for land tax is exemptions are very limited and the own home USE is one main one. Move out and its possible its taxable.