On December 6, 2019, the Australian government officially passed the “Reducing Pressure on Housing Affordability Measures” Bill amendment. This marks a house-sized apocalypse for Australian expats, living overseas who own property back in Australia that they were considering selling.
I sat down with Jason Stoch, a friend of America Josh from UpTrend Advisory, to answer some of the questions you might have.
So now… Over to Jason! Some of it gets a bit technical but we thought you might like it that way.
Introducing the Reducing Pressure on Housing Affordability Measures Bill Amendment
What this all means in a technical sense is that the “Main Resident Exemption” is no longer claimable for Australian Expats effective from 9th May 2017 and from 1st July 2020 for those expats who owned their property prior to 9th May 2017.
Take a deep breath. Get a Tim Tam. Slam it. Now let’s get back to processing what this means.
Regardless of how we all feel about being targeted as Australians whilst living overseas, the goal of the government in passing this law was to reduce pressure on housing affordability.
What has this amendment changed?
Foreign residents (probably you, dear reader) will be not entitled to the Capital Gains Tax main residence exemption resulting from a sale of their home from 9th May 2017, which means that the full capital gains tax will be paid at foreign rates (which are higher than resident rates).
There is a small grace period only for the non-residents who owned their property prior to 9th May 2017 where the rules will only take effect from July 1, 2019. This provides you with the opportunity to take advantage of the main residence exemption prior to June 30, 2020.
Special exceptions to the rule
There are few limited exceptions to this rule, however.
Individuals who have been foreign residents for a period of six years or less may be able to access the Capital Gains Tax main residence exemption if, during the period of that foreign residency any of the following occurred:
- The individual, spouse or child (under 18) has been diagnosed with a terminal illness
- The individual (so, the beneficiary, because of your deadness), spouse or child (under 18) dies
- The individual divorces and the assets are split between two parties
What this means for you
This is a punitive law that has a few factors to consider:
- If you are a non-resident of Australia and you own a home that you purchased prior to 9th May 2017, you may need to consider selling it prior to June 30, 2020, to allow you to access the main residence exemption to avoid the high taxes
- If you are a non-resident of Australia and you own a home that you were thinking of selling, you might need to hold on until you return to Australia one day and become a resident again
- You might need to consider relocating back to Australia sooner than originally planned if you know you will need to sell your home in the short term
Ok, so how does this work in practice?
Example 1 – Capital Gains Tax Applies
Josh (sorry Josh) bought a home on 1 January 2007 for $400,000AUD which became his primary residence in Australia.
Josh then decided to move to New York on 5 May 2016 to find adventure and romance and rented out his home in Australia. He became a non-resident for Australian tax purposes on 5 May 2017 (see Josh's other article on tax residency).
Josh, while living in New York on July 1, 2020, sold his home in Australia for $900,000AUD (bully to Josh).
Before he spends his cool half-million dollars on his beloved AllBirds, Josh has to consider somethings.
As Josh was a non-resident for Australian tax purposes when he sold the property, he will, unfortunately, pay Capital Gains Tax on the entire 500,000AUD gain in this new legislation at tax rates of up to 45%.
Side consideration, we'll call this 1a:
If Josh had sold the property prior to June 30, 2020, the entire gain would have been tax-free (ouch to say the least) as he had bought the property prior to 9th May 2017.
Example 2 – Capital Gains Tax Does Not Apply
Lauren bought her home on 1 January 2007 for $400,000AUD which became her primary residence in Australia.
Lauren then decided to move to New York in 2011 where she rented an apartment and simultaneously rented out her home in Australia.
In June 2016, Lauren returned to Australia and began living in her home again until she sold her home in June 2020.
There would be no Capital Gains Tax on the sale because Lauren was an Australian resident for tax purposes and while she was overseas, she was absent from her property for less than 6 years.
Want to learn more of how you may be impacted?
It is important to be proactive in the management of your situation if this applies to you by really understanding these rules. You would not want to be left with a huge tax bill when it could have been avoided through planning.
So now, back to Josh!
Ok, so basically: If you own a house, you need to think about planning. If you take home only one message, that's it.
If you want to understand how these rules will apply to you, I definitely recommend you book a tax chat with someone like Jason at UpTrend Advisory so that you are not at risk and you can continue enjoying your avocado toast abroad.
Or join us for our webinar!
An online seminar where Jason Stoch, Managing Director of UpTrend Advisory will answer common questions about what's required of you when you move from your home country to the United States, and your ongoing requirements while in the United States.
Key topics that we'll cover:
- Which country do I have to file returns in and what other requirements are there?
- When and how do I file a tax return in the US?
- What’s the Substantial Presence residency test and the impact of immigration status on residency?
- What are the tax requirements of a resident vs non-resident?
- What the tax requirements of an Australian that is treated as a resident in more detail e.g. Investment properties, shares/stocks?
- The Tax Treaty between the US and Australia
- FBARs / declaring foreign income + offshore assets
- When is a W-8BEN (or W-9) required?
You can submit questions when you sign up and we will do our best to provide information that will be relevant for everyone who is joining!
Click here to sign up, it's free!
