It can be quite an adventure to live and work overseas for a time, should the opportunity arise. Many people who have done so choose to keep their home because they can maintain the exemption from capital gains tax (CGT).
Not anymore. In fact, not ever.
Last week, Parliament passed the TLA (Reducing Pressure on Housing Affordability Measures) Act, which removes the CGT exemption for your home if you are a foreign tax resident. When the change was originally announced, the stated intent was to reduce pressure on housing affordability. How it achieves that is not clear, and the subject doesn’t even get a mention in the Explanatory Memorandum accompanying the law.
The change applies to sales from 9 May 2017, but the truly draconian part is that there’s no recognition of the time the property was your home. The law simply asks whether you are an Australian tax resident at the time of sale. If the answer is yes, these changes don’t affect you. If the answer is no, your house is subject to CGT in the same way as shares or an investment property – it does not matter that it was once your home, nor for how long. Despite much lobbying from the tax profession, including offering alternatives that would achieve more sensible and fair outcomes, our concerns fell on deaf ears.
A separate matter is whether your tax residency does in fact change upon moving overseas, which itself can be a complicated question to resolve.
You purchased your home in October 1985 for $70,000. You moved overseas in October this year, and became a foreign resident. You sell the house in October 2020 for $970,000. As you are a foreign resident at the time of sale, the family home CGT exemption is not available to any extent on your $900,000 capital gain – it having been your home for 34 of the 35 years you owned it is now meaningless.
At foreign resident tax rates, your Australian CGT bill will be hundreds of thousands of dollars. Without this change in the law, it would likely have been nil.
There are two exceptions where your home will be unaffected by this change. Firstly, this “Last chance” rule. The CGT exemption is still available for your home if you satisfy all of the following:
Selling your home by 30 June 2020 means the contract is executed by that date (irrespective of when settlement occurs). This doesn’t leave you much time.
If you bought your home before 9 May 2017, and have since become a foreign resident, you have a significant decision to make, and soon. Here are your options:
Sell your home by 30 June next year (“Last chance” rule). You’ll have the full or partial CGT exemption you always thought you had.
Keep it. CGT exemption is lost come 1 July 2020. If you are still a foreign resident when sold, a CGT liability will arise. (That is, unless you qualify for the “Life events” exception below – which you’ll hope you don’t.)
Return to Australia (whenever in the future) and become an Australian tax resident again. Sell while an Australian tax resident. The new laws won’t apply, and you’ll get the same outcome as Option 1.
If you are entrenched in your life overseas, Option 3 might not really be an option. So, if it’s between Options 1 and 2, making an informed decision – sell or keep – requires having an idea of the starting CGT cost that will become embedded in your house as of 1 July 2020 under Option 2. That will be an instant – and for many, substantial – hit to your personal wealth. With your estimate of your property’s current value, we can estimate that initial CGT exposure you are facing. But get onto this quickly – you have only a matter of months.
You’ll also need to judge the future growth in value of the property beyond 30 June 2020. Here’s the critical point: Option 2 means you’ll get the benefit of that future growth in value (net of CGT, now), but it comes at the expense of the CGT exposure that will instantly pop into existence from 1 July next year. Substantial after-CGT capital growth beyond 1 July 2020 may be required just to make up for that embedded CGT cost arising from 1 July. You’ll also need to consider whether any tax liability will arise in the country of your tax residency, and whether any double-taxation relief is available.
Of course, if you do choose Option 2, Option 3 will still be open, if things work out that way for you.
The other exception is available only where you have been a foreign resident for six years or less. It applies if during that time any one of certain “life events” have befallen you. These events include you, your spouse or minor child having a terminal illness, your spouse or minor child dying, or you get divorced. Obviously, there is no joy in your home remaining tax exempt under this exception.
If you bought your home after 20 August 1991, you will likely encounter a difficulty with calculating your capital gain. Your home’s cost base includes ownership costs such as interest, insurance, rates, and repairs and maintenance (for periods when it was not used to produce income). The higher the cost base, the lower the capital gain, and thus the lower your CGT bill. These costs could add substantially to your cost base – but who has kept records of these for their home? Virtually no one, because there was never any need. But now there is. Perhaps the ATO will provide guidelines for making acceptable estimates of these costs that any home-owner would have incurred.
The Government has continued to argue that this change is not retrospective, because it applies only to homes sold after it was announced on 9 May 2017. Well, yes, but it creates a Back to the Future-style time paradox in which the family home CGT exemption all the way back to the year 1985 is erased from existence. Does the Government’s argument pass the pub test?
If you’ve kept your house since becoming a foreign resident, you have a big decision to make. If you’re thinking of going overseas, the entire CGT exemption for your home is at risk.
Talk to your trusted Nexia Edwards Marshall advisor. We can provide the advice and information you need to make the right decision for you.
The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.