Retirement savings, especially when managing finances across international borders, can be complex. If you live in Australia, but hold plans in the USA, you need to understand the tax implications of having 401(k) and IRA plans. 

USA Tax Implications Of A 401(k) Or IRA Plan

401(k) and IRA plans are tax-advantaged retirement accounts that are available to US taxpayers. Contributions made to these accounts are typically tax-deductible, and earnings within the account grow tax-deferred until withdrawal. However, withdrawals from these accounts are usually subject to taxation in the USA. You should obtain tax advice from a qualified US tax advisor before accessing any benefits.

Australian Tax Implications Of A 401(k) Or IRA Plan

Australian tax residents (who are not temporary residents) are subject to tax on their worldwide income.

US retirement accounts like 401(k) and IRA plans are usually treated as foreign trusts by the Australian Taxation Office (ATO).

Therefore distributions from these vehicles will usually be taxable in Australia, except for amounts that can be said to represent contributions. This means that any taxable withdrawals from these accounts are treated as assessable income and taxed at the individual’s marginal tax rate. As foreign income, you would also be able to claim a Foreign Income Tax Offset (FITO) to reduce double taxation.

Roth 401(k) and Roth IRA plans are comprised of contributions made with after-tax dollars. This means that for Australian tax residents, withdrawals from these plans are generally tax-free.

Managing Funds While Living In Australia

For individuals residing in Australia who wish to access their US retirement funds, there are several options to consider:

1. Funds in the USA: Australian tax residents can choose to leave their 401(k) or IRA funds in the USA subject to complying with relevant US requirements. 
2. Withdrawal: Depending on the circumstances, individuals may opt to withdraw funds from their US retirement accounts. Careful consideration should be given to the tax implications of such actions, as they may trigger tax liabilities in both countries.

Our tax advisors and accountants are able to work with our clients, and their financial planners and wealth managers to clarify the taxation consequences, which would usually be an important element of the decisions that may be ultimately made.

Planning

Understanding the tax implications of 401(k) and IRA plans for Australian tax residents living in the USA is essential for effective retirement planning. While these accounts offer valuable tax benefits in the USA, they also come with potential tax liabilities in Australia. 

By navigating the complexities of dual tax systems and seeking professional advice, individuals can make informed decisions to optimise their retirement savings – while ensuring compliance with both US and Australian tax laws.

Given the complexities involved, seeking advice from tax professionals with expertise in both US and Australian tax law is highly recommended.

As specialists in International Tax, we can provide tailored guidance based on your individual circumstances. This can help you with your planning for accessing retirement funding in a way that helps you to minimise your tax obligations.

Exceptionally talented individuals with the capacity to raise Australia’s standing in their field may be eligible for a Global Talent Visa. This Visa is a permanent residency Visa that offers a migration pathway to individuals who can bring exceptional skills into Australia.

Because the Global Talent Visa is not a temporary visa, the temporary resident tax concessions are not available and you will be taxed just like any other Australian citizen moving home to Australia.

As international tax specialists in Australia we are often asked by individuals moving to Australia on a Global Talent Visas, what the Australian tax implications of making this move are in relation to the assets back in their home country.

The tax implications of making this move will depend on the type of assets you have back home.

Below is an overview of what you can expect.

Moving To Australia With No Assets Other Than A Bank Account

When you move to Australia with no assets except the cash in your bank account, the tax consequences of holding onto your foreign assets are limited to foreign exchange (forex) issues. Since foreign currency is considered a taxable asset, Australia will tax realised exchange gains and will allow a deduction for realised exchange losses. 

This means that money sitting in a bank account with fluctuating values will have no tax consequence. However, if you spend or transfer that money, including bringing it into Australia at a later date, then you trigger a forex realisation event.

If the value of your qualifying forex accounts is less than AUD $250,000 then you can make an election (known as the Limited Balance exemption) which effectively allows an exemption so that you can disregard any forex gains or losses that might arise on the accounts. This is a simplicity measure for taxpayers who are considered to have low balances of foreign currency. The objective is to lower tax compliance costs. People moving to Australia should take advice on the effect of these rules on their foreign savings.

Moving To Australia With A Main Residence In Your Home Country

While an Australian resident is eligible for an exemption from capital gains tax on their main residence, it is unlikely that this exemption will apply to you. This is because you were not an Australian resident while you were living in your property, in your home country.

Once you are living in Australia the overseas property becomes a property that is not your main residence. This applies whether you rent the property out or not.

If you rent your former residence out it becomes an investment property. The rental income is taxable and the expenses associated with generating that rental income are tax deductible. This includes interest on any mortgage taken out to purchase or renovate the property, any local rates, repairs, and other costs. Travel costs incurred to inspect or repair the property are specifically precluded as an eligible deduction. If you pay income tax on the rental income overseas, then you will be able to apply that as a foreign tax credit in your Australian tax return. This way the Australian tax paid on this rental income is limited to any difference between the Australian tax assessed and the tax paid overseas.

If you don’t rent out your former residence (or otherwise earn income relating to the property), then there is no income to declare, and no ability to claim deductions relating to the cost of owning this property.

When you sell the property you will be subject to CGT. The CGT will be calculated on the difference between the value the property sells for and the value of the property at the time you moved to Australia.

Moving To Australia With Investments

If you hold assets in your country of origin, then you will be required to report any assessable income earned from those assets, as well as any capital gains or losses generated on the disposal of those assets.

Certain types of income, such as interest, royalties, and dividends, are typically covered by Double Tax Agreements (DTAs) in a way which limits the amount of tax that the country of origin can impose. This means it is important to advise your bank and investment managers when you become an Australian resident so that they can ensure the correct foreign tax rate is applied at the source.

Regardless of the tax rules in the country of origin, as an Australian tax resident you will be required to report income from all sources in your Australian tax return.

General Tax Information You Should Be Aware Of When Moving To Australia On A Global Talent Visa

It is important to keep in mind that moving to Australia on a permanent basis will mean you become an Australian tax resident.

For tax purposes this means you will need to declare your worldwide income in your Australian tax return, regardless of where the income is earned and whether the income is brought to Australia or stays in an overseas bank account.

All foreign investment income, including interest, dividends and foreign stock plans, are assessable in Australia, whether or not they are assessable in another country.

The foreign income must be reported in the relevant Australian tax year in which it was earned. This may be different to the tax year relating to foreign country in which the investment income was earned.

In general you will be able to offset the tax payable in Australia with any taxes already paid in the country of origin.

Also be aware that Australia has complicated rules if you have interests in overseas companies or trusts, even if you did not set up the relevant companies or trusts or even if they are just ‘family companies’ or ‘family trusts’.

Capital Gains Tax

Australia has a Capital Gains Tax regime. This means you may be required to pay capital gains tax on any assets that you retain in your country of origins.

CGT is assessed at the same rate as your marginal tax rate, however there is a 50% Discount on the value that is assessed on assets that have been owned for at least 12 months after becoming an Australian resident.

CGT discount example:

You purchase a property in 2020 for $500,000.

In 2024 you sell the property for $1,000,000.

This gives you a net capital gain of $500,000.

Instead of paying tax on the full $500,000 gain, tax is only applicable on 50% of the total gain, which means you only pay tax on $250,000.

Deemed Acquisition

At the time that you move to Australia, any assets that you retain overseas are considered to have been acquired for their market value on the day you arrive. This valuation will become their cost base for capital gains tax purposes in Australia.

You are also deemed to have acquired these assets on the date that you become an Australian resident. This ensures that any fluctuations in value between the original date of acquisition and your move to Australia, are ignored for CGT calculations. It also means that you need to continue to own your assets for at least 12 months from the date you move to Australia in order to access the 50% capital gains tax discount.

Summary

As an Australian tax resident you will be required to lodge an annual income tax return in which you must report:

• Income from your worldwide source

• Capital gains or losses on all assets held, regardless of the country in which they are held

• Any foreign tax paid, which may be applied as a credit to reduce the amount of Australian tax assessed on foreign earnings

When you move to Australia your assets will be deemed to be acquired at the market value on the date you become an Australian resident.    

As everyone’s situation is unique, and tax laws are frequently updated, it is important to obtain up to date advice for your specific situation. This will ensure that specific factors that may impact your situation differently are also included in the advice, as well as ensuring you are getting the most up to date information.

eBook: Key Items A Global Talent Visa Holder Should Know When Moving To Australia

Download ‘The Key Items A Global Talent Visa Holder Should Know When Moving To Australia’

If you are moving to Australia on a Global Talent Visa you are likely to become an Australian tax resident. 

This eBook covers the 5 common tax concerns that those moving to Australia on a Global Talent Visa have including:

1. When do I become a tax resident?

2. Keeping foreign assets when moving to Australia.

3. Foreign assets including foreign currencies, trusts, companies or retirement funds and pension loans.

4. Selling your foreign main residence after moving.

5. Using your foreign bank accounts.

As an Australian moving to the United States, it’s important to understand what this means for your tax residency status. This is because your tax residency status will determine how your income will be treated for tax purposes.

Moving to the US on a Permanent Basis

If you move to the US on a permanent basis then it would usually be the case that you would be  considered a non-resident for Australian tax purposes from the day you leave. Note that a move can be considered permanent from an Australian tax perspective, even if you only expect to live in the US for a few years.

As someone making a permanent move to the US it is likely that you will be cutting most of your ties with Australia. Typically you may do things such as sell your Australian assets, close Australian bank accounts, resign from Australian clubs, remove yourself from the electoral roll, surrender your lease or sell your family home, all as part of and parcel of your move to the United States. In such cases usually you would become a non-resident of Australia.

However, there are exceptions and sometimes a person can become dual resident of Australia and the United States. Often this occurs because a person is living in the United States for long enough to be considered US resident but has not quite departed Australia for whatever reason. Sometimes it is because a person has employment or runs a business in the two countries and actually keeps two homes.

If you become a US tax resident and an Australian non-resident

If you leave Australia and become a US tax resident, then you will be subject to all the taxation rules that a US tax resident is subject to. We always recommend that clients obtain US tax advice before moving to the United States so that they are fully aware of how Australian assets would be treated by the IRS. 

As an Australian non-resident you would be subject to non-resident tax withholding rates on certain Australian sourced income, such as any Australian bank or unfranked dividends paid to you from Australian investments. For example this means that banks would withhold 10% of your interest income on your Australian accounts and Australian companies will deduct 15% withholding tax on unfranked dividends paid to you. But you will need to advise your bank and various share registrars that you have moved to the United States.

If you continue to earn any income from Australian sources (other than income that is specifically covered by non-resident withholding rates), then you would have to lodge an Australian tax return. A common example of this is rental income from an Australian property.

You would only be required to include any Australian sourced income, and this would be assessed at non-resident taxation rates. This income also needs to be declared in your US tax return as foreign income. You should also be able to claim a tax credit for any Australian tax already paid on the Australian sourced income in your US tax return.

If you have assets such as investment properties, a main residence, shares and managed funds it will also be vital for you to understand how Australia’s capital gains tax laws applied to you on your departure from Australia. Unless you make a specific choice to the contrary, becoming a non-resident of Australia gives rise to a deemed capital gain or loss arising on your assets and so obtaining income tax advice specific to your circumstances is important. At CST we can provide you with our Departing Australia Tax Review service and can also help you obtain US tax advice.

Dual tax residency?

Sometimes determining your tax residency status is not straightforward. This can happen when you meet the requirements for tax residency in both countries.

If this happens then you would first turn to the tax treaty between Australia and the US, for guidance on which country takes priority. Most of the time the tax treaty will provide sufficient rules to determine which country would be considered the country in which you have tax residency. 

In some cases, where an individual is genuinely living in both countries, regularly interchanging between locations, or having equal connections in both countries, a tax ruling may need to be sought and in some cases a treaty-based tax return is required to arrive at the correct result.

Final Words on Tax Residency

Your personal tax residency forms the basis of how all your income tax obligations are calculated, which makes the correct understanding of your tax residency vital, particularly for clients who may be travelling or moving between Australia and the United States, two high taxing countries with complicated tax systems.

When it comes to determining your tax residency it is always important to realise that tax residency is a matter of fact. Often a careful analysis of various facts will be required. Tax residency is not something that can be chosen, and therefore it is important to obtain timely advice so that income tax consequences arising either in Australia or the United States are well understood and budgeted for.

If you’re moving to the United States then you’ll need to understand how tax laws apply to your current and future superannuation account.  You should also obtain financial advice from a qualified financial planner before seeking access to your super.

Moving to the US on a Permanent Basis

If you are an Australian moving to the United States on a permanent basis then you are likely to be considered a non-resident for Australian tax purposes. This means that you will, by and large, be considered a tax resident of the US. 

In this situation Australia’s tax laws will continue to apply to your Australian superannuation in terms of how your superannuation earnings are taxed. However you should seek US tax advice in relation to how the IRS would seek to tax your Australian superannuation account or fund. CST Tax Advisors in the US can assist you with that. 

If you have an Australian self managed superannuation fund you should seek advice in Australia before you leave to avoid your SMSF being deemed non-complying, as generally the SMSF cannot be run by non-residents and should usually not accept contributions from foreign members. If your SMSF becomes non-complying because of your move, substantial additional tax may be levied by the ATO on your SMSF.

Accessing your Superannuation

Basically this means that your superannuation will continue to remain preserved in your Australian superannuation fund until you reach retirement age. If you continue to work for an Australian employer, they may continue to be required to contribute to your superannuation fund. 

When you are eligible to withdraw your Superannuation, if you are still living in the US, then you may find that these payments count as taxable income in the US. 

Contributing to your Superannuation

If you are eligible, and choose to continue to make contributions into your Australian superannuation fund to support your retirement, then you will likely find that these contributions do not count as tax deductions against your US assessable income. You should obtain specific tax advice from a US tax advisor or CPA.

While these payments may count as tax deductions in your Australian tax return to reduce any Australian sourced taxable income, superannuation contributions cannot be used to create a tax loss. This means that contributions that you choose to claim as a tax deduction may be wasted if you don’t have other Australian income to offset.

Since making superannuation contributions may not be a tax effective option, it is important to understand the full financial impact of your choice by talking to an appropriately experienced US tax agent, as well as an Australian tax agent. 

Talk to your tax agent about the tax consequences on your Superannuation plan before you move

Moving overseas can create a large number of potentially complex taxation issues to consider, particularly for those who have self managed superannuation funds. 

It is important to speak to an appropriately qualified and experienced tax agent about your specific situation. Planning ahead ensures you have the information necessary to make informed choices, and prevents you from being surprised with unexpected tax costs. 

It may also be advisable to speak to a financial planner so as to make the most appropriate plan in relation to investing for your future.

On 11 May 2021, the Australian Government announced that it is considering replacing Australia’s existing residency rules with a new ‘modernised framework’.

This update is intended to be based on a report by the Board of Taxation from March 2019.

The changes have not been passed into legislation at publication of this article.

Our Principal, Matthew Marcarian, analyses the changes and what it might mean for Australian expats in his – Australia To Change Personal Tax Residency Laws – article.

Below is a summary of the article.

Why might the Rules be Changing?

The Government has indicated that the rules are changing in order to:

• make them easier to understand and apply in practice
• deliver greater certainty
• lower compliance costs for globally mobile individuals

 What is Changing?

Under the current rules an individual is a tax resident if they:

• reside in Australia
• have their domicile in Australia
• live in Australia for at least 183 days of the year, or
• are a member of certain Commonwealth Government superannuation funds.

Unfortunately, due to the lack of measurable criteria in these tests there is a lot of grey area when it comes to the more complex situation involving travellers and individuals with more ambiguous mobile living situations.

The intended change will update these rules to focus on a framework that centres on three things:

• Physical presence in Australia
• Australian connections
• Objective criteria

While the precise nature of the intended update is not yet known, the Board’s recommendation has indicated specific, measurable tests that an individual should pass to meet the residency test. To this end there are three proposed tests to be considered.

1: The 183 Day Physical Presence Test

It is expected that the new primary test will be as simple as determining that an individual has spent at least 183 days physically present in Australia during the given tax year.

2: Commencing Residency Test

When an individual moves to Australia and is only here for between 45 and 183 days they would also need to satisfy at least 2 of the following factors

1. The right to reside in Australia (citizenship or permanent residency)

2. Australian accommodation

3. Australian family

4. Australian economic connections such as:

     a. Employment in Australia

     b. Actively involved in running a business in Australia

     c. Interests in Australian assets

Ceasing Residency Test

To cease residency an Australian would need to spend less than 45 days in Australia during the year, as well as the preceding two years. However, residency would cease immediately where the individual moves overseas to take up overseas employment and the individual:

1. Was an Australian resident for three previous consecutive income years

2. The overseas employment is for at least two consecutive years

3. Has overseas accommodation for the duration of their overseas employment

4. Is physically outside of Australia for less than 45 days in each year they are living overseas

Summary

The proposed rule changes are intended to simplify and clarify the law around determining residency. However, there is still work to do to develop the tests and factors. Further consultation in drafting the legislation is encouraged.

Australia To Change Personal Tax Residency Laws has been written by our Principal, Matthew Marcarian

Download the Australia To Change Personal Tax Residency Laws Paper Now

When it comes to providing tax advice, Matthew believes it is about more than the simple tax consequences. It is about gaining a deep understanding of the client’s situation to formulate clear, robust tax and business advice that deals with both current and potential tax concerns.

With over 20 years of experience providing international tax advice to a wide range of clients, Matthew is well adept at helping clients manage and plan for the tax outcomes and opportunities, both domestically and abroad.

With extensive qualifications in international taxation and personal experience living as an expat, Matthew is a leader in his field with specialist expertise in relation to trusts, controlled foreign companies, international taxation and advising Australian businesses expanding overseas.

Like any overseas move, moving from Australia to the United States will mean that you will encounter a brand new taxation system. 

If you’re used to the Australian tax system, the US system may seem a lot more complicated. For a brief overview of the differences see this comparison table:

As you can see, there are a number of key differences in the way taxes are levied and collected in the US. Much of this is due to the additional authority of the states to impose both income and sales taxes for their own jurisdictions. This means that the exact amount of taxes you will be faced with will, ultimately, depend exactly where in the states you are moving to.

On December 5th 2019 the contentious law denying non-residents the Capital Gains Tax (CGT) main residence exemption was passed.

This means that the update we previously provided on this legislation is still in force. If you are no longer an Australian resident, or are permanently moving overseas, and you still own a property that was your main residence in Australia, then you need to know what this means.

Existing Non-Residents with Main Residence Property In Australia

Did you purchase your Australian main residence before 9 May 2017? If you did then you only have until 30 June 2020 to sell your property if you want to claim the CGT main residence exemption.

After this date non-residents will not be able to claim the exemption. Basically this means you will be assessed on the full capital gain.

On the other hand, if you plan to return to Australia in the future then you may still be able to claim the exemption. If this is the case then you can wait to sell your former main residence once you return to Australia. Once you are a tax resident again then you will be assessed as an Australian tax resident. This means the law will again allow you to claim whatever main residence concession you would ordinarily be entitled to. Given the rise in Australian property prices over the last decade, this change could see an Expat caught unaware, being exposed to capital gains tax of several hundred thousand dollars (if not more), depending on the situation.

For a more detailed look at what the law entails please refer to our “Update on CGT Main Residence Exemption for expats” post.

Seek Tax Advice

The change in law has the potential to significantly impact non-residents. While you can get a general overview from the information provided in our blog, it is important that your specific situation be assessed by a tax specialist. This is important because your individual situation will be dependant on many variables that can’t be adequately covered in a general blog. A personalised assessment will ensure that you understand your options and can make the best decision for your situation.

Update: Since publication of this post the Bill has passed and is now law. The law passed is the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019. ) It was passed with no further amendments. This means non-residents will not be able to claim the CGT main residence exemption from 1 July 2020. The scenarios below currently apply under the new law.

For the past few years Australian expats have been waiting to see if the axe will drop on their ability to claim the capital gains tax (CGT) main residence exemption.

The current main residence exemption allows individuals to claim an exemption on paying CGT when they sell the home that they have been living in. Under the normal CGT rules, an individual may continue to claim their former home as their main residence for up to 6 years of absence. This applies unless and until the homeowner purchases and moves into another house that becomes their main residence in Australia.

The new measure has been in the works since the 2017-2018 budget, with non-residents potentially becoming ineligible to claim the main residence exemption since May 9th 2017.

Main residence exemption removed for non-residents in new Bill

The shortcomings of this bill continue to be of concern. After the Bill lapsed in April 2019, we have waited to see whether it would reappear. The hope was that a new Bill would be rewritten in a way that was fairer to taxpayers.

Unfortunately it was reintroduced on the 23rd of October 2019 in largely the same form. Like the original bill, it applies retroactively and allows no consideration for long term Australian residents who may end up caught out by the changes.

While many concerns with the original bill remain unaddressed, there are a few changes.

These changes have extended the transitional measures and added in some compassionate exceptions. The transitional measures ensures that existing foreign resident home owners have some time to sell their main residence under the existing rules. Previously they had until 30th June 2019. Under the new Bill they now have until 30th June 2020 to sell under the existing CGT rules. The additional exceptions that the revised Bill introduced means that there are now limited situations in which the main residence exemption may still apply for foreign residents. 

So, if you’re an expatriate with a former main residence in Australia you should consider now what strategy you wish to take. It’s time to consider if you need to sell while you can access the existing CGT exemption.

Summarised below is an outline of what these new laws could mean for you and what you can do about it.

What Happens If I Hold Onto My Australian Home When I Move Overseas?

Once you’re a foreign resident then any Australian property home you own is treated as a CGT asset. You are no longer able to apply the main residence exception that is available to Australian taxpayers.

Basically this means you will be liable for full CGT on any profit from the sale of the property. This applies even if you lived in the home for 20 years before becoming a non-resident. Since the main residence exemption can potentially save you tens of thousands of dollars in CGT this is a big change for temporary residents and Australians looking to move overseas.

As mentioned, there are limited situations where non-residents may still access the main residence exemption. This includes the transitional provision that allows you to sell your main residence under the existing CGT exemption if you sell before June 30th 2020. It also includes concessions that equate to compassionate grounds on the event of death, divorce, or terminal illness.

As a Non Resident Can I Use the CGT Main Residence Exemption When I Sell My former Australian home?

Normally when you satisfy the criteria for claiming the main residence exemption for CGT then you can apply this exemption (in part or in full). However, if this bill passes into law, foreign residents will no longer be able to access the main residence exemption. Well, in most situations.

Let’s take a look at when the exemption may still apply:

1- Did you purchase your main residence before or after May 9th 2017?

If you purchased your property after May 9th 2017 then you’re out of luck. You will not be able to claim an exemption for your principal residence if you sell it while you are a non-resident. That’s because you purchased your main residence after these new measures were proposed.

However, if you purchased before May 9th 2017 (and post 20 September 1985) then you are covered by the transitional provisions. This means you have until 30th June 2020 to sell under the current CGT rules and access the main residence exemption. Wait any longer and the exemption is no longer available if you sell your main residence while you’re a non-resident.

The big drawback of selling after 30th June 2020 is that the main resident exemption will not even apply for the period of time that you lived in the property. That means you won’t even get access to a partial exemption.

2- What If a serious life event happens to you within 6 years of becoming a non-resident?

With the new bill being introduced, there are now some situations where a non-resident may continue to access the main residence exemption for CGT. These concessions only apply if you’ve been a non-resident for less than 6 years. As a non-resident you may still be eligible for the main residence exemption if one of the following life events happens:

• You, your spouse or your child (under 18) get diagnosed with a terminal medical condition.
• You, your spouse or your child (under 18) pass away.
• You get divorced or separated.

Basically, if something unexpected happens within several years of becoming a non-resident for Australian tax purposes, then you may still be able to access the same concessions that Australian residents can. While no one can factor these contingencies into a tax strategy it’s good to know that this exists if the worst happens.

3- Will You Become An Australian Resident Again?

If you come back to Australia and become an Australian tax resident, then the main residence exemption is available to you again under the normal rules. This means you will have the opportunity to apply the CGT main residence exemption, either in part (if the property hasn’t exclusively been your main residence) or in full. Keep in mind that this only applies if you sell while you’re an Australian tax resident.  

This means that if you’re planning to return to Australia then it might be worth holding onto the property so that you can reduce your CGT liability. That’s great news if there’s a chance of returning to Australia to live in your home (or elsewhere) again. Of course, this should not be the only factor to consider when deciding whether to hold onto or sell your former home under the main residence exemption.

What If I Die While I’m a Non-Resident?

You might decide to hold onto your property because you’re planning to come back to Australia. But what if that doesn’t happen?

If you die within 6 years of becoming a non-resident then your estate may still be able to access your main residence exemption. However, when you pass away more than 6 years after becoming a foreign resident then your estate will be caught by the changes and the main residence exemption will not be applicable. That means your estate will be stuck with the full CGT liability.

What Do I Do With My Australian Property Now?

The answer to this is very personal. It depends on your ongoing plans, whether you’re concerned about the tax impact of these legislative changes, what the market is like, and what the best decision is for both your immediate and long term needs.

For instance, selling a property now for a $50,000 profit with no CGT to worry about would still net you less than selling it down the road for a $200,000 profit with a $45,000 CGT liability.

Ongoing income or costs also weigh into your decision, as do any plans to return to Australia down the track. Unfortunately, it also depends on unknown factors, including the unpredictable nature of tax law changes that may happen in the future. As always, it’s important to get tailored advice for your unique situation when considering what to do. Individual situations can involve complexities that extend beyond generic information.

As always, it’s important to get tailored advice for your unique situation when considering what to do. Individual situations can involve complexities that extend beyond generic information.

In our blog of 25 February this year we reported on what we consider to be highly inequitable capital gains tax changes that the Government has introduced into parliament. The changes are contained in the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018.  

The Bill, as drafted, denies foreign residents (including Australian expats) access to the capital gains tax (CGT) main residence concession if they sell their former main residence while they are living overseas. In short, no CGT relief would be available to Australian expats who sell their property while they live overseas even for the period of time they lived in their home before departing Australia. 

The Bill has still not been passed and seems for now to be held up in the Senate, which we hope augurs well for Australian expats.

Main Residence Exemption Removal still possible

Unfortunately despite a number of sensible submissions to the Senate (including our own CST Tax Advisors Submission), the Senate Committee has recommended that the Government proceeds with the proposals as announced.

Essentially the Committee indicated that it ‘considers that the measures contained in these bills will form an essential part of the government’s comprehensive and targeted plan to improve outcomes for Australians across the housing spectrum’.

The Committee did not explain why it thought that removing the CGT main residence exemption is a targeted plan to improving housing outcomes. We believe the natural reaction for most Australian expats to a potential loss of the CGT exemption would be not to sell their property until they one day return to Australia. Essentially a lock-in effect will be created rather than improving the quantity of housing stock available for sale. The Senate Committee Report can be access by following this link.

Our Recommendations

We sincerely hope that despite the Senate’s recommendation to proceed that the Government will rethink their proposal to ensure that Australian expatriates are treated equitably.

We strongly urge the Government to fix the Bill by ensuring that amendments are made so that:

• all Australian expatriates who were already non-resident of Australia when the changes were announced on 9 May 2017, should continue to be able to access the absence concession regardless of where they reside; and
• all persons should be able to access the partial CGT exemption for at least that part of the ownership period during which they lived in the property and were resident of Australia.

If the Government does not fix the equity issues in the Bill, at the very least we hope that the Government can extend the transitional period end date from 30 June 2019 (way too close) out to 30 June 2020 or 2021 to give people sufficient time to consider their options. Expecting Australians living overseas to be aware of ‘legislation by press release’ is not satisfactory.

Given that the changes are so fundamental in our view the Government owes a minimum duty to write to all foreign residents taxpayers who are lodging tax returns in relation to Australian rental income, in the event that these fundamental changes apply to them.

In this regard we note the Committee’s recommendation that it “recommends that the Australian Government ensures that Australians living and working overseas are aware of the changes to the CGT main residence exemption for foreign residents, and the transitional arrangements, so they are able to plan accordingly.“(Recommendation 1, Paragraph 2.34 of the Senate Committee Report on Page 17).

Want to make a Submission?

If you wish to make a submission to the Government it would not be too late to write to the Federal Treasurer. Alternatively you can contact CST for more information.

As we reported in our blog last year – the Australian Government announced that it would remove the CGT main residence exemption for foreign residents.

It was said that this reform was being introduced as part of measures to address housing affordability in Australia. Due to other legislative priorities a bill to enact the change was not introduced and we had hoped that the Government would have taken the time to ensure grandfathering of all existing properties.

However the bill was re-introduced earlier this month as Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018, apparently unchanged after the exposure draft consultation period last year.

The Bill has now been referred to a Senate Standing Committee which represents the last opportunity to lobby for changes to be made to the Bill. Submissions close 5 March 2018.

What Is The Problem?

In trying to tighten our CGT laws, the Bill denies Australians living abroad access to the “CGT absence concession”. This existing concession gives many Australian expats the opportunity to retain the CGT exemption on their former home for up to 6 years, even if they rented their home out after they had moved overseas. This exemption will be removed.

Disastrously though, the changes seem to be more fundamental. The Bill, as drafted, denies even a partial CGT exemption by providing no CGT relief even for the period of time when the person had lived in their home before departing Australia. The Explanatory Memorandum to the Bill makes this alarming problem crystal clear (see Example 1.2 which is extracted below). We do not believe this was the Government’s intention.

The only way out under the draft Bill is that taxpayers seem to be allowed to move back into the property after returning to Australia (as a resident) and to then sell the home on a CGT free basis (assuming the absence exemption otherwise applies). This creates a tax-driven ‘lock-in’ effects which is likely to create significant issues for taxpayers and rather than assist housing supply could in fact create further supply constraints.

Does This Apply To You?

If you are an Australian expatriate then the Bill provides that unless you sell your former home prior to 30 June 2019, you will be subject to CGT on the sale of the property if you sell it after that date while you are still a non-resident of Australia for tax purposes. Unfortunately, as currently drafted, the Bill would not even provide you with a partial CGT exemption to recognise the period of time that you lived in your home prior to your departure. To preserve your CGT exemption you would be left with the choice of either selling prior to 30 June 2019 or else keeping the property until you one day return to Australia.

The tightness of the 30 June 2019 deadline has seen concerns expressed in the Australian Financial Review recently about a fire sale in expat owned property. While predictions of a fire sale may not be true, it is nonetheless a highly unfair position to put home owners in and the Bill represents poor policy implementation.

Artificially ending the absence concession by using a ‘drop dead date’ on 30 June 2019 is highly equitable. It will mean that failure to sell by 30 June 2019 could mean that an Australian living overseas could be exposed to hundreds of thousands of dollars of tax, given the increases in Australian property over the last 3 years.

What Should Be Done To Fix This?

We strongly urge the Government to fix the Bill by ensuring that amendments are made so that:

• all Australian expatriates who were already non-resident of Australia when the changes were announced on 9 May 2017, should continue to be able to access the absence concession regardless of where they reside; and
• all persons should be able to access the partial CGT exemption for at least that part of the ownership period during which they lived in the property and were resident of Australia.

We believe that the flaws in this Bill are an oversight that will be rectified once these problems are better understood. In our experience most Australians living abroad who keep their home in Australia do pay taxes and continue to contribute to the Australian economy.

If the Government wishes to persist with the change of law to only permit CGT exemptions for those who are tax resident in Australia –  then they should ensure that they are fair to the thousands of Australians who have moved overseas (most of whom will return) but who have retained their former homes in Australia.

Final submissions are now being requested and we strongly recommend that interested parties make a submission on this inequitable change.

You can contact your local member of parliament and forward this blog.

If you are concerned about the unfairness of this change submissions can be made to.

Committee Secretariat Contact:

Senate Standing Committees on Economics
PO Box 6100
Parliament House
Canberra ACT 2600

Phone: +61 2 6277 3540
Fax: +61 2 6277 5719
economics.sen@aph.gov.au

Extract from Explanatory Memorandum to the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018

Example 1.2 — Main Residence Exemption Denied

Vicki acquired a dwelling in Australia on 10 September 2010, moving into it and establishing it as her main residence as soon as it was first practicable to do so. On 1 July 2018 Vicki vacated the dwelling and moved to New York. Vicki rented the dwelling out while she tried to sell it. On 15 October 2019 Vicki finally signs a contract to sell the dwelling with settlement occurring on 13 November 2019. Vicki was a foreign resident for taxation purposes on 15 October 2019. The time of CGT event A1 for the sale of the dwelling is the time the contract for sale was signed, that is 15 October 2019. As Vicki was a foreign resident at that time she is not entitled to the main residence exemption in respect of her ownership interest in the dwelling. Note:

This outcome is not affected by:

• Vicki previously using the dwelling as her main residence; and

• the absence rule in section 118-145 that could otherwise have applied to treat the dwelling as Vicki’s main residence from 1 July 2018 to 15 October 2019 (assuming all of the requirements were satisfied).