Moving abroad is one of the most challenging things that many of us will do.

My move to Singapore in March 2004 was a completely foreign experience in so many respects. There are so many logistical challenges to deal with that often tax planning is left until you arrive.

This of course is way too late.

This article covers some issues to address ahead of time.

Exit Taxes

An example of an issue that frequently arises is the issue of ‘exit tax’; that is, the act of leaving one country may trigger the deemed sale of all your assets held in your home country. 

Hence, it pays to know if the country you are leaving has an ‘exit tax’ as this can have quite serious consequences for you.

Tax Elections

It is also worth considering whether you can exercise any ‘tax elections’ as to how you may be able to obtain concessional tax treatment as you depart your home country.

For example, in Australia, one of the things to consider depending upon the particular asset, is whether you choose to be treated for tax purposes as ‘retaining some of your assets’.

Though you may move abroad, that does not mean that all your assets need to go with you.

Lodging an election to retain some of your assets for tax purposes in your home country, may give you a bit more flexibility as to the tax treatment available when you decide to sell them.

Creating a Trust in a 3rd Country

For a number of reasons, including tax planning, asset protection and risk mitigation, many people wish to hold their assets in a third country, through some type of trust.

Part of the planning you may choose to do before your move to a new country, is considering whether you should establish a pre migration trust in a 3rd country before you move to the country where you will work.

Often this will lead to a better tax outcome than ‘taking all your assets’ with you.

Many countries do not have tax regimes which tax foreign trusts, and therefore, income accumulating therein is not taxable in the country of your tax residence.

Tax Regime For Expats

In the planning phase of where you might go to work overseas, one important consideration is to consider whether the country you are moving to has a ‘concessional’ or ‘modified’ tax regime for expats.

Some countries, have particularly favourable tax regimes for expats.

As an example, some concessional tax regimes e.g., Japan, Belgium, Korea to name a few, may only tax expats on income arising in their country during the first five years of the expat’s tax residence in the country. 

These transitional rules are generally designed to provide an incentive to work in their country.

Other countries, such as the US, tax expats living in the US on passive income accruing in their home country structures.

Unique Residency Status

Another factor for you to consider when planning your move abroad, is the type of residency that you, the ‘departing expat’, will be taking up in your new country.

In some countries, there are unique residency statuses that can have different tax implications for you. 

An example of this includes the ‘temporary resident’ status in Australia.

This type of residence status imposes a different tax outcome as compared to general residence, and they can provide some additional flexibility in your tax position upon arrival.

Restructuring Your Existing Company or Trusts

It is vital to understand how your existing tax structures may have to be ‘restructured’ before you leave the country.

In some cases, a restructure may only involve changes to the office holders of a company or trustee of a trust.

For example, the residency of the trustee determines the residency status of a trust in Australia. 

If the intention is to keep the trust a tax resident of Australia, then this may be achieved simply with the resignation of the current trustee (the departing expat) and the appointment of another individual who will remain in Australia.

In other cases, it may be possible to issue or transfer shares to a family member to ensure that the company you have in your home country is not caught by the controlled foreign corporation rules when you arrive in your new country.

Most expats moving overseas will have some form of pension or superannuation plan.

In my experience changing one’s tax residence does not of itself impact how that pension plan is treated in most jurisdictions. However, some particular complex jurisdictions, like the United States of America, have egregious tax laws that often cause unintended consequences for arriving expatriates.

A US Example

One of my clients moving to the US was adversely affected by the international tax rules of the US with respect to foreign pensions. My client, Peter, had built up a sizeable superannuation (pension fund) balance in Australia. It was the product of 30 years working in the film and entertainment business. Over the previous ten years, Peter had been a senior executive working for a chain of movie theatres in Singapore. As such, international tax had not crossed his mind much. Peter and his wife, Helen, had grandchildren living in Santa Monica. They were keen to retire and enjoy the good life in a new location. Peter had calculated that he would be able to fund his future Santa Monica lifestyle through a combination of personal savings and by accessing his Australian pension. Everything was set.

Pension payments in Australia were tax free, so Peter thought that Uncle Sam would also not tax them. Unfortunately, that was not the case. In the US, such income streams are taxable if you are a US tax resident. We stopped Peter sending his pension to the US in the nick of time. We collapsed Peter’s Australian pension and enabled Peter to take his capital to the US and invest it in the US tax efficiently. Disaster averted.

This case study highlights why, in order to enjoy your pension, you must consider the impact of foreign tax laws when you are changing jurisdiction

Countries have different rules

In delivering service to clients, we consider the impact of any overseas move on their home country pension. The underlying motivation for establishing a pension fund is typically based on a desire to save funds for retirement so that there is no reliance on government pensions. 

Thus, it means that having the maximum amount available in the pension plan that is not eroded by taxation, is a primary objective. It is folly to think that a tax-advantaged regime in one country with respect to pension funds will axiomatically apply in another country. That is rarely the case.

Moving your Pension Plan

We have extensive knowledge of the taxation issues relevant to pensions and superannuation. 

This enables us to assist clients with compliance and planning in relation to this important area of their lives. When expats leave their home country to move abroad, there are many aspects of tax that need to be considered prior to departure and pension fund planning is often a priority.

For those expats that have their pension fund in the UK, it may actually be worthwhile moving their pension with them. There are particular rules to address this. A Qualifying Recognised Overseas Pension Scheme (QROPS) is an overseas pension scheme that meets certain requirements set by Her Majesty’s Revenue and Customs (HMRC). A QROPS can receive transfers of UK pension benefits without incurring an unauthorised payment and scheme sanction charge.

In Australia, for example, pension funds are only considered to be complying under the governing legislation if they remain within the Australian tax jurisdiction. This means, that the trustee must remain an Australian resident. Therefore, in the case of an expat, relocation can inadvertently trigger a tax liability. Steps need to be taken prior to departure.

Complying in multiple countries

Similarly, many expats arrive in a new country with their home country pension fund in place.  Therefore, they must adhere to the rules in their home country and their arrival country in relation to this pension fund. One of the specialist skills we possess is in advising clients how foreign pension plans will be treated as they move around the globe. We can assist clients on QROPS and other similar regimes.

Moving abroad is an exciting time for most people. If you undertake proper planning with respect to your pension plan before you leave, then the thrill of arriving in your new country is not shaken up by the bad news that you have created unintended tax issues by leaving your home country in an unplanned way.

Australia does not have an inheritance tax. When a person dies, the estate, or person who inherits the assets does not have to consider any special inheritance tax on the money or assets that are taking ownership of. While a beneficiary may be required to pay taxes from Superannuation death benefit payments, or capital gains on the sale of assets that have been inherited if those assets are sold, there is no specific tax levied on the value of inherited assets. 

However, there are many countries that do have inheritance taxes, including the United Kingdom. 

This means that when an Australian inherits money or assets from abroad, they may find themselves subject to an unfamiliar “inheritance tax”.

What is inheritance tax?

In a similar vein, estate taxes are levied on the value that is paid out of a deceased’s estate. The estate is required to pay these taxes, rather than the beneficiary. This means that the beneficiary receives the net assets after the estate has paid any required.

In some countries these taxes are referred to as “death duty”.

The laws around inheritance taxes vary between tax jurisdictions. There may be different tax rates, different inclusions on what type of assets are taxed and different types of exemptions or limits.

Some countries like the United Kingdom levy inheritance taxes where assets are transferred to trusts and for this reason many British expats should seek inheritance tax advice before establishing a trust in Australia.

When would an Australian resident be required to pay Inheritance taxes?

As an Australian resident you are not subject to inheritance tax, regardless of where the inheritance is coming from. However the deceased estate may be subject to estate taxes prior to paying or transferring your inheritance to you.

In essence this means you, as an individual taxpayer, do not have to be concerned about being assessed for specific inheritance taxes.

What taxes does an Australian need to be aware of when inheriting assets from overseas?

1. Ongoing earnings from the inherited estate

When you receive money from an inheritance you may be subject to taxation on any of the amounts that have been earned as income, and were not already taxed within the estate. This is because a deceased individual may continue to gather income after their date of death. If there is a delay between the date of ownership of the estate assets being transferred to you and the physical transfer of such assets to you then you may personally be assessed on such income. The executor of the estate would make you aware of any income amounts that this may apply to.

Furthermore, any ongoing income that you earn from inherited assets will be taxed under ordinary taxation laws. For example, if you inherit a business, you will be subject to any income tax on the ongoing business earnings once the business has been transferred to you. If you inherit an investment property then you will be subject to income tax on the ongoing rental income that you earn once the property has been transferred to you.

Since we are talking about inheritance from an overseas estate, it is important to note that you may also continue to be subject to taxes in the country in which the inherited asset is located. In this situation most countries have a double tax agreement with Australia which will typically ensure that you are limited to paying taxes based on the country that has the highest income (or capital gains) tax rate.

2. Capital Gains Tax

Sometimes a deceased estate may be liquidated so that the beneficiaries are simply paid out in cash. Other times beneficiaries may be bequeathed assets such as property, shares, a family business, collectables, or other assets.

Under Australian Capital Gains Tax laws the date of death is typically used as the date you acquired the asset, with the market value of the asset at this point in time being your cost base. This means that when you eventually sell the asset you will be subject to capital gains tax on any capital gain made on this sale.

There may be some exclusions. For instance if you inherit a family home and move into or continue to live in that home, then you may be exempt from capital gains under the main residence exemption.

3. Superannuation Death Benefits

A superannuation death benefit may be paid to you as a lump sum or an income stream. Typically a lump sum death benefit is tax-free where you were a dependent of the deceased. If you were not a dependent, or you receive a superannuation death benefit income stream, then you may be subject to taxes on part of the death benefit, depending on the components of the benefit paid.

4.  Bringing money into Australia

If you have inherited cash from an overseas estate you also need to be aware of the impact of transferring funds from overseas into Australia.

Foreign currency can be treated as a CGT asset. This means that when you withdraw money from an overseas bank account you are triggering a taxable event. This is because exchange rate valuations fluctuate and there can be a difference between the value of what you originally inherit and the value of what ends up in your Australian bank account, purely because of these exchange rate fluctuations.

This means that you may be taxed on any increased value of the overseas money, from the time of inheritance to the time the funds are transferred to your Australian bank account.

Inheriting money from overseas

In simple terms, inheriting money from an overseas estate is similar to inheriting money from within Australia. While you will not personally be assessed on inheritance taxes, you do need to consider other taxes based on the ongoing benefits earned through the inheritance.

The biggest difference is the added complications that inheriting from overseas may impose, including:

• Potential capital gains tax on exchange rate fluctuations when withdrawing foreign currency
• Estate taxes imposed on the estate that are paid prior to distributing your inheritance
• Foreign taxes imposed on continuing to hold onto any foreign assets or investments

Once you receive the inheritance the assets or money received are yours. This means that their ongoing use and benefit are assessed, where applicable, in your hands, just as any ordinary assets or finances that you earn or invest in yourself, would be. 

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

Discretionary trusts provide flexibility in relation to revenue and capital distributions. This is one of the reasons they are a common choice for families. However, when there is a potential foreign beneficiary, the discretionary trust can find itself facing additional costs in the form of foreign surcharges. Foreign surcharges are additional fees that various state jurisdictions impose on the duties and/or land taxes over and above the original impost.

The 2020 changes to foreign surcharge requirements mean that administration for Australian discretionary trusts became a lot more complex.  

Foreign Surcharges are subject to a complex array of rules

Each state and territory has its own rules for determining when a beneficiary is a “foreign person”. They also have their own rules for governing foreign surcharges, with some states even imposing clawback rules in the event a beneficiary later becomes a foreign resident. For this reason it is important to obtain specific advice for the relevant state or territory when a discretionary trust intends to purchase property. 

Ultimately, any discretionary trust that is determined to have foreign beneficiaries will be required to pay both the ordinary state duties and/or land tax, as well as the relevant foreign surcharge. For this reason most discretionary trusts aim to avoid having foreign beneficiaries. Where this is not practical for the purpose and primary aim of having the trust in the first place, the trustee must be aware of how having foreign beneficiaries will impact their financial considerations.

Changes for NSW discretionary trusts that own residential property

On 24 June 2020 the State Revenue Legislation Further Amendment Act 2020 came into effect in NSW. This Act changed the foreign person surcharges for both land tax and duties where residential land located in NSW was owned by a discretionary trust. 

The change means that a trustee is deemed to be a foreign person unless the trust deed explicitly excludes all foreign persons from being beneficiaries or potential beneficiaries. This clause in the trust deed must be irrevocable. This means an individual beneficiary who has children overseas, who are defined as foreign persons, would not be able to amend the deed to include their foreign child as a beneficiary. 

Non-compliant trusts, i.e. trusts that do not exclude both foreign persons, and potential foreign persons, as beneficiaries, will deem the trustee to be treated as a foreign trustee. The trust then becomes subject to the foreign surcharge rate of duty. 

In NSW the rate of foreign surcharge is presently 8% of dutiable transactions relating to residential land while for land tax the rate is 2%. These charges are payable in addition to ordinary rates. 

Retrospective Impact of the change in NSW

One of the most concerning things with the change in NSW is that the law applies retrospectively from 21 June 2016 for dutiable transactions, and from 2017 for land tax surcharges. 

If you don’t have any foreign beneficiaries then you have until 31 December 2020 to amend your trust deed to irrevocably remove both foreign persons and potential beneficiaries who could be foreign persons, if you wish to avoid the foreign surcharge. 

If you have previously not had foreign beneficiaries, but you do not wish to amend the trust deed because you will, or potentially will, have foreign beneficiaries, then you will need to consider if you are liable for any retrospective duties and land taxes.

Victorian changes

Victoria has also implemented some changes as of 1 March 2020. While these changes essentially have the same impact as in NSW, the law does not apply retrospectively.  

What should you do if you have a discretionary trust with property?

If you have a discretionary trust that holds property, or is intended to hold property then you need to assess the importance and likelihood of having beneficiaries who are foreign persons, or could potentially be foreign persons. This includes assessing your current trust deed, evaluating the goals and purpose of the trust, and reviewing the financial impact of having, or potentially having, foreign beneficiaries.

This may result in a change to your trust deed in order to intentionally exclude any foreign, or potentially foreign beneficiaries, or it may involve a change in your investment strategy. 

The Australian tax system is surprisingly different to the UK tax system.

This makes a simple comparison between the two challenging. 

Determining, from an individual taxpayer perspective, which country has higher taxes, isn’t straightforward. Both countries apply progressive rates of tax, as well as a range of potential adjustments and offsets.

Income taxes are lower in the UK due to the progressive rates of tax applying at higher levels of taxable income, but as the UK also has much higher medical contribution taxes than Australia, the UK taxpayer may end up with a higher overall tax burden.

In Australia, income tax is assessed on the taxable income of a taxpayer which is assessable income less allowable deductions while in the UK specific “allowances” may reduce the different types of income before that income is taxed. 

Australian resident taxpayers have a standard tax free threshold, regardless of the type of income or income level, while UK taxpayers have access to different allowances (tax free amounts) that can vary based on income level and the type of income they are earning.

Foreign sourced income is also treated quite differently in the UK, with a threshold applying before tax is imposed.

The following table highlights some fundamental differences between the two tax systems:

	Australian System	UK Tax System
Assessable Income	Progressive rates of tax applied to taxable income.	Progressive rates of tax applied to taxable income- but different rates apply to capital gains and different types of income have allowances deducted before taxes are assessed.
Tax Free component	Standard tax free threshold applies to all taxpayers on the first $18,200 of their income, regardless of the source of this income.	A personal allowance is deducted from the taxpayer’s income before tax is assessed. This allowance is increased for married taxpayers and blind taxpayers, but is reduced for high income earners. Additional allowances are separately applied to different types of income, such as capital gains and investment income.
Public Health	Flat rate of medicare levy applies to all taxpayers unless they are exempt.	Variable rate of health insurance taxes applies, depending on income type and amount of income. This is paid by both the employer and the employee.
Personal benefits provided by an employer	Personal benefits are taxed to the employer as fringe benefits. There are a range of concessions and exemptions that may be applied.	Personal benefits are taxed to the employee, at the value of the benefit. There are some benefits that are exempt.
Residency	An individual who resides in Australia, or an Australian citizen who doesn’t setup a permanent home outside of Australia	Physically present in the UK for a specified period of time during the tax year
Individual Taxpayer’s Tax year	1 July to 30 June	6 April to 5 April
PAYG System	PAYGW (Pay As You Go Withholding) means employers withhold some of an employee’s wage to be paid to the tax office. This helps cover the individual taxpayer’s annual tax assessment. Any excess PAYGW becomes a tax refund.	PAYE (Pay As You Earn) is similar to Australia’s PAYGW system. When too much PAYE has been withheld then an individual can apply for a tax rebate (tax refund) for the excess.
Who is Required to Lodge a Tax Return	All Australian residents and any non-residents with any Australian sourced income are required to lodge a tax return (some exclusions apply for residents who earn under the tax free threshold and have no PAYGW to claim, and for non-residents who only earn certain types of income, such as interest income covered by PAYGW under the DTA).	Most employees’ taxes are covered by their company’s payroll system, meaning they don’t need to lodge a tax return. Tax returns may need to be lodged where: – Income other than employment income is earned (above the allowance) – Foreign income was earned – You are a higher rate taxpayer (annual income over 100,000 pounds) – You need to claim a tax rebate for excess PAYE

Residency

Australian residency is generally dependent on whether an individual actually resides in Australia, however Australian citizens may continue to be Australian tax residents while temporarily residing overseas. There are a number of tests that can be used to help determine residency.

UK residency is based on the number of days an individual is physically present in the UK during the tax year. For more complex situations that do not meet the automatic test, other factors may apply.

Tax Rates

Both Australia and the UK apply progressive rates of tax ranging from 0% to 45%.

However, while Australia has a standard initial tax free threshold for all taxpayers, the UK utilises a system of allowances that taxpayers deduct from their income before tax is assessed. The amount of allowance changes depending on a range of factors, and different allowances are applied for different types of income, such as employment income, investment income and capital gains.

Medicare/ NHS

Australians pay a flat rate of medicare (2%), unless they are exempt. High tax payers pay an additional medicare levy surcharge of up to 1.5%, unless they pay for private hospital health insurance. 

In the UK both the employer and the employee are required to pay a contribution towards national health insurance, at rates varying from 0% up to 13.8%.

Capital Gains

Both Australian and the UK impose a capital gains tax.

In Australia capital gains are simply added to an individual taxpayer’s assessable income and taxed at the marginal rate at which the income falls. Assets that have been owned for more than 1 year can be discounted by 50% before being included as assessable income. Other exemptions may also be applied to reduce or rollover capital gains.

The UK tax system gives taxpayers an annual allowance for capital gains. Any capital gains up to the allowance each year are tax free. Like Australia, there are also other exemptions that may be applied to reduce or rollover certain capital gains. 

In the UK, capital gains are taxed at a different rate to other income, and residential property is taxed at different rates to other assets. Higher/additional rate taxpayers pay 28% on residential property and 20% on other chargeable assets. Basic rate taxpayers will pay either 10% or 20% on capital gains, unless it is on residential property, in which case the rate is either 18% or 28% (depending on the size of the gain and the taxable income of the taxpayer.

Both countries have an exemption for the sale of an individuals’ main residence.

Inheritance tax

Australia does not have an inheritance tax.

Neither inheritances nor deceased estates attract any specific form of tax. Any property or investments that are inherited will attract taxes in the same way as any property or investments that were acquired personally and subsequently sold. (There are some provisions for inheriting a main residence that allow the main residence exemption to be carried over).

The UK has a standard inheritance tax rate of 40% above the tax free threshold (the standard tax free threshold is currently 325,000 pounds).

Where everything is left to a spouse, civil partner, charity or community amateur sports club, there is normally no inheritance tax to pay. When your home is given to your children (including adopted, step, and foster children), the threshold can increase to 500,000 pounds.

If an individual who is married (or in a civil partnership) passes away with an estate that is worth less than their threshold, then the unused portion of their threshold can be added to their partner’s threshold for when they die.

The inheritance tax may be reduced to 36% on certain assets if at least 10% of the net value of the estate is left to charity in the will. There are some other reliefs and exemptions to help reduce inheritance taxes on gifts donated prior to death, business relief, and agricultural relief.

Australian and UK Tax Systems

Each tax system has a range of complexities that are unique to the respective country.

In some ways the basic Australian tax return is more straightforward for the individual taxpayer.

On the other hand, the UK system’s use of deductible allowances for different types of income, provides for a range of tax planning avenues that are not available to Australians.

Since the tax systems between each country are so different, and residency changes can trigger complex tax issues, it is important to seek expert advice in both countries when making a move between Australia and the UK.

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).