Australian Expatriate Property Tips and Traps - Negative Gearing & Capital Gains Tax (CGT)

Written by Dale Hoy April 2018

This article is an extract from:7 Critical Financial Strategies for Australian Senior Executives living in Asia (Feb 2018 edition) by Dale Hoy.

Did you know?

i) Negative Gearing
Should your tax deductions exceed your rental income and you make a tax loss in Australia, then you can carry forward indefinitely offsetting the loss against future rental income, capital gain on sale or salary income on your return to Australia.

If you become a non-resident for Australian tax purposes, you can still “negatively gear” your primary residence (or other residence).

ii) Capital Gains Tax
From 9 May 2012, the 50% Capital Gains Tax” CGT “discount rule (only 50% of net capital gain taxable if asset held for more than 12 months) does not apply (on a proportionate basis) to the number of days of non-residency in the ownership period.

This rule applies regardless of whether or not the sale happens when you are a resident or non-resident. For ownership periods prior to 9 May 2012, the 50% CGT discount concession may be claimed (on a proportionate basis of ownership period) provided the market value exceeds the cost base as at 9 May 2012.

Furthermore, the Government intends to legislate that all non-residents (and including Australian citizens) may no longer be exempt from capital gains tax if they sell their main residence.

The effective date is from 9 May 2017 albeit “grandfathering” will apply until 30 June 2019 in respect of a main residence held on the effective date (and see further under the section below titled “Update”).

Australian real estate

i) Negative Gearing

An Australia investment property is a popular investment choice for many expatriates, an attractive tax planning tool whilst overseas and is a wise way for forced savings. Australian property is the most tangible and has demonstrated itself as one of the most consistent markets in the world.

As an expatriate, you can rent out your primary residence while living overseas, potentially generating significant income. It will also allow you to claim numerous costs as rental property tax deductions.

Potential rental property deductions include “cash deductions” (ie rental expenses) and non-cash deductions (depreciation of fittings etc and building allowances for construction costs).

Generally, the following are all allowable tax deductions if you rent out your primary residence (and other rental properties):

  • Interest on the loan used to purchase the primary residence.
  • Property management expenses.
  • Maintenance and repair costs.
  • Depreciation of the building, fixtures and fittings.
  • Depreciation of any capital improvements you make to the house whilst renting.
  • Water rates, council rates and utility costs etc.
  • Land tax.

Australians are familiar with the “negative gearing” tax benefits whilst working in Australia, the excess tax deductions over income can legally help reduce income tax on your salary or other income, a most cost effective tax planning strategy.

As an expatriate, this annual deficit often has no Australian income to offset so losses continue to accumulate each year you are away to be used at some future time. These losses can be carried forward indefinitely until such time you need them to offset either future rental surplus, capital gains on sale or to be offset Australian taxable income when you return to Australia.

When in Australia, you can negatively gear into any type of asset including shares however as you are living abroad, other activities are not taxable in Australia and you will not be able to claim your interest costs in Australia while you are overseas and therefore you cannot accumulate tax losses.

(ii) Capital Gains Tax

Most people are aware that their family home (or main residence) is exempt from capital gains tax in Australia. What this means is that any money you make from the sale of your family home through capital appreciation is not subject to capital gains tax in Australia.

However, most people believe that when they move out of the property, then any further capital appreciation of their house will be subject to capital gains tax. 

This is not necessarily the case.

As long as you do not claim an alternative house as your main residence, then you are entitled to continue to claim your previous residence as your main residence for capital gains tax purposes for up to an additional six years (6 year absentee rule).

So, if you plan is to move overseas for only 4 or 5 years then, as long as you do not claim an alternative house as your main residence, then your capital appreciation during your time abroad should remain Capital Gains Tax free. Note also that you do not have to move back into your former home in order to claim the main residence exemption under the absentee rule.

UPDATE

As part of the 2017-18 Federal Budget, the Australian Government announced as of 7:30pm (AEST) on May 9, 2017 foreign and temporary tax residents would no longer be exempt from capital gains tax (CGT) when selling their main residence. In a later announcement (as part of consultation process) the Government limits the application to ‘foreign residents” only (ie non-residents). 

It is possible (but unlikely) the Government may exclude Australian citizens from the ambit of final legislation. (This rule was made subject to grandfathering for existing properties held on this date and disposed of on or prior to June 30, 2019).

Tips for what you must do now

a) If an expatriate wishes to sell their principal residence, the most tax effective time for sale is as an Australian tax resident or (if you are or going to be a non-resident) no later than 30 June 2019 (if held as of 7.30 pm 9 May 2017).

b) Negative gearing both your main residence and other investment properties remains a tax effective strategy as an expatriate and on return to Australia enabling excess losses to offset future capital gains, rental income or Australian employment income.

Case Study

The Australian Treasury web site provides the following example regarding the proposed new Capital Gains Tax rules for non-residents selling their main residence.

Facts
Anita acquired a dwelling on 20th February, 2003, moving into it and establishing it as her main residence as soon as it was first practicable to do so. 

On 15th August, 2020, Anita signs a contract to sell the dwelling and settlement occurs on 12th September, 2020.

Anita used the dwelling as follows during the time she owned it:

  • residing in the dwelling from when she acquired it until 1st October 2007;
  • renting it out from 2nd October, 2007 to 5th March, 2011 while she lived in a
  • rented home in Paris as a Foreign Resident (assume the absence provision applies to treat the dwelling as her main residence).
  • residing in the dwelling and using it as a main residence from 6th March 2011 until 15th April, 2012;
  • renting it out from 16th April, 2012 until 10th June, 2017 while she lived in a rented home in Hong Kong as a Foreign Resident (assuming the absence provision applies to treat the dwelling as her main residence);
  • residing in the dwelling from 11th June, 2017 until it was sold. The time of the CAPITAL GAINS event “CGT” event for the sale of the dwelling is the time the contact of sale was signed, that is 15th August, 2020.

As Anita was an Australian resident for taxation purposes at that time (as she had re-established her Australian residency) she is entitled to the full main residence exemption for her ownership interest in the dwelling.

This example shows that although Anita lived overseas for a period of time, she was still entitled to the main residence CGT exemption when she sold it, as she was an Australian resident for tax purposes at the time of sale. Had Anita sold the property before returning to Australia, then she would not be entitled to any CGT exemption, and would have paid full CGT on the sale of property. Furthermore, she would have been denied the 50% CGT discount concession from 9 May 2012.

Critical Issues
As a non-resident for Australian tax purposes generating rental income in Australia, you as an expatriate are only obliged to file a tax return in Australia if you have an overall rental profit. However, it is wise to lodge returns reporting rental losses in order to maintain continuity. 

Of more importance is that filing “nil returns” can serve to limit how many years the Tax Commissioner can audit (it is usually last four years if you are working overseas).

As an expatriate Australian real estate owner, ensure all cash and non-cash deductions are claimed against rental income on your principal or other Australian investment properties (enabling future tax losses to be carried forward and available to reduce future taxable rental income, capital gains or against salary income on return to Australia).

As an expatriate, if you wish to sell your former main residence, ensure the sale is undertaken as an Australian tax resident, minimising or eliminating Australian capital gains tax (see under Update again).

[This article is an extract from: 7 Critical Financial Strategies for Australian Senior Executives living in Asia (Feb 2018 edition) by Dale Hoy.   If you've found it useful, you may like the free download of the whole book here >>]