Successive Australian Governments continue to proceed down the path of increasing taxes or removing tax discounts from those who are not Australian tax residents. Historically in Australia, tax was only payable on 50% of any long term capital gains (where the asset was held for more than 12 months). However, this “50% discount” was removed for non-Australian tax residents in relation to any capital gains accruing from 8 May 2012.
Commencing on 1 July 2016, buyers of certain property in Australia including real property situated in Australia (except for residential property being transferred for less than AU$2m) were broadly required to withhold 10% of the sale proceeds and remit the amount to the Australian Taxation Office where the seller is not an Australian Tax Resident. The amount withheld is a non-final withholding tax and the foreign resident will be required to lodge an Australian income tax return in relation to the sale at which point any amounts withheld will reduce any Capital Gains Tax payable on the disposal of the asset or be refunded.
Effective from 1 July 2017, amendments were made to the above withholding regime to increase the withholding rate to 12.5% and reduce the exempt residential property threshold to AU$750,000.
Aside from the “50% discount” for long term capital gains, there are a number of other Capital Gains Tax concessions in Australia including the “main residence exemption”. Broadly, where an individual has an interest in a residential property which is used as their main residence, any gain or loss on the disposal of their interest is disregarded for tax purposes. Where the individual subsequently moves out of the property, they are allowed to continue to treat the property as their main residence for:
- an indefinite period if it is not used to produce income and they do not have another main residence; or
- a period of up to 6 years if it is used to produce income and they do not have another main residence.
As such, there are many individuals who hold Australian residential property which was their main residence and which they continue to treat as their main residence for Australian taxation purposes.
Legislation has now received Royal Assent which has resulted in the removal of the “main residence exemption” for non-residents of Australia where:
- They acquired an interest in their main residence after 9 May 2017; or
- They dispose of an interest in a main residence after 30 June 2020 (if their interest in the property was acquired prior to 9 May 2017).
Some limited exceptions apply for individuals (or their spouse/child under age 18) who, during the first six years as a non-resident of Australia have a terminal medical condition, die or transfer the property as a result of a relationship breakdown.
This proposal was originally announced on 9 May 2017, however it lapsed (along with all other bills) when the 2019 Australian Federal Election was called. The retrospective nature of this Act leaves those potentially impacted by it in a difficult situation. The new legislation ensures that non-residents of Australia who have sold (or are selling) an interest in a main residence which was acquired after 9 May 2017 will be required to pay tax on any capital gain. This may require amendments to previously lodged tax returns or additional filings and result in an unexpected income tax liability.
We recommend that anyone who holds an interest in Australian property undertake preliminary Capital Gains Tax calculations to determine the savings potentially available by disposing of the interest prior to 30 June 2020 or the tax potentially payable on other interests.
Should you require any assistance with these calculations, please contact Josh Meggs.