Many Australians move abroad indefinitely or decide to live indefinitely where they once initially visited. This may result in being a non-resident for Australian Tax. While these decisions are seldom taken lightly, there are critical tax implications to consider. Australian Tax may not be priority at these times but considering them may save you time and money. These decisions can be looked at proactively to take advantage of tax opportunities but also reactively to ensure you are on top of your tax obligations.
In this blog, we will discuss some major implications of becoming a non-resident for Australian Tax specifically about investments and Capital Gains Tax (CGT).
Assets that are NOT Taxable Australian Real property (any assets that is not a direct interest in real property situated in Australia – for example, Shares, Cryptocurrencies, ETF’s, managed funds)
Once your Australian residency ceases you can choose to pay tax under CGT Event I1. A capital gain or loss is to be calculated based on the difference between:
- The market value of the asset at the time that the taxpayer becomes a non-resident, and
- The asset’s cost base
For example –Jeremy holds 1000 Telstra shares which he bought at 1/1/18 for $3.50 p/s (Cost base = $3,500), he ceases to be an Australian Tax resident as at 1/6/20 where the market price is $3 p/s (market value=$3,000). If he decides to deem the disposal as at this date, he would have a capital loss of $500, without ever having sold the shares.
On the flip side there could be a capital gain, depending on the transaction.
Complications arise here because there was no actual sale of the asset – so if there is a gain, the taxpayer would have to pay the tax on this gain from their pocket.
Please note, once this choice has been made it applies to all of the taxpayer’s CGT assets, with the exception of the taxpayer’s assets which are “Taxable Australian Property”.
Disregard the CGT event when Australian Tax residency ceases and then deem the asset to be “Taxable Australian Property”, until a CGT event occurs when the taxpayer:
- no longer owns the asset – eg the asset is sold, or
- The taxpayer becomes an Australian resident again, when a future CGT event will trigger a capital gain or loss.
While it may seem easier to disregard your gain and go with scenario 2, you should be aware that this may not always be the most favourable option.
One advantageous position here is that you have up until you lodge your tax return to make this choice. For example, you may prepare your Capital Gain Tax position on your assets between the date of departure and the date when you lodge your tax return. This gap gives you extra time to consider your investments and the most strategic tax situation (whether you deem the disposals or disregard the gain until the asset is actually sold).
If you prepare your tax returns through a tax agent, the tax return lodgement date is extended to May the following year allowing you more time to consider your options.
Please note that the choice is all in or all out – it cannot be made per CGT asset.
Taxable Australian Property (TAP)
TAP is treated differently to non-TAP when Australian Tax residency is ceased. It remains subject to Australian capital gains tax upon a future disposal, even if the property owner is not a resident of Australia.
Foreign Resident Capital Gains Withholding (FRCGW)
The FRCGW rules impose a payment obligation on purchasers of certain taxable Australian property from foreign tax resident vendors. Where an Australian property is sold for AU$750,000 or more, the FRCGW rules may apply. The purchaser is required to withhold 12.5% of the purchase price and send this to the ATO. The vendor then claims a credit for the withheld amount when they lodge their Australian income tax return.
These measures were introduced to assist the collection of foreign residents’ Australian tax liabilities.
If you are a non resident for tax purposes and are selling a property for $750,000 AUD or more, you must inform the purchaser of your tax resident status. The purchaser will need to convey that information to their conveyancer and real estate agent to ensure the correct procedure occurs.
If you are an Australian tax resident and sell an Australian property for $750,000 AUD or more, you will need to apply for, and receive a Capital Gains Withholding Clearance Certificate. This certificate exempts you from any withholding obligations.
Principle Place of Residence (PPOR)
As a general rule, Australian tax residents are exempt from paying capital gains tax on the sale of the property you regard as your family home, which is known as your principal place of residence. This is because you don’t generate an income from living in your own home. However this does not apply to non tax residents of Australia.
Changes for foreign tax residents of Australia
There has been recent controversy due to government changes in relation to abolishing the main residence tax emption on property’s for non-residents. Under the new rules you may be liable to pay tens of thousands in CGT.
For example, Anna and Joseph own a house in Melbourne purchased in 2005 for $500k. They moved to Canada in 2015 after Anna was offered a job there and decided to live there indefinitely shortly after. Under the new rules if they sold their property for $750k, they will be liable to pay tax on that amount.
There is an exemption to this rule if you pass the ATO’s “life events test”. Which is:
- you were a non-resident for Australian tax purposes for a continuous period of six years or less and, during that time, one of the following must have also occurred:
- you, your spouse, or your child under 18, had a terminal medical condition
- your spouse, or your child under 18, died
- the CGT event involved the distribution of assets between you and your spouse as a result of your divorce, separation or similar maintenance agreements
Capital gains tax – property – 6 year rule
If you purchase a property and live in it for a minimum of six months, you may be able to avoid paying Capital Gains tax if sold within six years. For this to occur you must not consider another property to be your PPOR. Please note, the 6 yeat CGT rule is not available for non tax residents of Australia.
If you are no longer an Australian Tax resident, your superannuation remains subject to the same rules, even if you are leaving Australia permanently. This means you can’t access your super until you reach preservation age and retire, or satisfy another condition of release.
However, if you are moving to New Zealand permanently or indefinitely you can transfer it to a New Zealand KiwiSaver scheme from a participating Australian super fund
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Individuals who cease to be an Australian Tax resident, while still holding a main residence in Australia and/or Australian non-TAP assets need to carefully assess their situation to ensure there are no unintended tax consequences. Please contact us should you require anything further.