Are you a non-resident considering investing in the Australian residential real estate market?
Or are you a residential property owner who is considering moving overseas?
You need to be aware that selling your Australian properties in the future may incur additional capital gains tax, especially due to the removal of the main residence exemption for non-residents.
Capital Gains Tax – what is it?
As real estate is a capital asset and considered “Taxable Australian Property”, you will make a capital gain or capital loss on the eventual sale of that asset. This is measured as the difference between the cost base (what it cost you to acquire the property, with certain modifications), and the proceeds from the sale (what you receive when you dispose of the property).
The capital gains and losses you make from a disposal of an Australian property will need to be reported in an Australian income tax return, and you will be subject to tax at the marginal tax rates (see below).
A net capital loss cannot be used to reduce other taxable income, such as rental income, but you can carry it forward to offset future capital gains.
Capital Gains Tax Discount and Main Residence Exemption – how do they affect you?
Australian residents can access certain capital gains tax exemptions and discounts. The main two being:
- the main residence exemption, where broadly, the property was considered your permanent home and you have lived in it; and
- the 50% capital gains tax discount, if the asset is held for more than one year.
Effective from 9 May 2017, the main residence exemption has been abolished for non-residents (however there is a window of opportunity to claim the exemption before 1 July 2020 for properties acquired before 9 May 2017).
Likewise, the capital gains 50% discount is no longer available to foreign and temporary resident individuals. Access to the discount ended for assets acquired after 8 May 2012. However, unlike the main residence exemption, the discount is still available for gains which accrued prior to the change of law on 8 May 2012, and gains which accrued while an Australian resident. In this case, market valuations would be required at the relevant dates to determine the discounted and non-discounted gains.
If you are intending to move overseas, you need to be aware that selling your Australian properties in the future when you are a non-resident, may incur additional capital gains tax, especially due to the removal of the main residence exemption for non-residents. If this is you, we recommend that you speak with us or your tax advisor to discuss tax planning strategies.
Do your properties earn rental income?
Rental income earned on Australian properties is also subject to tax in Australia. The annual rental income and allowable deductions will need to be reported in an Australian income tax return. This is regardless of whether you are a resident or non-resident. It is important to keep appropriate records in order to calculate the income and expenses at the end of the financial year. If you use a property agent, they will provide an annual summary of income and expenses, and any additional expenses will need to be substantiated. Some of the allowable deductions you can claim against your rental income include:
- Interest paid on loans used to acquire the property (not the principal repayments)
- Depreciation of the building, furniture and fittings
- Repairs and maintenance
- Land tax, council rates and water rates
- Strata levies
- Property agent fees
From 1 July 2017, travel costs incurred in connection with a residential rental property cannot be claimed as a deduction.
Foreign Resident Tax Rates
The following income tax rates apply to foreign resident individuals for the 2019-20 financial year.
|Taxable income||Tax on this income|
|0 – $90,000||32.5c for each $1|
|$90,001 -$180,000||$29,250 plus 37c for each $1 over $90,000|
|180,001 and over||$62,550 plus 45c for each $1 over $180,000|
Non-residents are also generally required to apply for and receive foreign investment approval before purchasing any residential property in Australia. For more information, visit the FIRB website: https://firb.gov.au/.
If you are unsure about how this may affect you contact your DFK Gooding Partners advisor on (08) 9327 1777.