Living overseas is a rite of passage for many Aussies, but under new rules buried in the budget, they may be in for a nasty surprise if they have an investment property.<\/p>\n
Tax experts are now warning that Australians working overseas could lose access to any capital gains tax discount on investment properties under new residency requirement rules.<\/p>\n
As part of the budget\u2019s new tax rules, the 50 per cent capital gains tax (CGT) discount for assets held longer than 12 months was scrapped, and replaced with a cost-base indexation model (adjusting for CPI inflation) plus a 30 per cent minimum tax.<\/p>\n
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KPMG workforce and innovation partner Craig Robinson, who also advises expats on tax, said that under the current rules, tax relief was proportional based on the time you spent overseas \u2014 as a nonresident for tax purposes. <\/p>\n
His understanding is that, under the new legislation, stepping foot overseas long enough to break tax residency completely strips you of post-July 2027 indexation benefits when selling your Australian property \u2014 even for the years you realised capital gains while actually living in it as a resident.<\/p>\n
The change will affect investment property-owning Aussies working overseas for several years after July 1, 2027 and Aussies currently working overseas, who will still be doing so after that date.<\/p>\n
$70k worse off under new rules<\/p>\n
Take the case of an investor who buys a Brisbane apartment and holds it for 15 years and makes a capital gain of $450,000. For 13 of those years, they live, work and pay taxes in Australia, but in the middle of their ownership, they accept a three-year corporate secondment to London, officially breaking their Australian tax residency.<\/p>\n
Under the old rules, the tax office applied a proportional calculation. The investor would only lose their tax concessions for the exact years they were physically overseas, while successfully claiming the 50 per cent capital gains discount for the 13 years they lived and worked locally.<\/p>\n
This effectively reduced their taxable capital gain from $450,000 down to $270,000. Applying a typical Australian marginal tax rate of 39 per cent (including the Medicare levy), their final tax bill upon selling the property would have come to $105,300.<\/p>\n
Under the new all-or-nothing system, that brief stint overseas changes everything. Because they broke their tax residency at some point during the asset\u2019s post-July 2027 testing period, they are entirely disqualified from accessing cost-base indexation. Despite spending more than a decade as a domestic taxpayer, those two years in London completely strips them of their inflation-adjusting tax relief, leaving them to face a tax bill on the full, unindexed capital gain.<\/p>\n
With the old 50 per cent discount scrapped entirely, the full $450,000 capital gain is dumped directly onto their tax return. <\/p>\n
Assuming the same 39 per cent tax rate, the total tax bill suddenly climbs to $175,500 \u2014 leaving the investor an eye-watering $70,200 worse off.<\/p>\n
Mr Robinson said the rules only apply to people who have broken their Australian tax residency.<\/p>\n
\u201cTypically to do that, you\u2019re talking about a fairly significant period of time and that you have largely severed your connection with Australia,\u201d he said. <\/p>\n
\u201cSo think people that have moved to London for multiple years and really established life there rather than somebody that has left for, say, six months.<\/p>\n
\u201cPreviously, you got a proportion of the relief under the 50 per cent discount rules. As it currently stands, there is no ability to get a proportion of indexation on that property under the new rules.\u201d<\/p>\n
Property owners hit harder than shareholders<\/p>\n
Mr Robinson said the rules do not hit Aussies who own shares as hard, because they are eligible for something called \u201cdeemed disposal\u201d when they sell.<\/p>\n
\u201cSo if you\u2019re an Australian, leaving Australia, you\u2019ve got, say, a share portfolio, and it\u2019s not real Australian property,\u201d he said. <\/p>\n
\u201cYou can do what is referred to as a deemed disposal in your tax return when you come to leave. And that means that you would get access to indexation for the period that you have been an Australian resident, but you wouldn\u2019t get it thereafter.<\/p>\n
\u201cSo with property, you don\u2019t have the ability to undertake a deemed disposal. So you wouldn\u2019t get any cost-based indexation. Property is referred to as taxable Australian property.\u201d<\/p>\n
He said Aussies need to think carefully about their investments if they are planning to move overseas.<\/p>\n
\u201cI think the main thing is a planning perspective. So obviously, individuals are likely to need to consider how they\u2019re going to be impacted across their portfolio,\u201d he said.<\/p>\n
\u201cSo they should review their assets when making decisions about selling or relocating internationally. It\u2019s just important that people understand the complexity that sits behind that change and how it impacts them.\u201d<\/p>\n
\u2018Surprisingly harsh\u2019 new rules<\/p>\n
Other tax experts have weighed in on the changes, with one saying the rules are \u201csurprisingly harsh\u201d.<\/p>\n
Ben Turner, an accountant specialising in expat tax at Atlas Wealth Management, said he also understood the new rules mean an individual must not be a foreign resident or temporary resident at any time during the testing period, or they will lose their indexation benefits.<\/p>\n