Leaving the country may cost a fortune

Australians who own dwellings and plan to work or live overseas might need to think again.

Few Australians realise they could lose a large percentage of their most valued asset for the crime of selling their family home while choosing to reside outside Australia for a period of time.

Australians who own dwellings and plan to work or live overseas need to think again. Leaving the country may cost a fortune.

And many of those currently overseas are also in grave danger of receiving a very harsh tax penalty.

Sydneysiders and Melburnians face the greatest risk from what is another clear Coalition government plan to return to the sort of retrospective legislative proposal planned for superannuation until the party room saw sense.

The people in danger from the retrospective legislative plan are those who are sitting on substantial unrealised capital gains on their residential dwellings.

Right now in most circumstances those profits are capital gains tax-free. But if draft legislation currently being considered by the government is introduced and passed then if an Australian citizen becomes an overseas resident for tax purposes and sells their house they will pay full capital gains tax. If they want to sell their Australian residential house tax free they must return to Australia and be classified as an Australian taxpayer once again.

If the carefully planned attack on Australians working overseas is successful — and it is part of the 2017 budget measures — then Australians with large tax free residential dwelling profits need to carefully plan their actions. There is a limited grandfathering provision so Australians with capital gains on a residence who are already overseas tax residents have until June 30 2019 to realise their tax-free gains. That’s less than two years.

A reader has sent me this example: If this law is passed (and it plans to operates from budget night), an Australian citizen and resident who, has paid off a main residence, which they have lived in for say 10, 20 or 30 years can sell that residence capital gains tax exempt if they remain an Australian resident

But if they are promoted to a position or accept an appointment in, say Canada or the US, — or choose to reside in another country in retirement — they lose that tax exemption the day they become nonresident. They get it back if they return so overseas executives must come back home for tax purposes if they want to sell their house. .

And I know that if you work in a country like Canada, the Canadians very quickly put you under their tax jurisdiction.

Under the draft legislation, apart from that short grandfathering period, there is no allowance for the time the dwelling was owned as an Australian resident so the entire gain from original purchase to sale becomes fully taxable on the day the Australian citizen become a non resident for tax purposes.

Few Australians realise they could lose a large percentage of their most valued asset for the crime of selling their family home while choosing to reside outside Australia for a period of time.

Equally bizarre, under this proposed legislation it seems you can purchase a house, move in for a short time so its declared a residence then rent it out for 25 years while you are a non resident then re establish your residency and claim a full capital exemption for the entire period.

Because the plan is so bizarre I feared I was being mislead so I checked with the Tax Institute and discovered they have prepared a paper explaining to the government the folly of what it proposes. Let me use their words:

“In our opinion, the policy behind this measure appears to be somewhat confused. The measure is said to be a housing tax integrity measure that is designed to prevent foreign residents from being entitled to the CGT main residence exemption.

“Further, the measure is said to reduce the pressure on housing affordability.

“We agree that the measure does prevent foreign residents from accessing the CGT main residence exemption. However, it will also prevent Australian citizens who have been Australian residents for tax purposes for years from using the CGT main residence exemption if they are foreign residents at the time the CGT event (egg the sale of the property) occurs.

“In our opinion, there is no legitimate policy reason for denying Australian citizens the CGT main residence exemption in these circumstances.

“We request that the Government clearly explain what abuse they are trying to prevent with this integrity measure.

“If the real purpose of the measure is to deter foreign residents from acquiring residential property in Australia, this should be stated and the measures should be drafted to achieve that purpose.

“Similarly, if the concern is really about foreign residents claiming the CGT main residence exemption when they are not in fact living in the residence or the country, this should be addressed in another way.

“Finally, in our opinion, this measure has nothing to do with housing affordability despite the claims in the explanatory memorandum. It may, in fact, have the opposite effect”, the Tax Institute says.

The Institute points out that Australian citizens who hold property that they might have sold during periods where they become foreign residents are being incentivised not to sell it.

Back to my words. Only Canberra could devise a policy aimed to increase housing stock that in fact may decrease the stock and increase property prices.

But seriously, its really important that those in the government’s retrospective firing line follow the progress of this proposed legislation and get advice of its effect on their individual circumstances. At the moment parliamentarians are deeply concerned with issues of freedom of speech, same sex marriage and who can sit in the parliament. Hopefully one day they can return to issues more concerned with running the country.