Capital gains withholding regime impacts Aussie expat real estate ownership

Richie Muir says “changes to the law mean expats need to think twice before selling property in Australia whilst living offshore”. Muir advises expats to “sell your home before you leave Australia or after you have returned to keep your principal place of residence CGT exemption”.

What’s all the talk about?

Legislation was introduced last year to combat low levels of compliance by foreign residents paying tax in respect to Australian capital gains. It meant that when a vendor disposed of real estate with a market value over $2 million, they were deemed to be a foreign resident and the purchaser of that asset was required to withhold 10% of the purchase price and pay that amount to the Australian Tax Office (ATO) unless the vendor could provide a clearance certificate.

Last month, the Commonwealth Government introduced significant changes to the current scheme so that from 1 July 2017 it will apply to the sale of all real estate over the much lower market value threshold of $750,000 and will require purchasers to withhold an increased amount of 12.5% of the purchase price.

What does it mean for Australian expats?

Australians are deemed to be foreign residents for tax purposes if they do not reside in Australia, for example expats who have set up a permanent home in another country. Expats must declare any income earned in Australia including any capital gains.

Any expats considering selling their home or investment property in Australia, with a market value above $750,000, will be caught by these proposed new laws.

With the recent lowering of the threshold, this will catch a substantial amount of sales and have significant ramifications. For example, if an expat sold their Sydney apartment for $1m, they would only receive $875,000 after the 12.5% was paid to the ATO.

The recent changes also affect vendors who co-own property with expats or other foreign residents as the purchaser will be required to withhold an amount proportional to the foreign resident’s interest in the property.

What can expats do if they are selling real estate over the threshold?

Australians intending to move abroad permanently and sell their property later may need to rethink when they sell, particularly when selling their principal place of residence that is usually exempt from capital gains tax. The ATO will only issue a clearance certificate when they have no reason to believe that the vendor is, or will be a foreign resident during the 12 months currency of the certificate, so it may be better to sell before leaving or once they have returned to live in Australia.

In some circumstances expat vendors may apply to the ATO for a variation so that a reduced rate of withholding is payable (between nil and 12.5%). For example, a variation may be granted because the vendor will not make a capital gain on the transaction. Expat vendors may also be entitled to a credit but only after they have lodged an income tax return. The laws are complex so expat vendors should contact their lawyer or tax agent to get advice on whether a variation can apply for them.

Where a variation doesn’t apply, expats should factor in the withholding and make sure they will have sufficient funds to pay out any mortgage on the property so they do not delay or breach their sale contracts.

Have any questions?

Richie Muir is a legal director at Lawlab. Lawlab is a leading Australian law firm delivering national property law and conveyancing services digitally for the convenience of off shore and local clients.