Selling Australian Property as an Expat

Navigating the sale of an Australian property as an expat is more complex than many might imagine. From tax obligations to exemptions that no longer apply, there’s a lot to consider if you’re an Australian expat planning to sell property back home.

In this guide, we’ll break down the key changes to tax rules that impact expats, what to expect in terms of costs, and how your plans might be affected if you return to Australia. Understanding these can help you make the most informed decision possible when it comes to selling.

1. The Main Residence Exemption: What’s Changed for Expats?

What is the Main Residence Exemption?

The Main Residence Exemption has long been a lifeline for Australian property owners. If you’re a resident, you’re generally allowed to sell your primary residence without paying Capital Gains Tax (CGT). However, recent changes have altered this rule significantly for expats.

Removal of the Exemption for Expats

In 2020, the Australian government introduced legislation that removed the Main Residence Exemption for non-residents. This means that if you’re living and working overseas as an expat, you no longer qualify for the tax exemption—even if the property you’re selling was once your main residence when you lived in Australia.

Example Scenario

Let’s say you purchased a home in Sydney in 2015, lived there until 2019, and then relocated to Singapore for work. Under the new rules, if you decide to sell the property now, you’ll be subject to CGT, even though it was once your main home. This change can catch many expats off guard, resulting in unexpected and often substantial tax bills. One of the biggest surprises is that this CGT is often calculated from your purchase price, not from the date that the property was rented out.

Impact on Capital Gains

Losing the Main Residence Exemption means that the entire capital gain on the property, from the time you bought it until the time you sell it, will be taxed. This tax bill can be sizeable, especially if your property has appreciated significantly in value over the years. For many, this might be a reason to hold off on selling until they’re able to return to Australia and regain resident status.

2. Removal of the 50% CGT Discount

What Was the 50% CGT Discount?

Australian residents who hold onto an asset like property for over a year before selling are eligible for a 50% discount on CGT, and the same applies for other investments such as shares or managed funds. This provides a significant tax break, effectively halving the CGT liability for Australian residents.

However, this was removed for Australian expats in 2012, which meant that the full capital gain would be taxable for non-residents of Australia on Taxable Australian Property (TAP), such as residential real estate.

The Impact of Removing the Discount for Expats

Expats no longer qualify for this 50% discount. This means you’ll face the full CGT rate on the property’s capital gain if you’re a non-resident at the time of sale. Not only does this increase your tax obligation, but it also can impact the timing and potential profitability of selling your property while living abroad. It’s important to note that you may be eligible for a pro-rated discount on the capital gain depending on whether the property was owned prior to May 2012 as a non-resident, or if you owned the property for a portion of time as an Australian resident.

Example Calculation

Imagine you purchased a property in Melbourne in 2016 for $500,000. Today, it’s worth $800,000, resulting in a gain of $300,000. If you were still an Australian resident, you’d typically apply the 50% discount to the gain, leaving $150,000 taxable. But as an expat, you’re taxed on the full $300,000 gain, significantly increasing your CGT liability.

3. Non-Resident Tax Rates and How They Affect You

Understanding Non-Resident Tax Rates

As a non-resident, you don’t receive the same tax benefits as residents. Most notably, there is no tax-free threshold for non-residents, meaning you’ll be taxed on the very first dollar of income you earn in Australia. This applies not only to property sales but also to any rental income you might earn if you’re renting out the property while overseas.

Tax Rates for Non-Residents

Non-residents face a higher tax rate structure than residents. For example, income (including capital gains) above $190,000 is taxed at 45%, and the tax rate is 30% from the first dollar all the way up to $135,000. The non-resident tax rate is effectively a “first dollar” tax, adding to the financial challenges of selling as an expat.

Rental Income and Non-Resident Tax Rates

If you’ve been renting out your property while overseas, be aware that your rental income is also taxed from the first dollar, with the same higher rate applying. This is especially important if you’re considering selling and want to offset part of the cost with rental earnings in the lead-up to the sale.

With any investment property, it’s important to review your cash flow and consider your overall tax implications. Strategies such as making superannuation contributions, prepaying interest, or even expanding your property portfolio could be key considerations.

4. What Happens When You Return to Australia?

Returning to Australia and Your Tax Residency

If you plan to return to Australia, you’ll have the opportunity to regain resident tax status. This can have a notable impact on how any property sales are treated for tax purposes. Once you’re back and classified as a resident, in most cases you will regain eligibility for the Main Residence Exemption and the 50% CGT discount from that point forward.

Selling After Returning to Australia: A Strategic Advantage?

If you return to Australia, re-establish residency, and then sell the property, you may be able to reduce your tax obligations. Regaining resident status can reinstate certain tax benefits that are unavailable to non-residents. However, keep in mind that this will depend on factors such as the time you’ve been back in Australia and your overall tax position.

5. Key Considerations for Expats Planning to Sell Property

Timing the Sale

Timing is critical. If possible, consider whether it’s worth holding the property until you return to Australia. This may help you qualify for tax exemptions and discounts, reducing the overall tax burden. For those who may not be returning anytime soon, weighing the costs of non-resident CGT rates against potential property market trends and rental income can help in decision-making.

Professional Advice is Essential

Given the complexity of tax rules surrounding expats and property sales, consulting a financial adviser or tax expert with experience in expatriate tax matters is invaluable. They can help you understand your options, potential liabilities, and timing strategies to optimise your financial outcome.

Exploring Alternatives: Should You Sell or Rent?

For some expats, selling the property may not be the only or best option. Renting out the property while maintaining ownership could allow you to continue building equity, especially if the rental market is strong. Be sure to weigh the pros and cons of renting versus selling, considering factors such as maintenance costs, potential appreciation, and your long-term plans.

Conclusion

Selling Australian property as an expat comes with unique challenges, especially given the removal of key tax exemptions and the impact of non-resident tax rates. Whether you’re selling to simplify your financial situation, planning to return to Australia soon, or weighing the options for managing your investment, understanding the tax implications is essential.

Make sure to seek professional advice to develop a clear strategy that aligns with your financial goals. With careful planning, you can navigate the process effectively and make informed decisions about your property, wherever in the world you may be.

Ally Wealth Management is the trusted ally in finance for Australians at home and across the globe. As both Australian expats and residents, the founders of Ally have a unique understanding of the common personal financial challenges faced.

Book your complimentary appointment with our team at Ally Wealth Management to discuss how we can help you to achieve your financial goals.

Ally Wealth Management Pty Ltd is a Corporate Authorised Representative of Sentry Advice Pty Ltd ABN 77 103 642 888. Sentry Advice holds an Australian Financial Services Licence (AFSL) No. 227 748.

General Advice Warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.