Steve Humphrey and his wife Jun are among thousands of expatriates reviewing their financial plans following Treasury's decision to push ahead with "draconian" changes to capital gains tax (CGT) on their Australian property.
The decision is causing widespread anxiety and confusion among Australians living overseas who have to sell before the end of June if they want to avoid the tax. Expats say difficulties selling in a falling market are compounded by COVID-19 bans on allowing potential buyers to view properties without the permission of the tenant.
The federal government rejected last-minute lobbying to have the changes scrapped. The new rules were introduced in the 2017 budget to improve affordability by removing the CGT main residence exemption for foreign residents.
The Humphreys, based in Singapore, have two investment properties in Melbourne, one of which might eventually be their home.
Steve and Jun Humphrey are among many expats caught out by the CGT decision.
“You set up a retirement strategy and then they introduce a retrospective tax," says Humphrey, 58, who works for a multinational company involved in mining services. "Makes it problematic,” he says. His wife, 52, is a teacher.
Expats are stuck and "unable to conduct effective action due to the COVID-19 restrictions", says Robert Deutsch, senior counsel for The Tax Institute, an association for tax professionals.
Deutsch, who had been lobbying for a second 12-month extension to the tax deadline, describes the legislation as “misguided, draconian" and not in the nation’s best long-term interests.
His comments follow Treasury confirming the government will not be making changes to CGT main residence rules that had been extended to the end of June from the previous year.
It also applies to apartments, caravans, houseboats or mobile homes if these are a principal residence.
“A very reasonable grandfathering arrangement was put in place for foreign tax residents, and by June 30 they will have had over 37 months to dispose of their property and still have been able to access the exemption,” a Treasury spokesman says.
But Deutsch dismisses the claim that expats have had 37 months as "disingenuous”. “Hardly anyone wanted to act on all this until legislation was passed so really people affected have had only the last six months in full knowledge of effective legislation," he says. "That period includes Christmas and New Year when people hardly ever want to sell, and since late February there has been the COVID-19 disaster.
"At best you could say people have had six very difficult months in which to sell – certainly not 37 months.”
The measures do not force anyone overseas to sell their Australian property but overturn an exemption for expats that has been in place since September 1985.
“It applies only to foreign tax residents who voluntarily choose to sell their Australian property while a tax resident of another country,” the spokesman says.
Many expats claim the retrospective tax creates uncertainty and additional complexity, particularly for those considering retiring in Australia in the next few years.
Steve Streiberg, another Australian expat with property in Melbourne, is based in Warsaw, where he works for a multinational company.
Streiberg and his family left behind their home for an overseas relocation about eight years ago, first in Indonesia and then in Poland.
“Losing our primary residence exemption means our retirement home (if sold) will have a tax shadow over it of between $500,000 and $1 million,” he says.
Foreign tax residents have the option of re-establishing their Australian tax residency, for example after returning to Australia, to gain access to the main residence exemption on the sale of the property, according to Treasury.
“It will force me to hold the house indefinitely, locking up a property that could be sold for a new family home to avoid a massive loss during downsizing,” adds Streiberg. As an example of how the proposed change in CGT will hit an overseas buyer, The Tax Institute cites a couple who in 1991 buy a house in Australia for $1.2 million with the house bought in the wife's name.
In 2019 they move to England on an initial two-year contract and rent out their property in Australia on a renewable one-year lease. Those who work overseas can become a non-resident for tax purposes when out of the country.
Tough time to sell
If the house is sold in April 2021 for $4.6 million and the wife is a foreign resident at the time of sale, she won't qualify for the main residence exemption.
The capital gain will be around $1.8 million ($4.6 million minus $1.2 million reduced by 46.67 per cent), according to an example from The Tax Institute.
Buyers’ agents claim the economic downturn, bans on open house inspections and auctions and tenant protections make it a tough time to sell.
Jarred McCabe, a director of Wakelin Property Advisory, says: “Many buyers have to rely on online inspections, which is not satisfactory because it is so difficult to assess the condition of a property."
He recommends that those considering a sale put together an extensive package of photographs, videos and explanatory material for potential buyers.
Alternatively, negotiate access to a property with the tenant by offering incentives, such as rental deduction or commercial cleaning after an open house.
Buyer's agent Cate Bakos says since COVID-19 fears have calmed, there has been an increase in demand.
“The stock numbers are low and there are some hungry buyers,” says Bakos. “An expat who wanted to sell a family home for less than $2 million could get an OK price.”
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