Coronavirus pandemic leaves expats unable to sell their homes to avoid CGT bills

Key points:

  • Before December's changes, Australians living abroad had been able to claim the capital gains tax exemption on their home

  • The Government had given expats until June 30 to sell their homes to avoid big tax bills

  • Expats say travel bans and social-distancing measures have made selling their homes before June 30 impossible

Maria Pawelek is one of thousands of Australian expats who fears she could be hit with large capital gains tax bills.

Due to COVID-19 social-distancing measures, she's been unable to sell her family home before a June 30 deadline that would have allowed her to avoid liabilities.

For decades, Australians living abroad have been able to claim the capital gains tax (CGT) exemption on the family home.

But the Federal Government in December introduced changes that mean thousands of expats could be up for big tax bills, unless they sell their homes before June 30.

The change was flagged in the May 2017 federal budget as a housing-affordability measure designed to save $581 million.

It eliminates the CGT exemption for Australian expatriates that has been in place since September 20, 1985.

The measure received much criticism from the expat community and their advisers, causing the Federal Government to delay its introduction several times.

When it finally passed Parliament in December, the law included a six-month reprieve so foreign residents who already held property on May 9, 2017 would be able to claim the CGT main-residence exemption as long as they sold their property on or before June 30, 2020.

If expats do not sell by June 30, the tax bill will date back from the time the owner purchased their home, not the point at which they moved overseas, which means many could be left with hefty bills.

Ms Pawelek told ABC News she and her husband now faced that very predicament.

Attempts to sell their Sydney home last month came to an abrupt halt after the Federal Government in mid-March introduced social-distancing rules.

How COVID-19 disrupted a crucial home sale

Ms Pawelek and her husband had lived and worked in Australia most of their lives, but the family moved overseas in June 2016 so she could take up a position as legal counsel for Amazon based in Luxembourg.

She said the couple had always wanted to hold on to the family home but in January were told about the CGT main residence exemption change and decided it would be best to sell.

They placed their Coogee home on the market in early March, not knowing what was about to come.

Days later, the tenant renting their property was forced to go into lockdown after being suspected of contracting COVID while on an overseas flight with someone who had tested positive.

"On March 9, the tenant told us we had to stop inspections because he had to go into self quarantine," Ms Pawelek said.

By the time her tenant came out of quarantine, social-distancing measures had been put in place and the couple were forced to pull their home off the market.

They had spent $15,000 on real estate agent fees.

"Now that's lost money," she said.

When they purchased the home in 2006 it was worth about $1.2 million, she said. Now it is worth about $2.3 million.

If they sell after the June 30 cut-off, the CGT would be calculated on 50 per cent of the capital gain, less any expenses.

Even if they try to sell before June 30 through an online auction or private sale, she said the property market had plummeted and they would still financially lose out.

Ms Pawelek had written to Treasurer Josh Frydenberg and the ATO requesting an extension to the June 30 deadline, but never heard back.

Government dismisses calls to extend June 30 deadline.

Tax experts have for weeks been calling on the Government to extend the June 30 deadline.

But a spokesman for Assistant Treasurer Michael Sukkar indicated that would not happen.

He told ABC News the changes were announced in the 2017-18 budget, giving Australians ample time to prepare their homes for sale.

"A very reasonable grandfathering arrangement was put in place for foreign tax residents, and by June 30, 2020 they will have had over 37 months to dispose of their property and still been able to access the exemption," Mr Sukkar said.

The measure did not force anyone living overseas to sell their Australian property.

"It applies only to foreign tax residents who voluntarily choose to sell their Australian property while a tax resident of another country," Mr Sukkar said.

But Atlas Wealth Management managing director Brett Evans said the law was only passed in December and that the ban on real estate auctions and open house inspections combined with the closure of foreign borders had made the task of selling an Australian property "almost impossible".

Mr Evans said the firm had written to several federal MPs in March requesting a 12-month extension to the June 30 deadline.

"On a daily basis, we've been talking to Australian expats who have experienced problems when trying to sell their property during the COVID-19 pandemic," Mr Evans said.

These problems included quarantine requirements of 14 days for all Australian citizens returning to Australia, which stopped them from being able to meet with real estate agents and prepare their property for the sale process.

He said it also included cases of tenants testing positive for the coronavirus, which again restricted access to the property.

"It is implausible for the Government to have expected Australian expats to have acted on this legislation any sooner than December 2019 as the changes were not part of the legislation beforehand," Mr Evans said.

A 'perfect storm' leaves expats in limbo

Robyn Jacobson, senior tax trainer at TaxBanter said she had personally lobbied Treasury to extend the deadline.

"With the impact of the COVID-19 pandemic, it's not just the case they [expats] might not be able to evict the tenants to sell, but that the tenants may have tested positive to COVID and this has prohibited inspections at those properties," she said.

"The other thing is that potential buyers have been unable to inspect properties due to travel restrictions, and sellers have been unable to return home to set up their properties and attend to the sale."

"Further, because of the economic impact, buyers are reluctant to outlay substantial funds or have been unable to obtain finance.

"So we've got a perfect storm of conditions that makes it impossible for these expats to enter a contract to sell their homes before June 30 this year.

RSM Australia associate director, tax services, Tracey Dunn said COVID-19 had had a "far-reaching and continually evolving impact on Australian residents and expats who can't return to Australia due to border closures and self-isolation restrictions".

"You have a situation where people may want to return to sell their homes, but they can't because of the restrictions," Ms Dunn said.

The change in law had placed expats in a position where they were now incapable of complying with the law.

"Taxpayers may be forced to pay a significant amount of tax," Ms Dunn said.

"The deadline should be extended because June 30 isn't reasonable."

'Non-residents' may now be deemed 'residents'

The COVID-19 pandemic also has implications for non-Australian residents temporarily in Australia.

The ATO does not currently have any idea of the number of non-residents that are in Australia and may stay longer than they originally intended as a result of COVID-19.

The agency this month updated its website guidance for taxpayers, noting that if a taxpayer stays in Australia for longer than expected because of COVID-19, there may be implications.

"You may need to lodge an Australian tax return if you earn any assessable income from an Australian source," the ATO's updated website guidance states.

"This includes salary or wage income that is assessable in Australia.

"All foreign-sourced income will also be assessable unless you are an Australian resident who is a temporary resident."

"If you are here temporarily for some weeks or months because of COVID-19, then you will not become an Australian resident for tax purposes as long as you usually live overseas permanently [and] intend to return there as soon as you are able to," the ATO states.

"However, the tax residency issue may be more complicated if you end up staying in Australia for a lengthy period [and] do not plan to return to your country of residency when you are able to do so."

It said COVID-19 had created "a special set of circumstances" that must be taken into account.

If the working arrangement is short term (three months or less), the employment income would probably not have an Australian source, it said.

The ATO added it would look at people's individual circumstances.

"We appreciate that there will be unique situations with a range of potential tax outcomes," the ATO said.

KPMG tax partner Ablean Saoud said the updated guidance meant companies needed to work harder to determine if their employees were taxable here.

While minor and incidental work for a related Australian entity may be tolerated, anything above this could be considered an integration of that employee within the Australian business.

"This would expose the employee to the risk that their employment income may then be considered Australian-sourced," Ms Saoud said.

"The guidance may also have implications for employees based overseas who have historically carried out a portion of their work for an Australian entity within the group, such as a global or regional executive role."

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OP: ABC News

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