Housing tax integrity

LZR Partners is pleased to submit our response to the Treasury’s consultation paper entitled “Housing tax integrity – Capital gains tax changes for foreign residents” containing draft legislation and explanatory memorandum which was released on 21 July 2017.

The main proposal in the paper is to extend Australia’s foreign resident capital gains tax (CGT) regime by:

  • denying foreign and temporary tax residents access to the CGT main residence exemption from 7:30PM (AEST) on 9 May 2017; and
  • existing properties held prior to this date will be grandfathered until 30 June 2019.

These rules will impact Australian citizens and permanent resident visa holders who are on existing overseas assignments. These individuals may not be aware of these proposed changes and have made decisions to retain their Australian main residence based on the Australian law at the time of their departure.

It may also affect the decisions of individuals considering future overseas assignments which often form a critical part of their career or professional development as their Australian family home may now become subject to Australian CGT once they leave.

Given the capital growth experienced in the Australian residential property market over the last decade, this might act as a significant impediment for Australian nationals undertaking long term foreign assignments. If these individuals sell their existing Australian main resident, it may be difficult to re-enter the Australian housing market at the same level upon their return to Australia (the writer speaks from personal experience).

The following example illustrates the harshness of the proposed legislation:

Example 1

Michael and Penny are Australian citizens by birth and are treated as tax residents of Australia. They acquired their home in Port Melbourne on 1 March 1998 for $500,000. In July 2019 Penny is offered a job working full time in London for a contract period of five years.

In preparation for their departure, Michael and Penny put their Port Melbourne house on the market. After a period of negotiation, they sign the contract to sell the property on 13 September 2017 for $1.65 million.

Assuming that they became foreign residents of Australia for tax purposes from July 2019, they will pay tax on the full $1.15 million capital gain, despite only being foreign resident taxpayers for six weeks at the time that they sell.

Compare this result to the same set of facts, but Michael and Penny sold there property whilst they remained tax residents of Australia. As the property was their main residence, the whole of the capital gain was exempt from tax as compared to being taxed on the total capital gain of $1.15 million if they sold 6 weeks later when they were foreign residents.

The result of this proposed legislation is clearly inequitable and discriminatory.

Download a copy of the LZR submission which highlights a number of additional anomalies.

If you have any questions, please do not hesitate to contact Michael van Schaik.

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