Tax Q&A Your tax questions on CGT for overseas resident, answered

By
7/7/2016


Q: I am an Australian citizen but have been living in the UK since 2003 (originally on a UK working holiday visa but I'm now a dual citizen of the UK and Australia). I have been deemed a non-Australian tax resident since 2008, and am currently a UK tax resident.

In September 2001, I purchased an Australian (NSW) property with my sister for $352k, and we both lived in the property as our main residence. I moved to the UK in May 2003 and am currently living with my sister after she moved here sometime later. 

We are considering selling our property (valued at $740k), and I wanted to ask what capital gains tax exemptions or concessions will be applicable? Can we claim a principal place of residence exemption for any period, given that I am no longer an Australian tax resident? Does the six-year CGT exemption apply, and if so, for which period? Can I still get a 50% discount for any period when I was an Australian citizen or resident? Do I pay the CGT tax in Australia or the UK?

A: This mainly depends on two things: whether you and your sister have had a principal place of residence (PPOR) in the UK since 2003, and whether you and your sister have used the Australian property for income-producing purposes while you have been living in the UK, as the capital gains tax (CGT) treatment is different for each scenario and situation.

Scenario 1 

Australian property was never used for income-producing purposes and you had no other PPOR in the UK since 2003.

There will be no CGT applicable since this property has been your nominated PPOR and has never been used for income-producing purposes. 

Scenario 2 

Australian property was used for income-producing purposes and you had no other PPOR in the UK since 2003. 

For the period 2003–2009 (that is, the period covered by the ‘six-year rule’), there will be no CGT liability. The period since 2009 to the date that you sell the property will be assessable for tax on the capital gain. You will be required to obtain a valuation of the property from 2009, and the difference between the selling price and the valuation price will be the capital gain. 

There will be no CGT 50% discount concession (even though you have held the property for more than 13 months) because non-residents of Australia for tax purposes are not entitled to the CGT 50% discount concession, nor are they entitled to the tax-free threshold. You will be required to lodge an Australian income tax return, and the tax will be required to be paid in Australia as well.

Scenario 3 

Australian property was used for income-producing purposes and you had another nominated PPOR in the UK since 2003.

The period since 2003 to the date that you sell the property will be assessable for CGT. You will be required to obtain a valuation of the property from 2003, and the difference between the selling price and the valuation price will be the capital gain. 

There will be no CGT 50% discount concession (even though you have held the property for more than 12 months) because non-residents of Australia for tax purposes are not entitled to the CGT 50% discount concession, nor are they entitled to the tax-free threshold. You will be required to lodge an Australian income tax return, and the tax will be required to be paid in Australia as well.

Please note, however, that for Scenarios 2 and 3, although the CGT 50% discount concession no longer applies to non-residents of Australia for tax purposes, the fact that the Australian property was purchased prior to 8 May 2012(when you were an Australian resident for tax purposes), you may be eligible for some reduced CGT discount, provided you meet certain eligibility conditions before 8 May 2012. I would require additional information and facts in order to provide you with further advice. 

Stamp duty on ownership transfer 

Q: A couple of years ago I knocked my parents’ house down and rebuilt a new two-storey house so my parents and my family could live in the one house. The house is in my parents’ name, and the loan is in my name. Is there a way of transferring ownership of the house to my wife and myself’s name without paying stamp duty? We eventually want to use the equity in the house to buy an investment property. We live in NSW.

A: If  your parents transfer the ownership of their property to you and your wife’s names while they are alive, then this is a dutiable transaction which will attract stamp duty for you and your wife. This will still be the case even if there is no consideration paid in exchange for transferring ownership. 

Breakout costs 

Q: My husband and I purchased an investment property (with the aim of making it our own home in the future) back in 2009. At the time of purchase it was vacant, and a few months later we rented it out. We had a loan on the property at a fixed interest rate for five years. After two years we decided to breakout costs were $75,000. Can we claim this as a tax deduction? The property was still tenanted at the time. We decided to pay out some of the loan in the refinancing process as we moved into the property to make it our own residence. 

A: The tax deductibility of the $75,000 loan breakout costs depends on three elements, namely the vacancy period for a few months after you purchased the property; the period when it was used for income-producing purposes (that is, when it was being rented); and, most importantly, your intention in breaking the loan and refinancing.

Firstly, the tax treatment of the vacancy period of the property for a few months following the purchase depends on whether the property was available for rent, or intentionally left vacant. If the property was genuinely available for rent – for example, among other requirements, if it was listed with a real estate agent and advertised for market rental during the vacancy period – then part of the breakout finance costs is
tax deductible. If the property was intentionally left vacant, then the breakout costs must be capitalised and can only be claimed if and when you sell the property as part of the capital gains tax calculations in the future.

Secondly, for the period when the property was used for income-producing purposes and rented out, the breakout costs for refinancing can be claimed as income tax deductions on a pro rata basis.

Thirdly, the intention test applies here because you mention that after two years (into a five-year) fixed rate period you decided to break the contract and refinance the loan. You also mention that you then moved into the property and made it your principal place of residence. The most likely intention in this instance is that you wanted to refinance for private purposes, which would most likely suggest that years three, four and five of the breakout costs cannot be claimed as income tax deductions. If the intention was for investment purposes, then this is usually a question of fact, and you would be required to substantiate this in order to claim full tax deductibility on the $75,000.

Therefore, as a guide based on the limited facts – and depending on the nature of the vacancy period when the property was initially purchased – the tax deduction on the breakout costs must be pro rated and the highest amount you can claim as a tax deduction would be $30,000, being two years out of five at $75,000. It may also be less than $30,000 but not higher.


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