Tax Q&A: Application of CGT on overseas assets

By Shukri Barbara | 07 Apr 2020

Q: Shukri Barbara is principal adviser at Property Tax Specialists My family bought an apartment in Hong Kong in 2010, and we lived in it as our main residence until we moved to Melbourne in January 2016. Since then, we have been renting out the Hong Kong apartment.

After moving to Melbourne, my husband and I bought a house there, which we have since been occupying. I am an Australian resident, and my husband is an Australian permanent resident. We are both Australian tax residents.

If my husband and I sell our Hong Kong property within six years, ie before the end of 2021, does the six-year rule apply to this property? Would there be no need to pay capital gains tax on the Hong Kong property, assuming we declare it as our main residence?

Yours sincerely, Wai

A: Under the six-year rule, a property can qualify for main residence exemption for a period of up to six years if it is being rented out, assuming no other property has been nominated as a main residence.

In your case, we consider that in Australia, tax is levied on individuals separately; however, where a couple live together as a family, the dwelling is considered as the abode of both individuals. Each will still be assessed individually.

Where a person first becomes a permanent resident from a non-citizen position, all assets owned overseas are considered to have been acquired at the date of granting permanent residence – at market value.

If the non-resident was a citizen during that same time, then a main residence exemption would continue to be available.

Where two properties were used as main residences at different times and continue to be owned, then a choice must be made

Only one property can be nominated as a main residence at any one time. Where two properties were owned and used as main residences at different times and continue to be owned, then a choice must be made.

On the sale of one of these properties, when lodging the tax return for the year in which the sale is made, a nomination must be made as to which property will receive the main residence exemption and for what period.'

Where the overseas property was the main residence before the non-resident became a permanent resident, then the main residence exemption can be continued for another six years from the date of fi rst rental under the six-year absence rule.

If an election is made nominating the overseas property as the main residence, the property in Australia will be subject to capital gains tax on sale. Exemption will start from the time the overseas property ceases to be nominated as the main residence. This means only a partial main residence exemption may be available on sale of the Australian property if it continues to be occupied for a longer period.

The amount of capital gains to be assessed will be apportioned between the days the property is occupied as a main residence and the days it was a rental. Note that from May 2012 the 50% discount has not been available to reduce capital gains tax where the taxpayer is a non-resident for tax purposes. Thus, the decision of which property to nominate as the main residence and for what period should be made after estimating the tax liabilities of each position, including the cash flow implications.

Need to know

  • Overseas assets are considered to have been acquired at their market value on the date a non-citizen becomes a permanent resident.
  • Main residence exemption only starts when a property is nominated as your main residence.
  • When choosing a main residence, consider your tax liabilities and the cash flow implications.

Shukri Barbara
is principal adviser at Property Tax Specialists

 

 

 

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