Tax Q&A: Does CGT exemption apply with foreign property?

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10/01/2019

Question: I have an apartment in Lisbon, Portugal, that I bought in 2001. It was my residence until I came to Australia in 2011. I am now selling the apartment. There will be a profit of $5m from the sale, though I also have $2m–$3m worth of expenses.

In Portugal, it is considered that I’m making no profit and hence pay no CGT.

In the meantime, I am still renting in Australia. I have phoned the ATO, and they said on the phone that I will need to pay CGT. I am trying to get the right information regarding my taxes. Can you help?

Thanks, Ana

Answer: Given that there are a few unknowns in your circumstances that may materially affect the tax analysis, I have made the following assumptions based on the facts you provided:

  • you were not a resident for Australian tax purposes until you came to Australia in 2011
  • you became a tax resident of Australia in 2011
  • you have always owned the apartment in your own name as an individual
  • the apartment was still your main residence when you became an Australian tax resident
  • the apartment has never been rented out

If any of these assumptions is incorrect, it may materially alter the tax analysis below, so we strongly recommend that you obtain formal tax advice.

Based on the assumptions above, until the point when you became a tax resident of Australia in 2011, your apartment was not caught by the Australian tax net. However, when you became an Australian tax resident you were deemed to have acquired all the CGT assets you owned, including your apartment in Portugal, at that date, and this determines its market value for tax purposes. In other words, for Australian tax purposes the apartment is treated as if its acquisition date was the date on which you became a tax resident, and the cost base of the apartment was its market value at that date.

For Australian tax purposes, the apartment in Portugal is treated as if its acquisition date was the date you became a tax resident

As to the Australian tax treatment in relation to the proposed sale of the apartment, it will depend on whether you have purchased another property as your main residence since you became a tax resident of Australia.

If you have not purchased another property as your main residence, you may choose to continue to treat the apartment in Portugal as your main residence under the ‘temporary absence rule’. As the apartment has never been used to produce income, you are allowed to continue to treat this property as your main residence for an indefinite period unless you choose to treat another property you’ve bought as your main residence, or you rent out the apartment. Practically, what this means is that if you make a capital gain on the sale of the apartment now, the capital gain will be fully disregarded under the main residence exemption. However, if you have purchased another property as your main residence since you became a tax resident of Australia, you would have to choose either the new Australian property and your property in Portugal as your PPOR.

I strongly recommend that you obtain professional tax advice on both the Portuguese tax treatment of the sale and the Australian ATO treatment in calculating capital gains tax, due to the potential complexities involved. It should be noted that Australia does not have a current double tax agreement with Portugal.

Need to know
- The acquisition date is the day you become a tax resident of Australia.
- Australia does not have a double tax agreement with Portugal.
- Main residence exemption rules apply if the foreign property is considered your PPOR.

 

Eddie Chung
is tax and advisory
partner at BDO

 

 

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If you would like your tax question answered in our magazine or on our website, please email your question to: editor.yipmag@keymedia.com.au

 

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