Contributed by Roelof van der Merwe, National Tax Director, Findex
In today’s expat lifestyle (or for those watching infomercials, also referred to as the “laptop-lifestyle”) society, it is not uncommon for people to live and work in different countries.
If such an individual has bought a property (eg investment property) in Australia and eventually sells the property, will such an individual qualify for the full 50% capital gains tax (CGT) discount?
- When we talk about residency in this snapshot, we refer to tax residency1, a concept different from nationality or mere absences from Australia (eg you may have a non-Australian passport but be a tax resident of Australia).
- We have also assumed that the investment property was held on capital account, that the property was never used as a main residence nor in a business (ie can’t claim any potential main residence exemption or potential small business CGT concessions).
Background to the 50% CGT discount
Up to 8 May 2012, any resident or non-resident individual that held a property-rich CGT asset (eg an investment property) for at least 12 months before selling the asset, could qualify for a 50% CGT discount on any capital gain made on the sale of such an asset (ie only pay tax at the individual’s marginal tax rate on half the capital gain).
However, from 9 May 2012, the 50% CGT discount is no longer available for non-residents.
Therefore, the full 50% CGT discount should only be available for periods the asset was held:
- up to 8 May 2012 (ie regardless if you were a resident or non-resident in this time), and
- from 9 May 2012 up to the time of sale during the time the individual was an Australian resident (ie only residents can qualify for the 50% CGT discount in this time).
These changes mean that if you have been a non-resident during the time you owned the asset, you may not be able to qualify for the full 50% CGT discount on the eventual sale of your property (ie the 50% CGT discount percentage will be reduced).
However, it will not be necessary to reduce the CGT discount percentage if the asset was sold on or before 8 May 2012 or the individual was a resident at all times from 9 May 2012 up to the date of sale.
What does this mean for you?
Let’s run through a case study to understand the practical implications.
Assume the following facts (also refer to the timeline for more specific details):
- Marcus bought an investment property in Australia (in his own name) and shortly thereafter Marcus was seconded to work overseas (all this happened before 8 May 2012 and at 8 May 2012 Marcus was a non-resident); and
- In the period from 9 May 2012 until 14 June 2019 (ie the day Marcus signed the contract to sell the property) Marcus was both resident and non-resident of Australia at different times.
Marcus will not qualify for the full 50% CGT discount on the sale of the property on 14 June 2019 (ie the day the sale contract is signed) because from 9 May 2012 Marcus was both a resident and non-resident while he owned the property.
The tax law prescribes different methodologies for determining the new percentage of CGT discount that may apply to Marcus’ $9m gain.
- Option 1 — Because Marcus was a non-resident2 at 8 May 2012, he can obtain a market valuation of the investment property as at 8 May 2012, and calculate the new CGT discount percentage by taking into account the full 50% CGT discount:
- – on any increase in value of the property from 10 May 2009 (ie actual date of purchase) to 8 May 2012 (regardless whether Marcus was a resident or non-resident in this time), and
- – only on increases in the value of the property from 9 May 2012 during the time Marcus was a resident, OR
- Option 2 — If Marcus does not obtain a market valuation of the investment property as at 8 May 2012, a new percentage of CGT discount will be calculated without taking into account the 50% CGT discount for gains accrued up to 8 May 2012.
Both these options use a prescribed calculation3 to work out the new CGT discount percentage and under Option 2, the overall CGT discount percentage will most likely be lower (ie choosing the market value method (ie Option 1) will usually be the best course of action).
Furthermore, if the market value of the investment property at 8 May 2012 is equal to or greater than the eventual sale price at 14 June 2019 (ie $10m), Marcus will qualify for the full 50% CGT discount4.
|1 Tax residency is determined based on four tax law tests (ie resides test, domicile and permanent place of abode test, 183 days test and Commonwealth Superannuation test).|
2 Can only use market value method if non-resident at 8 May 2012 [s 115-115(4)(b) of ITAA 1997].
3 Section 115-115(4) Item 1 & 2 of ITAA 1997 if choose market value method (ie Option 1) and s 115-115(6) of ITAA 1997 if does not choose market value method (ie Option 2).
4 Section 115-115(4) Item 1 of ITAA 1997.
[This article was originally published in CCH Tax Week on 21 June 2019. Tax Week is included in various tax subscription services such as The Australian Federal Tax Reporter and CCH iKnow. CCH Tax Week is available for subscription in its own right. This article is an example of many practitioner articles published in Tax Week.]