Australian Capital Gains Tax (CGT) - An Introduction and FAQ's
Australia has had a comprehensive capital gains tax (CGT) regime since 20 September 1985. Individuals planning to move to Australia or leave Australia should understand the framework of these rules so as not to trigger any "avoidable" adverse Australian CGT consequences. Some general information is provided below, but Exfin strongly recommends that you seek advice from a qualified Australian taxation advisor before any relocation, as the rules are complex.
Note that the Government announced some changes in the May, 2017 Budget which could have a significant impact on expatriates - and in particular their ability to claim the CGT exemption for "main residences". We need to wait on the legislation to see the precise impact, but potentially both expatriates and temporary tax residents in Australia will be unable to claim the CGT main residence exemption from May 9, 2017 - with existing properties owned prior to this date grandfathered until 30 June, 2019. What is particularly important to understand is whether the exemption disappears entirely at this later point in time, or an entitlement continues to exist on a pro rata basis. If the former applies, then many Australian expatriates sitting on large capital gains in Australian property, may need to consider very carefully whether they should sell those properties prior to 30 June, 2019.
Q :What assets are subject to Australian CGT?
A : Broadly, any type of property. Most commonly, it will include real estate, shares in companies and interests in unit trusts.
Q: What is the rate of Australian CGT?
A : There is no rate of Australian CGT as such. A net capital gain is included in a taxpayer’s assessable income and taxed along with their other assessable income at their marginal rate of tax. The top marginal rate of tax is currently 46.5%, including the Medicare levy. If you hold an asset for at least 12 months before you dispose of it, you will be entitled to the 50% CGT discount - so that only one-half of your net capital gain will be assessable. If you are on the top marginal rate of tax, the rate of tax on a capital gain after applying the 50% CGT discount is effectively reduced to 23.25%.
However, effective May 8, 2012 this discount ceased to apply to non-residents and temporary residents. Eligibility in relation to existing assets is based on a formula which takes into account the number of days a taxpayer was resident or non-resident from that date, on a pro-rating basis. These changes, the enabling legislation for which was passed in June 2013, also applied to trusts holding these assets, raising the possibility that in some circumstances it may be preferable to hold real estate assets in a corporate structure.
We have stated this previously, but it is imperative that individuals who wish to ensure access to the discount in relation to growth prior to May 8, 2012 have a market valuation as at that date performed by a licensed valuer. Obviously, the more time elapses the more scope there is for argument with the ATO regarding the appropriate valuation.
Q: I am a non-resident of Australia but I am considering acquiring investments in Australia. Will I be subject to Australian CGT should I sell these investments?
A: It depends on the type of investments. Non-residents will only be subject to Australian CGT on assets that fall within the definition of "Australian taxable property". Broadly, these are confined to Australian real property and certain business assets located in Australia. However, in some cases, interests in entities that in turn hold these types of assets can also be considered taxable Australian property (referred to as indirect property interests).
Q: I am planning to emigrate to Australia. Will there be any Australian CGT consequences on my holdings of my overseas investments once I move to Australia.
A: Yes. Individuals emigrating to Australia will normally be deemed to be residents of Australia for taxation purposes from the date of their arrival in Australia. Australia’s CGT rules will then deem you to acquire all your CGT assets that are not already Australian taxable property; on the date of your arrival for their market value at that date. You will then be subject to Australian CGT on any subsequent disposal of those assets.
Please note that from 1 July 2006 modified rules applied to temporary residents - generally speaking, these are people who are not Australian citizens and come to Australia on temporary entry/work visas (eg. a 457 visa).
Q: I am an Australian resident having lived here my entire life. I am planning to leave Australia indefinitely. What are the Australian CGT implications for my assets in Australia?
A: On the date of your departure you will be deemed to have disposed of all your CGT assets that are not Australian taxable property for their market value on that date. As such, you may be liable to pay Australian CGT should you be deemed to have realised a capital gain (broadly where the cost of those assets to you are less than their market value on the date of your departure).
You can make an election for this taxing event not to occur, but if you do this then Australia will always be able to tax you on any subsequent disposal of the assets going forward (despite your no longer being a resident).
Please note: An exemption from these rules may apply to your main residence. Australian tax laws allow you to rent out your main residence for a period of up to 6 years after your departure and you can still then dispose of the property free from Australian CGT. There are conditions, however - for example, you may only have one main residence at any point in time, whether in Australia or overseas.
Note also the recent changes, mentioned above, in terms of the application of the 50% CGT discount to non-residents.
If you believe that a CGT liability might arise on the sale of an asset you should seek professional assistance to assess the likelihood and amount of any liability.