Here you will find common sense answers to the most common questions asked by our members. Answers are provided by the appropriate expert in that area.

How will the new capital gains tax changes happening in June 2019 affect property owners financially?

How will the new capital gains tax changes happening in June 2019 affect property owners financially?

Since the May 2017 Australian Federal Budget, Australian Expats have been living under a cloud of fear that they may become taxable on their former Australian residence.

In short, the proposals only affect anyone that actually lived in their Australian property prior to relocation overseas. If you only ever rented your property then no changes are occurring.

For those that did live in the property at any stage, the current law allows a tax free entitlement for the period actually lived in the property, plus a potential further 6 years tax free whilst rented, and then calculated the taxable amount on a pro-rata basis with any other proportionate period when the property was rented being taxable.

The changes propose to make the full period of occupation taxable regardless of how long or short that may be, If the property is sold whilst the owner is living out of Australia. For example, if you lived in the property for 20 years in Australia then moved overseas and sold the property after leaving Australia, the entire gain on the property would be taxable, totally ignoring the many years of occupation and penalising you even if you have just been abroad for 6 months!

The proposed changes don’t apply if the property is sold prior to 30th June 2019 or if the property is sold once you have returned to Australia and living there as a tax resident (but not necessarily in the same property).

SMATS has been at the front line pressing Prime Minister Scott Morrison, who was the Treasurer at the time of the announcement, through submissions and representations in collaboration with Austcham HK. We have asked that the rules not be changed as the current law is adequate to capture investment related profits and the removal of a family home tax free status for simply living abroad is extremely harsh and unjust.

This has seen a delay in the passing of the legislation with the removal of the Bill from the Senate floor late in 2018. This was done largely on the fact there was great unfairness in removing a long time entitlement being lost and the risk of a forced sale through unforeseen circumstances, such as death, divorce or financial trauma, triggering an unwanted and unplanned tax burden.

Since then, the Opposition Shadow Treasurer has formally come out to support our requested change to exclude Australian Citizens and Permanent Residence Visa Holders.

The stalling of the legislation and Opposition support to our requests is extremely encouraging, however while the Government remains in review process and the looming election in May 2019 approaches, there is great difficulty for anyone considering selling their previous property to ensure that keep the tax free status if sold prior to 30th June 2019.

Some things to consider include:

  • Don’t sell if you never lived in the property, as the changes don’t affect you.
  • Don’t sell if you genuinely consider that you wouldn’t sell the property until at least you have returned to live in Australia as you would not be disadvantaged.
  • If you lived in the property for extended periods of times prior to moving abroad, then selling prior to 30th June 2019 is a real option for you if it was likely that:
    • You were going to sell the property sometime soon while still living overseas
    • You think the law may pass
  • Another option if you think that you want to keep the property long term as an investment but may want to sell it while still abroad, is to transfer the property to a Family Trust. This realises the tax free gains, retains the property in a tax effective vehicle and potentially frees up the equity for your next family home if you intend to upgrade. There is a stamp duty cost of approximately 5%, however that may be more cost effective than large Capital Gains Tax charge.

You need to carefully consider your options and try and predict your future intentions as best as possible.

We will be sending our children to study in Australia soon, is it best to buy or rent somewhere for them to stay?

We will be sending our children to study in Australia soon, is it best to buy or rent somewhere for them to stay?

For many expatriates with children there will inevitably be a day when the decision on where your children undertake their tertiary education and whether or not you will be back in Australia to provide a home for them in that time.

This dilemma is also faced by many people from non-Australian backgrounds as they look at the international options for their childs study. Over 500,000 Student Visas are currently active in Australia, so it is clear that many people like Australia as a study destination for their children.

If you have decided on Australia for schooling and intend to allow your children to live alone, then the next dilemma is where to house them during the period of study.

The simple solution is to rent somewhere for them, be it an apartment, room or University dormitory.

This option is generally simple however at the end of the study period the cost soon mounts and this can be a substantial burden that is non-recoverable.

The other alternative is to buy a property that is suitable for your child to use while studying and then sell it at the end of the study period or keep it to remain as an on-going investment.

This can provide the opportunity to recover some or all of the costs of occupation and study from the potential capital gains on the property over the years it was held.

This has been a successful strategy for many over the years and should be seriously considered.

Below is a simple analysis of the key issues of renting vs ownership.

  Rental Ownership
Initial Outlay For rental only a small deposit is required initially, usually 4 weeks rent, so the burden here is very low

To purchase a property there is a large outlay at the outset. In most cases Finance is available for up to 80% of the purchase price which can reduce the initial out of pocket outlay significantly.

Regardless, 20% deposit plus an allowance for 5% Government & Transfer fees means a significant up front commitment is required.
Flexibility Rental leases are usually 6 to 12 months duration allowing a very flexible environment and an ability to change around if required. If you have purchased a property then ideally you would want your child to stay in that property and any decision to change would be fairly unwelcomed. As such owning is fairly inflexible in that regard. It is possible however to rent the property out to another person should your child insist on an alternative venue to live, so there still is a reasonable level of flexibility.
Ongoing Cost Simple fixed cost, with modest increases through the study period.

The weekly cost of owning the property with a mortgage will vary greatly depending on the type and location of the property and the initial value.

It will likely be more expensive that renting by at least half again each week.
Multiple Children Additional room can be taken either at the same location or a different place. If you purchased a property with 2 or more rooms, then the cost for having your other children stay does not increase at all. When you have 2 or more children staying in the one property then this will usually make the ownership cost less than the alternative of renting.
Opportunity to recoup outlay There is no opportunity to recover the rent at all.

If you have chosen a good property in good area, it is highly likely that the value will rise over the period of study and that gain should be sufficient to cover most if not all of the weekly ownership costs.

If you have selected a better area or allow some additional time for the value to improve, then you may not only fully recover the holding expenses but also the cost of the education.
Tax Implications

There are no tax implications on renting a property for your child.

The expense is not allowed as a tax deduction in Australia.
It is possible to get substantial tax benefits when having your children live in your property which can offset tax issues you may have on other Australian property you own or build up as a future tax benefit to offset the Capital Gains on sale or future income in Australia when you return to live in Australia sometime in the future.

The cost and benefit of buying will vary greatly depending on the personal circumstances of each individual, but the opportunity should always be considered as the chance to fully recover all expenses for your childs education is something that could have a major impact on your future personal finances.

There are also two very important things to consider as well:

  • Start Early
    Even if your children are very young, the advantage of buying a property sooner than later is significant. You will have the advantage of todays price, which tends to be lower than the potential price in the years ahead when the property is needed, and you also have the advantage of being able to rent the property out until needed, meaning your holding cost is very modest for now. By the time you actually need the property the cost to you may be very modest indeed making it far more affordable to educate your children.
  • Selection Is Very Important
    As with all property investment decisions it is essential to purchase the right property. You should be careful to avoid “specialized student accommodation” as it can be very small and extremely difficult to re-sale later, even though the rent returns are very attractive. A normal property that is desirable in the general market, good size and well located near a study zone has proven to be a sound investment throughout history and this trend is likely to continue. The advantage of an extra room or two should also be considered, and may be essential if you have more than one child.

Buying a property in Australia is always a big decision, however when it can provide the advantage of housing your children through their academic life, the rewards can be very attractive and in most cases make the decision to buy a more astute option than the alternative of renting accommodation.

All information provided is of a general nature only and does not take into account your personal financial circumstances or objectives. Before making a decision on the basis of this material, you need to consider, with or without the assistance of a financial adviser, whether the material is appropriate in light of your individual needs and circumstances. This information does not constitute a recommendation to invest in or take out any of the products or services provided by SMATS Services (Australia) Pty Ltd or any of it's related entities.