One common misconception amongst expatriates when it comes to Australian taxation, is what constitutes ‘the family home’ in order to be exempt from Capital Gains Tax (CGT).
Many people wrongly believe that they can move into their investment property for a period of time upon returning to Australia, and then claim it to be their residence and therefore non-taxable. This is simply not the case, CGT will always remain an issue that must be considered.
It is true that the Principal Residence is tax-free in Australia, but you should be aware that this only applies to those who are resident for tax purposes. If you are living abroad then this tax exemption cannot apply to you, if you are in fact a non-resident.
If you’re planning to buy a home in Australia that will one day become your residence, this home will be subject to CGT in the future for the proportionate period that the property was not your residence. Not renting the property does not help, it is still subject to CGT whether or not a tenant resides in the property.
For example, if you buy a house and rent it out for four years, then return to Australia and live in the house for six years before selling it, then CGT will be payable on 40 per cent of the capital growth – that is, four out of the ten years. This negative impact can be greatly reduced, or indeed eliminated, by your entitlement to 50 per cent exemption on the pro-rata amount after one year of ownership, and the ability to offset any tax credits built up over your time as an expatriate.
Some good news does apply if you lived in the house before you became an expatriate. The tax office will continue to deem the property as your principal residence for up to six years – regardless of whether it is rented out or not – under the temporary cessation rules. If you are away longer than six years, then only the rent years after the first six will count towards the taxable pro-rata calculation.
