Expats and CGT

Question

We are an Aussie expat family (Australian citizens) currently residing in Singapore. We are moving to Darwin at the end of this year as my wife is starting work at the local hospital in January 2022. We will be looking to purchase our PPR in Darwin when we move back.

We have two investment properties in Australia, one in Brisbane and one in Melbourne. Our Melbourne property was our PPR before we moved to Singapore in February 2015 and was nominated as our PPR under the ‘6 yr rule’ until February 2021.

We will most likely be staying in our Melbourne property for 2-3 months before residing in Darwin and then turning the property back into an investment property after relocation. Will this reset the 6yr CGT exemption rule?

In addition to that, we were thinking of doing a spousal transfer so my wife is the sole title holder of the Melbourne property to maximise the tax benefit as she is in the highest tax bracket. I understand that if we did this now that it would trigger a CGT event at 100% due to us being foreign residents. If we did the spousal transfer when we are residing in the Melbourne property will it be exempt from CGT if the property is considered as our PPR?


Answer

Here is the 6 year rule legislation https://www.ato.gov.au/law/view/document?docid=PAC/19970038/118-145 As you can see from the example, even as an expat you are entitled to continue to cover it with you main residence exemption in your absence. Also the 6 years only applies to the time it was available for rent. If it is not available for rent then the period of time that you can cover it with you main residence exemption in infinite. This may give you less or more time than you are thinking. For example if you listed it for rent a month before you left then the 6 years will finish earlier. On the other hand if you left it vacant until you were sure you were going to stay in Singapore and didn’t list it for rent until September or later you may have a chance to extend the 6 year period by stopping charging your tenants rent until you come back. Anyway back to your question.

Just because you are living in the property when you sell it does not cover it completely with your main residence exemption. You need to look at the whole period of ownership. Nevertheless, it is very important that you don’t sell this property until you come back to Australia permanently. If you sell while a non resident you will get no main residence exemption at all for any of the time you owned it, not even while you lived there.

I am confused about wanting to transfer the property 100% to the high income earner. Surely after owning it all these years it will not have much debt and be positive for tax purposes. Are you thinking that the high income earner could borrow to buy out the low income earner? If so consider you need to have another reason for the transfer than just the tax benefit or the ATO could ping you with Part IVA. If you argue the non tax benefit reason for the transfer is a gift to the high income earner then no loan will be deductible including your portion of the existing loan because it relates to a gift not the purchase of an income producing asset.

I would also like you to consider whether there is any real difference in the tax brackets of the spouses. You get the best possible tax outcome when both spouses are in the same tax bracket not necessarily on exactly the same income. From 1st July 2024 most people will be in the 30% tax bracket. That is taxable income between $45,000 and $200,000.

The CGT calculation based on what you have said would roughly be, assuming you had lived in the Melbourne property from the time you purchased it until the time you rented it out and that you don’t sell until you come back to live here.

Start with the market value when first rented out.

Add selling costs and improvements basically anything you haven’t claimed against the rent

Reduce by any building depreciation you could claim

This is roughly your cost base.

The difference between this and the selling price is your capital gain.

You then apportion this between days covered by you main residence exemption and days not. We are only talking about days since you first rented it out as section 118-192 has reset your cost base and acquisition date. The days covered will probably be the 6 years under section 118-145 and the 3 months you live in it when you get back. The portion that is represented by the days not covered by your main residence exemption does receive some 50% CGT discount but not all of it as you will not be entitled to the 50% CGT discount for the time you are overseas.

Of course if you transfer while still overseas you are going to be taxed on all the gain from the time you purchased the property with no 50% CGT discount for the time overseas.

There are so many questions within this question I have touched on each so that you can consider what paths are really available to you but before you actually set off on that path please get further detailed advice.

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