I am after some guidance with regards to selling a rental property (unit in Sydney) in Australia whilst I am considered a non-resident for tax purposes (permanently residing in New Zealand since Feb 2010). The rental property has been owned for 13 years, with it initially being a primary residence however has been a rental property for 10 years.
It is not our intent to return and live in the premises however would consider if there is a tax benefit.
Is it more beneficial to sell prior to returning to Australia or after returning?
Yes, there is an advantage in returning to Australia and becoming a resident again for tax purposes before you sell. You will need to get advice on how New Zealand will treat you for tax purposes if you do that. You also need to look at the bigger picture of your other income or assets.
But purely from the point of view of the CGT on this property there is a CGT advantage to being a resident of Australia for tax purposes when you sell. The main advantage being that if you are not you will lose the main residence exemption for the period you were living in it and also lose the possibility of being able to continue to cover it with your main residence exemption for up to 6 years after you left. Which I will explain in a minute. There is another problem with being a non resident for tax purposes that coming back to Australia won’t fix. That is you do not get the 50% CGT discount for the period you were a non resident after May 2012, it is a pro rata calculation or you can do a market value reset. This just makes it even more important to try and cover the property with your main residence exemption for the 6 years after you move out. Which of course can’t happen unless you are a resident of Australia for tax purposes at the time you sell it.
So best explained by an example.
- Purchase $200,000 in 2008 immediately moved in as main residence
- Market value when moved out to NZ in 2010 $250,000
- Current Market value $770,000
- Selling costs $20,000
If tax resident of Australia when you sell and utilize 118-145 (For the first 6 years after you moved out) because you are not covering another property with your main residence exemption. Don’t worry about home in NZ
|Start with a cost base of||$250,000|
|Net sale proceeds||$750,000|
|Capital Gain||$500,000 over 11 years (from 2010) first 6 years (after 2010 reset) covered by main residence exemption
$500,000 /11 x 5 = $227,273 capital gain
Apportionment of 50% CGT discount (very roughly) over 11 years 2 entitled (between 2010 and 2012) (would start to be entitled again once you got back here) to 50% discount 9 not entitled 50/11 x 2 = 9% discount
So taxable capital gain is approximately $227,273 x 91% = $206,818 put in your Australia tax return but at least you get the first $18,200 tax free because you are now a resident. But this is where you need to look at the big picture you may have other world wide income that by becoming a resident again Australia will get the right to tax.
If not a tax resident when you sell forget about anything to do with the main residence exemption or the reset to market value when you first rented it out.
|Start with a cost base of||$200,000|
|Net sale proceeds||$750,000|
Allowed 50% CGT discount from 2008 to 2012 4 years then remaining 9 years no discount 50/13×4=15%
Taxable gain $550,000 x 85% = $467,500 and you don’t get the first $18,200 tax free.
You can choose to not apportion the 50% discount and instead get a valuation at 2012.
Note I am ignoring all the finer points of the CGT calculation such as depreciation, improvements, the fact apportionment is done on a daily basis etc. And of course a lot depends on your own figures, the market value at 2010 is very relevant.
Nevertheless I think that the difference is significant enough to pay for a nice long holiday in Australia. Though I must caution you that you are not considered a resident for tax purposes if you come here for a holiday. You would have to settle here and best to stay for 2 years. You do not necessarily have to move back into the unit.
Needless to say you should not rely on this information alone to do your tax return, the figures are just to give you an idea of what a difference it makes to be a resident. The difference it will make to your capital gains tax that is. You need to consider how that will affect your other assets and income.
Thank you so much for allowing your question to be published I am sure a lot of people will find it useful, a very important issue that is sometimes missed.