Whether to Sell Your PPR When Going Overseas to Work

Question

Hi

My family and I are moving overseas in May this year, and we are considering options regarding our Australian property. We have done research regarding the possible Capital Gains Tax implications, but we have a list of outstanding questions which we are hoping will help us make our decision.

Background:

  • My wife and I are dual Australian / Irish citizens.
  • We bought a property for $1,050,000 in Australia in 2019 which has been our principal place of residence. We estimate current market value of our house to be $1,500,000.
  • We are moving to Ireland in May 2022, and intend to become non-resident in Australia for tax purposes. We intend to live and work in Ireland full-time for the next 2-5 years, but we are unsure of our long-term plan beyond that (I.e., if and when we would return to live in Australia).
  • We are working through the process of deciding if we will sell our Australian house before we leave (and hence not have it subject to CGT), or to retain our house and rent it out.

Regardless of our decision we would still like to own a property in Australia while living in Ireland, therefore if we sell our Australian home, we would likely buy an investment property in Australia.

Questions regarding scenario of selling our PPOR before we leave, and buying an alternative investment property:

  • Q – If we decide to sell our house before leaving Australia (and therefore it is not liable to CGT), what must we have done before we physically leave – exchanged contracts, or settled the purchase. At what point is the CGT liability triggered?
  • Q – If we decided to sell our house before we leave Australia, but then buy an Australian investment property:
    • Are there any implications if we bought the investment property before or after we left Australia (would it be treated differently from a tax point of view)?
    • How would the rate of tax we pay on the rental income be determined while we are non-resident (automatically top margin rate (45%) or depends on income earned in Australia, or combined Australian & Irish income? I assume this tax rate on the rent would be the same for our current house if we rented it out while overseas?
    • If we returned to live in Australia in the future, and then sold the investment property, would the 50% CGT discount become applicable and if so, over what period (assume only for any capital gain accrued when we are back in Australia)?

Questions regarding scenarios of keeping our PPOR and renting it out while living overseas.

  • Q – If we did not sell the house before we left, and in the future, we returned to Australia, became tax residents and moved back into our house, would this remove the requirement to pay capital gains if we then sold it at a later date? What are the rules around this? Would the CGT be calculated based on the time we were overseas?
  • Q – If we retained our house, but later sold it while overseas, would the CGT be calculated based on the whole time we owned the house (I.e., from Nov 2019), or just from when we left Australia and it becomes our non-primary residence?
  • Q – Regarding the rate of CGT on selling our house while non-resident, I understand it depends on our marginal income tax rate. Given my current marginal tax rate is 45%, and my wife’s marginal tax rate is 37% – Is the rate used for CGT 45% (as this is the highest), or would it be split between 45% and 37%? (Our house is in our joint names).
  • Q – If we rented out our house while non-resident, we would make an annual loss on the rental income minus mortgage interest plus deductible expenses. Can this loss be offset in any way – are these losses accumulated across financial years? Can this accumulated loss be offset against future CGT liability, or future income tax if we moved back to Australia?
  • Q – Does the double taxation agreement (between Ireland and Aus) mean we would only get taxed on the rental income once? If so, what determines if it is included in the Australian or Irish taxation system?

Other Questions:

  • Q – Becoming non-tax resident
    • When would we actually become non-resident for tax purposes? Would it be from the date we leave Australia (May 2022), from end of the financial year (July 2022), six months after we leave, or determined some other way?
    • What is the process to become and non-tax resident? Any forms etc.
    • Are there any tax implications of us leaving Australia before the end of this financial year?

Answer

This is way bigger than a basic askbantacs question but is so relevant to so many people I am happy to answer it all because you have allowed it to be published.

I have directly answered your questions below but want you to consider that you do want to hold a property in Australia anyway, which is wise and if you never sell you never pay tax, as long as you don’t die overseas after being there for more than 6 years. Anyway, to get all this into prospective you have a $450,000 capital gain atm that you won’t have to pay tax on if you sell before you leave the country. If you sell while overseas you will still get the 50% discount on that part of the gain because it was while you were a resident. Though the actual numbers at the time might not work out exactly because it is all a pro rata, that is the best we can estimate. So, the taxable capital gain will be $225,000 at non resident rates tax, split between the two of you. The tax will be $73,125. This is what is driving your decision to sell your current PPR and buy another, would not the real estate agent fees and stamp duty on such a transaction be similar? If this is a good property… better the devil you know etc. Besides you may end up coming back here in less than 6 years and then the 6 year rule would have completely protected it with your main residence exemption while you were away.

Questions regarding scenario of selling our PPOR before we leave, and buying an alternative investment property:

  • Q – If we decide to sell our house before leaving Australia (and therefore it is not liable to CGT), what must we have done before we physically leave – exchanged contracts, or settled the purchase. At what point is the CGT liability triggered?
    • A I would prefer you to have settled because you are stuffed if the contract falls through and you have to find another buyer.
  • Q – If we decided to sell our house before we leave Australia, but then buy an Australian investment property:
    • Are there any implications if we bought the investment property before or after we left Australia (would it be treated differently from a tax point of view)?
      • A No, other than the loss of the opportunity to cover it with your main residence exemption for 6 years if you come back here to live before you sell.
    • How would the rate of tax we pay on the rental income be determined while we are non-resident (automatically top margin rate (45%) or depends on income earned in Australia, or combined Australian & Irish income? I assume this tax rate on the rent would be the same for our current house if we rented it out while overseas?
Foreign resident tax rates 2021–22
Taxable income

Tax on this income

0 – $120,000

32.5 cents for each $1

$120,001 – $180,000

$39,000 plus 37 cents for each $1 over $120,000

$180,001 and over

$61,200 plus 45 cents for each $1 over $180,000

    • If we returned to live in Australia in the future, and then sold the investment property, would the 50% CGT discount become applicable and if so, over what period (assume only for any capital gain accrued when we are back in Australia)?
      • A – Ok we are talking here about an investment property you have never lived in? No 50% CGT discount for the days of ownership that you were a non resident for tax purposes. Pro rata calculation.

Questions regarding scenarios of keeping our PPOR and renting it out while living overseas.

  • Q – If we did not sell the house before we left, and in the future, we returned to Australia, became tax residents and moved back into our house, would this remove the requirement to pay capital gains if we then sold it at a later date? What are the rules around this? Would the CGT be calculated based on the time we were overseas?
    • A – If you come back and live there within 6 years no CGT problems at all. This period is infinite (not limited to 6 years) if it is not available to produce income (listed for rent). If rented for longer than 6 years then it is pro rata but you will get the market value cost base reset to $1,500,000 when you first rented it out because you are a resident when selling it. So let’s say you came back after 7 years of renting it out and sold it then for $2,200,000. You have made a $700,000 capital gain but only 1/7th of it is taxable because of the 6 year rule. As you were a non resident for that year no CGT discount is available so your taxable capital gain would be $100,000 or $50,000 each.
  • Q – If we retained our house, but later sold it while overseas, would the CGT be calculated based on the whole time we owned the house (I.e., from Nov 2019), or just from when we left Australia and it becomes our non-primary residence?
    • A – If you sell while a non resident for tax purposes any principle place of residence exemption you were previously entitled to is lost. So back to Nov 2019.
  • Q – Regarding the rate of CGT on selling our house while non-resident, I understand it depends on our marginal income tax rate. Given my current marginal tax rate is 45%, and my wife’s marginal tax rate is 37% – Is the rate used for CGT 45% (as this is the highest), or would it be split between 45% and 37%? (Our house is in our joint names).
Foreign resident tax rates 2021–22
Taxable income

Tax on this income

0 – $120,000

32.5 cents for each $1

$120,001 – $180,000

$39,000 plus 37 cents for each $1 over $120,000

$180,001 and over

$61,200 plus 45 cents for each $1 over $180,000

  • Q – If we rented out our house while non-resident, we would make an annual loss on the rental income minus mortgage interest plus deductible expenses. Can this loss be offset in any way – are these losses accumulated across financial years? Can this accumulated loss be offset against future CGT liability, or future income tax if we moved back to Australia?
    • A – If you don’t have any other income that is taxable in Australia then these losses can be accumulated and eventually used when you come back or offset against the capital gains
  • Q – Does the double taxation agreement (between Ireland and Aus) mean we would only get taxed on the rental income once? If so, what determines if it is included in the Australian or Irish taxation system?
    • A – Generally our double tax agreements give the taxing rights to the country where the property is located. So if Ireland decide to tax you on that income as well they must give you a tax credit for any tax you have to pay in Australia. Where as Australia does not have to give you a credit for any tax you pay in Ireland.

Other Questions:

  • Q – Becoming non-tax resident
    • When would we actually become non-resident for tax purposes? Would it be from the date we leave Australia (May 2022), from end of the financial year (July 2022), six months after we leave, or determined some other way?
      • From the date you leave Australia with the intention of becoming a non resident. Though in that year’s tax return you just lose part of your tax free threshold on a pro rata basis.
    • What is the process to become and non-tax resident? Any forms etc.
      • A – a box is ticked on your tax return. Your visas and leaving the country documents make up the evidence as to what you residency status is.
    • Are there any tax implications of us leaving Australia before the end of this financial year?
      • A – You may well be better off to go a few months into next year especially if you have rental property losses, though this is probably not an important issue compared with all the other things you have to consider.

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