Article in Australian Financial Review: 4 October 2018, by Tom McIlroy and Michael Smith.


 

Canberra/Shanghai | Federal government plans to slug expats millions in capital gains tax if they sell their homes while living overseas could be at risk, amid growing concern from Labor and Senate cross-benchers. [See related Tax Technical article about the ‘ham fisted’ aspects of this measure and the Bill introducing it: the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 2) Bill 2018.]

Some 100,000 Australians living and working overseas face losing a capital gains tax exemption on their main residence if they sell the property while based overseas as part of housing affordability measures announced in the 2017 budget.

Expatriates in Hong Kong have launched a global campaign to overturn the proposal, arguing it was punishing professionals for working overseas, wiping out the life savings of ordinary workers and would make it harder for Australian firms to recruit staff to offshore offices.

Tax expert Robyn Jacobson said the legislation could result in the retrospective denial of the exemption as far back as September 20, 1985 – when the capital gains tax regime commenced.

"We are hoping a new Treasurer will look at this with fresh eyes," says chief executive Jacinta Reddan.

The existing laws would apply for any property sold before June 30, 2019, provided it was owned before the 2017 budget.

“The proposed changes are draconian and retrospective because while the bill is proposing the measures will apply to CGT events that happen after May 9, 2017, it has the practical effect of denying the main residence exemption back to when people originally bought the property,” said Ms Jacobson, a senior trainer at TaxBanter.

“If the owner is a non-resident at the time they enter into the sale contract, these measures have no regard for residency status throughout their ownership period of the property or how they used the property as their home. It is all based on residency status when they sell it.”

A spokeswoman for Treasurer Josh Frydenberg said debate on the legislation was expected to conclude in the Senate by December.

Budget papers show the plan is worth $581 million over the forward estimates.

“While Labor supports the policy intent in principle, we are concerned about what we regard as the most likely unintended consequences particularly for expats and I wrote to the former treasurer, now Prime Minister pointing out these design flaws,” Mr Bowen said.

Independent Tim Storer and Centre Alliance senators Stirling Griff and Rex Patrick have indicated they would look unfavourably at retrospective changes.

Ms Jacobson called for changes to allow the cost base of the property to be reset to the market value at the time the owner became a non-resident, or for calculations of the number of days the property was a main residence.

‘There were a few tears’

James Englebrecht, a Hong Kong-based partner at St James’s Place Wealth Management, provides advice to hundreds of Australians and said he has had clients in tears because they were concerned about the impact to their finances.

“She was in shock and there were a few tears,” he says of a Sydney woman currently going through a marriage break-up who came to see him last month. “She was completely broken by the news.”

Mr Englebrecht said the client had no choice but to sell the family home because of the divorce but because it was under renovation would not be able to find a buyer before the changes were implemented. As a result she would be hundreds of thousands of dollars out of pocket at a time when his finances were already strained.

“Her and her husband bought not long after the crash in 2008. They still pay stamp duty and continue to pay rental income tax. They are not anywhere near ready to sell it now as has just started doing some work on it. ”

“It’s not necessarily people who are high flyers. Just regular families trying to get ahead.”

In one hypothetical scenario, an Australian acquires a property for $100,000 in 1986 and live in it as their main residence until 2016 when its market value has increased to $2.2 million.

The person than rents out the property and becomes a foreign resident. By 2021, the same property is sold for $2.5 million. The person would have to pay tax on all of the gains over the entire 35 years because they had been working overseas.

Mr Englebrecht said he is worried because he has his wife bought a two-bedroom place in Sydney before moving to Hong Kong.

The couple, who have just had their first child, expect to return eventually with a larger family which means they would likely sell the property to buy a bigger home.

However, that option would be restricted if they had to pay capital gains tax on any profits from the sale.

Global lobbying by expats

The Australian Chamber of Commerce in Hong Kong is leading a global campaign encouraging Australians working overseas to protest the changes. One of the largest concentrations of Australians working overseas is in Hong Kong.

“We are hoping a new Treasurer will look at this with fresh eyes. It’s not too late,” chief executive Jacinta Reddan said.

“Many of the people I’m talking to are concerned. They say to me, should I go back to Australia? Should I sell my house? Why I am being penalised for working overseas when I have paid taxes in Australia all my life.

“All I have is my house which I had planned to return to. These are big life decisions people are being forced to make.

“We are now calling on international Australians to write to the new treasurer and Scott Morrison. He is now in a position to take a broader view taking into account all the impacts of this legislation.”

King & Wood Mallesons global chief executive: Sue Kench, described the changes as shortsighted and “wrong at every level”. Based in Hong Kong, Ms Kench said professionals considering a move overseas would think twice in light of the financial hit.
“Where we are in the world at the moment, we need Australians offshore. We need them influencing in the region, and as a country, Australia Pty Ltd, it’s never more important than now.

“The more people we can encourage offshore, the better. These things don’t do that, they discourage,” she said.

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