The federal government is facing growing calls to scrap or overhaul controversial changes to capital gains tax (CGT) exemptions for Australian expats, but tax watchers say now is the time to plan ahead and avoid getting slugged.
Set to affect about 100,000 Australians living and working overseas, the changes would deny CGT exemptions for homes sold while the owner was outside Australia, a retrospective slug as far back as September 1985 for some owners.
The existing laws would apply for any property sold before June 30, 2019, provided it was owned before budget night on May 9, 2017.
Some experts have labelled the moves a new death tax for expats who die overseas and the beneficiaries of their will.
HLB Mann Judd Sydney tax partner Peter Bembrick says Australians overseas should take careful steps to avoid bill shock from the ATO.
"It may sound like a dream come true — you've been offered a fantastic job and the opportunity to live in, say, London or New York or Singapore for a few years," he explains.
"The changes mean that anyone who moves overseas and rents out their family home, and then decides to sell the home back in Australia while they stay on overseas, will need to pay CGT on the proceeds of the sale. While these changes haven't yet been passed into law, they have the support of both parties and should be considered as inevitable."
Bembrick says the laws are a significant change from the previous "six-year absence" rule, which meant that if the home was sold within six years of moving overseas, it would be exempt from CGT.
The new rules could apply from July 1, 2019, but Labor has asked the government to reconsider in light of potentially unintended consequences.
How it would work
In one hypothetical scenario, Australian lawyer John buys a property for $100,000 in 1986 and lives in it as his family's main residence until 2016, by which time its market value has increased to $2.2 million.
John rents out his property and becomes a foreign resident. By 2021, the home is sold for $2.5 million. He would have to pay tax on all of the gains over the entire 35 years because he'd worked overseas.
Bembrick says tax-free status would be available for Australians who move home and return to their properties within six years, but only if their tax residency also reverts to Australia.
"So people can't just come back for a month, sell the property, and then immediately
head back overseas again," he adds.
When considering tax residency, he recommends this rule of thumb – anything longer than three years and with no fixed return date and reasonable prospects of staying away longer makes it more likely your tax residency will change.
An absence of less than two years usually won't be treated as a change in tax residency.
"If you remain an Australian tax resident, you may not have issues with CGT. But it will mean that all of your foreign salary and investment income will be taxed in Australia, with a credit for any foreign tax paid on the income," Bembrick says.
But residency rule changes aren't only front of mind in Australia.
The biggest personal tax reforms in China for decades are affecting Australian expats, with KPMG tax partner Ablean Saoud warning both locally employed and seconded employees could be hit.
Saoud says Beijing's moves, covering the method and rates of tax collection and imposing new residency rules, will start from January 2019.
On tax residency, people not domiciled in China for tax purposes will see the current "full-year" concept changed to a 183-day test.
Existing rules exempting "non-doms" from worldwide taxation for the first five years could be changed, potentially meaning a tax break will require earners to be outside China for more than 183 days in a calendar year, rather than the current 31 consecutive or 91 cumulative days.
Otherwise expats in China may be subject to tax on worldwide income, including their personal income, in each of the calendar years they are based in China for more than the 183-day threshold.
Saoud says the existing set of expat tax concessions on eight categories of fringe benefits — covering everything from housing to children's school tuition and family meal expenses — could be abolished with a new personal itemised deduction system introduced.
"If the expat tax concessions are abolished, employers will likely be facing the additional cost for picking up PRC tax on these fringe benefits," she adds.
"There are also concerns that the authorities will impose caps on the deductions, in which case there would be an incremental tax cost to the expats if their actual expenditure on the deductible items far exceeds the cap stipulated."
The moves are expected to see higher compliance costs for companies, as well as a significant loss of foreign talent in light of heftier tax bills.
Companies will also need to factor in foreign employees' larger tax liabilities in their pay structures.
For information about financial planning for Australian expatriates please visit the Whole Wealth Page:
This article was published and provided by the Australian Financial Review.