Capital gains tax CGT discount cancelled for non-resident property investors

The Government will implement another tax policy aimed at reducing “loopholes” and the party at the expense of this current change is the humble offshore investor. This is a “palatable” change to make as it gains extra tax revenue, doesn’t affect the current electorate and offshore investors can’t vote anyway. But it sure is a rough deal for them.

This is what is going to happen. Normally, when a property is sold after one year of ownership, the investor reports the gain in their Australian tax return and gets to pay tax on only half the amount. However, soon all overseas investors in Australian real property (like houses, apartments, offices) will not get any capital gains tax reduction when they sell their property.They will have to pay the tax on the whole amount.

To make things fairer the ATO have invented some tricky rules that aim to preserve any past gains. Overseas investors will be allowed to discount any gains they have made up to the date of the new law (estimated 08/05/12). The tricky part is figuring this out. For a general application of the rules take this simple example which is how it is supposed to work:

  • Mr Li is a Chinese resident and owns an apartment in Sydney
  • It cost him $100,000 on 1st July 2000
  • He sells it for $200,000 on 1st December 2012
  • The value of the property was $180,000 at 08/05/12

In theory Mr Li made 2 gains -

  1. From 01/07/00 – 08/05/12 = $80,000 which will be half taxed (i.e. $40,000)
  2. From 08/05/12 – 01/12/12 = $20,000 which will be fully taxed

All in all it makes for a more complex situation come tax time.

As an aside, you may be wondering why foreigners have to pay capital gains tax at all? Can’t they just remain hush-hush about their Australian properties? Well, in Australia the law states that gains from most real property must be taxed in Australia. Foreign investors have to register for an Australian tax file number and pay tax in Australia on their property’s rent and realised capital gains every year.

Investors with other investments, like shares, are normally exempt from paying tax on their capital gains and franked dividends. It’s property investors who are caught out.

We have experience dealing with and advising offshore investors. If you would like some help with your tax issues please contact us.

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