It is now more important than ever to carefully consider tax implications when disposing of Australian residential property (real estate) as a foreign resident. Over the last 6 years Australia has introduced new capital gains tax rules for foreign residents.
In this article, we consider the potential tax consequences of selling Australian residential property as a resident of the UK. The article is split into two segments:
1. Australian tax implications, and
2. UK tax implications.
Please note, the article below is a brief summary of tax legislation in both the UK and Australia. If you are planning to dispose of Australian property as a foreign resident, it is recommended that you seek professional advice specific to your situation and not rely solely on this article.
Australian Capital Gains Tax Implications
In Australia there are two capital gain tax (CGT) reliefs commonly utilised when disposing of residential property.
The first is the ‘main residence exemption’. The main residence exemption means there will generally be no tax liability upon sale of your main residence. Where the dwelling was your main residence for only part of the ownership, the full exemption is proportioned according to the number of days it was not your main residence. Please note, the exemption will remain available where the main residence was vacated and not rented out (and no other main residence election was made).
However, since 30 June 2020 foreign residents who have sold property have no longer been able to benefit from the exemption, unless they have satisfied the requirements of the life events test, covered below.
In order to qualify for the ‘life events test’, both of the following must be true:
- You were foreign resident for tax purposes for a continuous period of 6 years or less
- During that period, one of the following occurred:
– you, your spouse or your child under 18 had a terminal medical condition
– your spouse or your child under 18 died
– the CGT event happened because of a formal agreement following the breakdown of your marriage or relationship.
The second frequently utilised capital gains tax relief in Australia is the capital gains tax discount. When you sell or disposes of an asset, you can usually reduce the capital gain by 50% if you owned the asset for at least 12 months.
As with the main residence exemption however, the capital gains discount has now been removed for foreign residents who acquired assets after 8 May 2012.
Where foreign residents either acquired the asset on or before 8 May 2012 or had a period of Australian residency after 8 May 2012, they may apply the discount to part of their capital gain. The discount is then calculated using the ATO worksheet, attached here.
Upon disposing of Australian property and once the capital gains tax calculation has been finalised, foreign residents are liable to tax on their capital gain at a rate of 32.5%.
UK Capital Gains Tax Implications
As a resident of the UK you are normally liable to UK tax on your worldwide income and gains arising in the tax year, this is known as the arising basis of taxation. Therefore, your Australian residential property gain will normally be taxable in the UK.
Until 05 April 2023 the UK capital gains tax allowance is £12,300. However, from 6 April 2023 this is reduced to £6,000 and then again to £3,000 from 6 April 2024. Any taxable gain over the relevant allowance will be liable to residential capital gains tax rates, currently standing at 18% and 28% (depending on the size of the gain and marginal rate of income). Unlike the new rulings for foreign residents in Australia, the proportion of the gain which relates to the period of time where the property was your main residence will be exempt from the UK taxation. This is known as principal private residence relief (PPR relief).
However, where you are resident but non-domiciled in the UK, you can elect to be taxed in the UK on your UK income and gains alone, and pay UK tax on foreign income and gains only if these are remitted (brought) to the UK. This is known as the remittance basis of taxation. Electing to use the remittance basis however, means the loss of your tax-free personal allowances and capital gains tax exempt amount for the year the election is made. In many scenarios, the individual is selling the Australian property in order to purchase property in the UK. In this instance the capital gain would be remitted to the UK and thus UK capital gains tax would apply. Therefore, if you are entitled to use the remittance basis, it is important to calculate the most tax efficient method of taxation.
Where you are taxed on an arising basis (worldwide income) and you’ve paid tax in Australia on your Australian property gain, you may be entitled to a UK foreign tax credit.
Where a ‘UK resident’ has property gain from Australia, the Australia-UK double tax treaty in principle becomes relevant. However, it generally has no impact on the application of domestic law in Australia or the UK.
As evident above, ongoing changes to the rules for foreign residents selling Australian property means it is now crucial to understand the tax implications of disposing Australian property, particularly whilst resident of the UK.
If you require any advice or assistance with UK or Australian capital gains tax, we are here to help. Simply send us an email at the address below or fill in our contact form to arrange a free initial consultation.
Sheltons Accountants (London and Sydney)