Do you qualify for the full CGT discount if you were a non-resident during the time you owned the property?
20 January 2021
In today’s expat lifestyle, it is not uncommon for people to live and work in different countries. If such an individual has bought a property (e.g. investment property) in Australia and eventually sells the property, will such an individual qualify for the full 50% Capital Gains Tax (CGT) discount?
Before we begin, it’s important to note two assumptions made in this article.
When we talk about residency, we refer to tax residency, a concept different from nationality or mere absences from Australia (e.g. you may have a non-Australian passport but be a tax resident of Australia).
We have also assumed that the investment property was held on capital account, that the property was never used as a main residence nor in a business (i.e. can’t claim any potential main residence exemption or potential small business CGT concessions).
Background to the 50% CGT discount
Up to 8 May 2012, any resident or non-resident individual that held a property-rich CGT asset (e.g. an investment property) for at least 12 months before selling the asset, could qualify for a 50% CGT discount on any capital gain made on the sale of such an asset (i.e. only pay tax at the individual’s marginal tax rate on half the capital gain).
However, from 9 May 2012, the 50% CGT discount is no longer available for non-residents.
Therefore, the full 50% CGT discount should only be available for periods the asset was held:
Up to 8 May 2012 - regardless if you were a resident or non-resident in this time; and
From 9 May 2012 up to the time of sale - during the time the individual was an Australian resident (i.e. only residents can qualify for the 50% CGT discount in this time).
These changes mean if you have been a non-resident during the time you owned the asset, you may not be able to qualify for the full 50% CGT discount on the eventual sale of your property (i.e. the 50% CGT discount percentage will be reduced).
However, it will not be necessary to reduce the CGT discount percentage if the asset was sold on or before 8 May 2012 or the individual was a resident at all times from 9 May 2012 up to the date of sale.
What does this mean for you?
Let’s run through a case study to understand the practical implications.
Assume the following facts (also refer to the timeline for more specific details):
Marcus bought an investment property in Australia (in his own name) and shortly thereafter Marcus was seconded to work overseas (all this happened before 8 May 2012 and at 8 May 2012 Marcus was a non-resident);
In the period from 9 May 2012 until 18 January 2021 (the day Marcus signed the contract to sell the property) Marcus was both resident and non-resident of Australia at different times.
Marcus will not qualify for the full 50% CGT discount on the sale of the property on 18 January 2021 (i.e. the day the sale contract is signed) because from 9 May 2012 Marcus was both a resident and non-resident while he owned the property.
The tax law prescribes different methodologies for determining the new percentage of CGT discount that may apply to Marcus’ $9m gain.
Because Marcus was a non-resident at 8 May 2012, he can obtain a market valuation of the investment property as at 8 May 2012, and calculate the new CGT discount percentage by taking into account the full 50% CGT discount:
On any increase in value of the property from 10 May 2009 (i.e. actual date of purchase) to 8 May 2012 (regardless whether Marcus was a resident or non-resident in this time); and
Only on increases in the value of the property from 9 May 2012 during the time Marcus was a resident.
If Marcus does not obtain a market valuation of the investment property as at 8 May 2012, a new percentage of CGT discount will be calculated without taking into account the 50% CGT discount for gains accrued up to 8 May 2012.
Both these options use a prescribed calculation to work out the new CGT discount percentage and under Option 2, the overall CGT discount percentage will most likely be lower (i.e. choosing the market value method (i.e. Option 1) will usually be the best course of action).
Furthermore, if the market value of the investment property at 8 May 2012 is equal to or greater than the eventual sale price at 18 January 2021 (i.e. $10 million), Marcus will qualify for the full 50% CGT discount.
Determining your CGT discount percentage
We trust you found this tax snapshot useful to highlight some tax consequences if you change your residency during the time you own a land-rich property in Australia.
As always, the devil is in the details and determining your new CGT discount percentage will depend on the specific facts of your situation.
If anything in this tax snapshot triggered your interest or you are a type of taxpayer (or know a taxpayer) that is in this position (e.g. was a non-resident during the ownership period), please contact your Findex adviser or get in touch with the Findex Tax Advisory team.