19/01/2011
Question: I’m an Australian citizen and I live and work overseas and don’t own any property in Australia, although I have owned property before and have used the First Home Owner Grant and do not file a tax return as I pay tax in the country I work in. If I purchase a house in Australia as my principal house of residence and rent it out in preparation for my return to Australia, what tax implications will this have for me?
Answer: If you buy an Australian property and rent it out for a while before returning to Australia and then use it as your main residence, the future sale of the property may bring about an apportioned capital gains tax liability. In contrast, if you buy a house and live in it as your main residence for a while before you rent it out, the ‘temporary absence rule’ will apply – you may then rent the house out for up to six years without compromising its tax-free status, provided that you do not own another main residence elsewhere. In other words, the sequence of events may substantially affect the tax outcome regarding the property.
By way of example, if you buy a house for $500,000, rent it out for two years before you return to Australia, then live in the house for another eight years and sell it for $1m, you will have an apportioned taxable capital gain of ($1,000,000 - $500,000) x 2/10 years = $100,000. Assuming that you qualify for the 50% capital gains tax discount (ie the property is not held in the name of a company), the maximum capital gains tax payable will be $100,000 x 50% x 46.5% (assumed marginal tax rate) = $23,250.
Therefore, you may want to consider rearranging your affairs to minimise your tax exposure with the help of a property-savvy tax advisor.
Eddie Chung
Eddie is a partner – private & entrepreneurial clients at BDO Kendalls.
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