Q: I am a dual-national Australian citizen living and working in the UK.
I was born in the UK, am Australian by descent and recently returned to the UK after nine years and nine months living in Sydney.
I sold my principal place of residence in Sydney to purchase a new principal place of residence in the UK; however, I retain two investment properties in NSW, which were purchased in 2010 and 2011.
When I dispose of my principal place of residence, I intend to be ‘living’ in Australia for more than 183 days; however, my principal place of residence will still be in the UK.
In this situation, what is the best way to minimise capital gains tax liability?
Need to know
- There are special capital gains tax rules for foreign residents.
- An overseas property can be treated as your main residence.
- The main residence exemption can only be claimed for one property at a time.
First, as an Australian tax resident you pay tax on your worldwide income, with a credit for any overseas tax paid if there is a double taxation treaty between Australia and the country in question.
In your scenario, there are two issues to be addressed.
The first relates to the sale of the Australian home, and the second to the sale of the UK home.
In Australia, there are special capital gains tax rules you need to know if you’re a foreign resident.
These rules will impact you when you sell residential property in Australia. As you have not advised of the dates for the sale of the Australian home, you need to be aware that a capital gain on the Australian home may be taxed.
Recent Australian tax changes mean that foreign residents will no longer be entitled to claim the main residence exemption when they sell property in Australia if they weren’t an Australian resident for tax purposes while living in the property at the date of sale.
It’s important to keep in mind that you can only choose to claim the main residence exemption for one property at a time
Nonetheless, you are permitted to treat an overseas dwelling as your main residence provided you meet all the relevant criteria, which broadly match those of Australia in relation to occupancy and ownership period.
However, it’s important to keep in mind that you can only choose to claim the main residence exemption for one property at a time.
This is critical if there is an overlap in the ownership periods of the Australian and UK properties.
In relation to the UK property, you must nominate this property as your main home to qualify for tax relief for most of the time you live away.
Furthermore, you must have lived in the home as your only or main residence at some point while you owned it.
The rules are different if you’re not a UK resident for tax – you cannot get relief for another property for the time your home is nominated as a main residence, apart from for certain periods that always qualify for relief.
There are two other issues that you need to address.
The first is in relation to the NSW properties, where there is a potential loss on the 50% capital gains tax discount from 8 May 2012 to capital gains made by a non-resident.
The second relates to Australian tax residency, where one of the tests only requires a one-day residency period if your intention is to remain in Australia.
Given the complexity of the issues you must seek specific advice on your matters.
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Editors Note: This article first appeared in Your Investment Property Magazine
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