Australian taxation obligations on disposal of Australian property

Australian property has long been an attractive asset class for investment by Australian resident and non-resident investors alike. Additionally, in a globally mobile society (COVID-19 pandemic restrictions aside), relocating to or from Australia for work, study or other purposes whilst acquiring or retaining Australian property is not uncommon. Rising property prices across Australia, particularly in the major metropolitan areas of Sydney and Melbourne, has resulted in (often significant) gains being made upon disposal of property. Whilst returning a profit is often an achievement of an investment goal, it is also likely to result in taxation implications to be considered in Australia.

As an individual, am I liable for tax in Australia?

Making an accurate assessment of an individual’s Australian taxation residency is a critical element in determining the extent to which Australian taxation may apply to income derived.  Assessing an individual’s taxation residency is a different concept to nationality and requires an investigation into the individual’s circumstances by taking into account a variety of factors.  A detailed analysis into the residency tests is outside the scope of this article.  Whilst there are numerous taxation provisions affected by an individual’s residency, broadly, non-Australian residents are limited to be taxed in Australia on income derived from Australian sources.  Importantly, income includes a capital gain generated by an event that happens to a capital asset that has a necessary connection with Australia.  These necessarily connected assets are termed taxable Australian property.

Taxable Australian property includes:

• Direct interests in Australian real property (for example, land and buildings situated in Australia), or
• Indirect interests in Australian property (for example, shares in a company or units in a unit trust where 50% or more of the market value of the entity’s total assets are Australian real property), or
• Options or rights to acquire either of the above.

Please note, there are numerous CGT events that may occur without you ‘selling’ an asset in the ordinary sense, for example, granting rights, options or creating trusts over Australian property.  Additionally, there are various integrity measures that may apply to transactions, for example, to apply the market value to the asset for taxation purposes when the parties did not deal at arm’s length in relation to the transaction.   

Taxation consequences of selling property

Calculating the capital gain

Upon disposal of taxable Australian property, you must assess and calculate any Australian taxation obligations. The applicable disposal date on an ordinary property sale is contract date rather than settlement date. This timing distinction is important as it may result in the capital gain being recorded in an earlier financial year than the settlement. Broadly, the gross capital gain is calculated by deducting the purchase price of the property, inclusive of any purchase costs (land transfer duty, conveyancer costs, etc.) from the sale price, less applicable selling costs (real estate agent commission, conveyancing costs, etc.). As a non-Australian resident, the capital gain made on the disposal of taxable Australian property is included in your Australian tax return and tax is assessed on the capital gain at the applicable non-resident marginal taxation rates (currently 45% for the part of the capital gain exceeding AUD$180,000).

Can the capital gains tax discount be applied to reduce the capital gain?

To be eligible for a 50% discount on an assessable capital gain, along with meeting other specific eligibility criteria, the asset must have been owned for 12 months or longer by an individual.  However, for taxable Australian property acquired after 8 May 2012, the 50% discount is no longer available for non-Australian tax residents.  Non-Australian tax residents will be subject to income tax on the entire capital gain generated, apportioned for any periods of Australian residency that may have occurred between 9 May 2012 and disposal.  For taxable Australian property purchased prior to 8 May 2012, the 50% discount can remain eligible for non-Australian residents to reduce their gain accrued between the purchase date and 8 May 2012, provided that a market valuation is obtained on the property at 8 May 2012.  Given there is a taxation saving likely to be derived through application of the 50% discount, obtaining a market valuation at 8 May 2012 would likely result in a favourable taxation outcome for a non-Australian resident taxpayer therefore should be considered.    

Foreign Resident Withholding Tax

In addition, from 1 July 2016, disposals of taxable Australian property by non-Australian tax residents are subject to foreign resident withholding tax.  When a non-Australian tax resident disposes of taxable Australian real property for a value of $750,000 or more, the purchaser, at settlement, is required to remit 12.5% of the purchase price to the Australian Taxation Office (ATO).  This is a non-final tax and does alleviate the non-resident taxpayer from the requirement to lodge an Australian tax return.  The amount remitted to the ATO from the transaction can be included as a credit by the non-resident taxpayer to reduce the income tax liability arising upon lodgement of their Australian tax return.

Summary

As can be seen by this brief article, determination of your taxation and lodgement obligations upon disposal of taxable Australian property can be complicated for non-Australian residents, particularly where there may have been changes in residency during the ownership of the asset.  The ability to access a reduction to the capital gain by application of the 50% discount (or part thereof) will come down to an assessment of the specific facts in each circumstance.  Should you wish to discuss your circumstances in greater detail, please contact Baumgartners.   

About Baumgartners:

Baumgartners, based in Melbourne, Australia, is an entrepreneurial firm of Chartered Accountants, Chartered Tax Advisers and strategic business experts who truly believe in building successful relationships. They are an energetic and passionate firm of professionals with a breadth of technical expertise. Combined with real business experience, this sets them apart from the rest. Their practice is growing rapidly because of their genuine approach to client service, the exceptional results achieved, and emphasis on people and relationships. An integrated full-service approach to strategic planning and a broad range of services provided, from accounting and taxation through to business consulting, superannuation, growth and wealth management strategies, financial planning, asset protection and risk minimisation strategies.