Selling Your House in Australia

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 will consider the potential tax consequences of selling Australian residential property as a resident of the UK. The article will be split into two segments:

1. Australian Tax Implications

In Australia, there are two capital gains tax (CGT) reliefs commonly utilized when disposing of residential property.

Main Residence Exemption

The first is the ‘main residence exemption’. The main residence exemption means there will generally be no tax liability upon the sale of your main residence. However, since 30 June 2020, foreign residents who have sold property are no longer able to benefit from the exemption, unless they have satisfied the requirements of the life events test.

To qualify for the ‘life events test’, both of the following must be true:

• You were a 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.

Capital Gains Tax Discount

The second frequently utilized capital gains tax relief in Australia is the capital gains tax discount. When you sell or dispose of an asset, you can usually reduce the capital gain by 50% if you owned the asset for at least 12 months. 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.

Upon disposing of Australian property and once the capital gains tax calculation has been finalized, foreign residents are liable to tax on their capital gain at a rate of 32.5%.

2. UK 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. Therefore, your Australian residential property gain will normally be taxable in the UK.

UK Capital Gains Tax Allowance

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).

Principal Private Residence Relief (PPR Relief)

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 UK taxation. This is known as principal private residence relief (PPR relief).

Remittance Basis of Taxation

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. 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.

UK Foreign Tax Credit

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.

Australia-UK Double Tax Treaty

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.

Conclusion

As evident above, ongoing changes to the rules for foreign residents selling Australian property mean it is now crucial to understand the tax implications of disposing Australian property, particularly while resident in the UK.

If you require any advice or assistance with UK or Australian capital gains tax, it is recommended that you seek professional advice specific to your situation.