Aussie expats lose tax discount

Caption: A file photo of Australians protesting against carbon tax in front of Parliament House in Canberra. Non-resident Australian will have to pay 50% capital gain tax from May 8, 2013.

From 7.00 PM, May 8, 2013, non-residents of Australia will no longer enjoy the 50 per cent discount on capital gain tax, a tax discount that currently applies to gains earned on taxable Australian property, such as real estate and mining assets.

When offloading property, capital gain tax applies to the difference between the sales price and the price at which a property was purchased. It is part of the income tax and taxed at marginal rates.

A 50 per cent discount is offered, allowing the taxpayer to only pay for half of the tax on its income. Although this concession will continue to exist for Australian residents, non-residents of Australia will lose the tax break.

Moreover, from July 1, 2013 the tax rate on capital gain for non-residents will be adjusted. The first two marginal rates will merge into one rate, aligning with the second marginal rate of residents: 32,5 per cent. This rate will increase to 33 per cent from July 1, 2015.

What does this mean for the Australian expat, owning or planning to purchase property in Australia?

The 32,5 per cent tax rate will apply to the total income falling between AUD18,201-80,000. Whereas a non-resident with an income of AUD80,000 is currently subjected to an income tax of AUD23,630, this will increase to AUD26,000.

This tax rate will apply to the full capital gain earned on taxable Australian property. Consider a property sold with a profit of AUD10,000; the complete amount will now be added to the total income, over which the new tax rate applies. Previously, AUD5,000 would be added to the total income. Under the new tax rate, this would add up to an income tax of AUD24,375. The taxpayer loses AUD1,625.

"Expats have lost a generous tax break which could be used when selling a property," comments Sean Abreu, Senior Wealth Manager at Mondial. "At the moment I advise non-residents against investment in Australian property."

For Australian expats who have already purchased property this is bad news, he thinks. The cancellation of discount applies to property that is owned for one year or more, and the 50 per cent concession can still be used on any capital gain built up before May 8, 2012, under the condition that a valuation of the property at May 8, 2012 can be provided.

"The chance that anyone can provide such valuation is very small, because at that time people did not know about the change of rules."

"Investing in property is a very popular option among Australians," explains Sean. "We all invest in property, that is what we do.

"Buying property in Australia is relatively expensive. It usually requires a double-income to afford a house. But when Australians come to Dubai, they earn the money to afford this more easily, so a lot of Australian expats do so. Of all my clients, I estimate 90 per cent invests in property."

However, the high demand of property among non-residents is also the reason for the taxation adjustments, Sean thinks. "The Australian governments want to discourage the purchase of property among non-residents, in order to bring down the prices, and make more profit from the property market."

Australia maintains one of the highest capital gain tax rates around the world, not considering the discount. It is also one of the few countries to set different conditions for non-residents.

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