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Australian Property: The Exception or The Rule?

Paul Gambles, Managing Partner, MBMG Group

Paul Gambles, Managing Partner, MBMG Group

The huge rise in Australian residential property prices (the 8-capital house price index has more than doubled since Q3 2003, whereas Consumer Price Index inflation has increased by less than 40 percent) has prompted comparisons with Spain, where prices roughly doubled between 2001 and 2007 before moving pretty much back to where they’d started.

This partly explains fears that Australia’s ‘house party’, which has been fuelled by a more than tenfold increase in household debt since 1993, could be brought to a crashing halt by a proposed change in tax policy affecting non-residents who own property in Australia.

Currently, Australian expats who live in an Australian property as their principal place of residence (PPR) can sell it without paying capital gains tax – what’s called a Main Residence Exemption (MRE). A property qualifies for this if either

1. it has never been rented (the absence rule, no time limit); or

2. if it had been rented out, but was then sold within six years of when the owner ceased to live there (whether or not they became non-resident at that time).

New draft rules, which would be backdated to May 2017, intend to abolish the MRE, without any time apportionment, for property owners who are non-resident at the time of signing the sales contract.

Existing properties as of 9th May 2017 will be granted an exemption until 30th June 2019. But this won’t extend any 6-year provisions for rented properties once that period has expired.

For expats owning Australian properties this means there’d be a pretty limited window of opportunity in which to act to avoid getting caught in this new tax web.

This is potentially bad news on two fronts for people intending to sell their property. Firstly, they are likely to be hit by CGT, from which they were previously exempt. Additionally, the changes could well trigger a mass exodus of foreign investors and discourage new investment, creating a pin to prick the property price bubble that’s got bigger & bigger up in recent years.