Mr Mansell is considering moving back to Australia within the next 3-5 years to raise his children. Over this time, residential property values are expected to continue to rise.
Mr Mansell is therefore considering whether to:
- Sell the lot to a developer now;
- Sell the lot when he moves back to Australia; or
- Transfer the lot to a related Australian resident company and develop it himself in the future.
Whilst there are a wide range of commercial issues for Mr Mansell to consider in this situation, below is an analysis of the tax implications which he should factor into his decision.
Capital Gains Tax
Although Mr Mansell is a foreign resident, he is liable for taxation in Australia in respect of his Australian sourced income – this includes capital gains made from the disposal of property.
By Australian Law, a person is liable for Capital Gains Tax (CGT) to the extent that the CGT event relates to Taxable Australian Property (TAP). The definition of TAP includes direct or indirect interests in real property situated in Australia. Being in Queensland, Mr Mansell’s lot is TAP and therefore subject to CGT. The disposal of the lot to a developer or a related company will create a gross capital gain of $150,000.
CGT General 50% Discount
Unfortunately, as Mr Mansell is a foreign resident, he has restricted access to the CGT general 50% discount.
Following amendments to the law, foreign residents are not able to apply the CGT general discount against capital gains derived after 8 May 2012. Given that Mr Mansell acquired TAP prior to 8 May 2012, however, he will be eligible to apply the full CGT discount percentage against the increase in value from the acquisition date (1 July 2010) up to 8 May 2012.
This would require Mr Mansell to obtain a market valuation for the lot as of 8 May 2012. Let’s assume this valuation comes in at $600,000.
Even if Mr Mansell were to return to Australia and become an Australian resident once again, he would not be able to sell the lot and obtain the full 50% general discount. He would be required to apportion the CGT discount for the number of days he was an Australian resident as opposed to a foreign resident after 8 May 2012.
If Mr Mansell returns to Australia, becomes a resident on 2nd September 2015, and sells the lot to a developer on 30 Sep 2015, his situation would be as follows:
Mr Mansell could apply the CGT general discount against $101,169 of his $150,000 capital gain.
Weighing It All Up
Let’s conclude broadly that:
- The sale of the lot will result in CGT regardless of when it is sold;
- Access to the CGT General Discount would only be available for the increase in the lot’s value from its acquisition date until 8 May 2012 (with potentially limited access after that date); and
- The related company would likely be taxed on revenue account in respect of any future sale of the lot (thereby nullifying the relevance of the CGT discount in the future in any event).
Mr Mansell should weigh up the benefits of transferring the lot now against the potential costs and risks associated with continuing to hold the lot as an individual into the future.
Given the likelihood that the lot’s value will continue to rise, making the decision to transfer the property now to the company may be the best decision – providing him longer term benefits despite short term costs.
In the best case scenario, Mr Mansell would save considerable income tax where the company acquires the lot and develops it in the coming years for a significant profit. This would lessen the overall impact of any CGT and transfer duty that he would pay now.
The above calculation demonstrates that Mr Mansell would still be eligible for the CGT discount in respect of $101,169 of a $150,000 capital gain if sold now.
Aside from capping his future taxation exposure, the transfer to the company may also provide him with the flexibility to develop the lot with a lower overall risk profile.
A transfer now to the company would be less beneficial if the company decided to sell the lot to developers soon after acquiring it – given the impact of transfer duty.
Mr Mansell may also retain profits in the company until such time as he returns to Australia.
You can contact us at firstname.lastname@example.org for further discussion on the commercial or taxation issues affecting development opportunities for your non-resident clients.