Case Study: Capital Gain Implication for Overseas Investments*

One of our valuable clients approached us with a question regarding the capital gains tax implications of their parents selling an overseas investment property. The parents had only moved to Australia in recent years and they were uncertain as to what value of the property may be taxed within Australia.

In order to calculate the capital gain implication we had to establish the facts surrounding the circumstances of the parents.

As the parents had moved to Australia in recent years, Rubiix must first establish if the parents were to be considered Australian residents for tax purposes. This was done by asking a series of questions around their personal circumstances that the Australian Tax Office (ATO) considers when determining whether someone is a resident of Australia for tax purposes. It should be noted that the ATO does not consider any single factor to be a determination, but all behaviours taken in aggregate.

These factors include, but are not limited to:

  • Securing accommodation within Australia
  • The length of time intended to reside within Australia
  • Location of immediate family
  • Opening of an Australian bank account
  • Participation in local competitions or events
  • Joining local community groups, or volunteering locally
  • Changing to an Australian mobile phone plan
  • Transport of household effects to Australia

It was determined by Rubiix that on the balance of behaviours, it was likely the client’s parents would be treated as residents for tax purposes. Even if the parents left Australia long enough to trigger the non-resident provisions and then return to Australia, the ATO would take the view that the long term intention was to return to Australia, thereby remaining residents for the duration of an extended overseas trip.

The next step was to determine the cost base of the property. This was complex and is a much specialised area of tax law when in relation to a foreigner becoming an Australian resident. The elements of cost base of are made up of:

  • Money paid or property given for the asset
  • Incidental costs of acquiring the asset or that relate to the asset
  • Costs of owning the asset
  • Capital costs to increase or preserve the value of the asset, or to install or move it
  • Capital costs of preserving or defending your title or rights to the asset
  • Other market value considerations relating to migration to Australia

Once the cost base had been calculated, we then sought to calculate the anticipated net capital gain. This estimate was based on the likely proceeds of the sale. We were then able to ascertain the taxable amount of the sale, being the proceeds of sale less the cost base of the asset, less some other discount factors relating to the duration of ownership.

As a result of this exercise, we were able to advise the client of an estimated tax liability in order to prepare them for tax time, rather than experience ‘bill shock’ after the ATO’s assessment. There are many factors that could have changed this outcome, such as not being considered residents for tax purposes, cost base adjustments from actions taken over the life of the investment or receiving a different sale figure upon disposal of the asset.

If you need assistance with this or matters like it, please contact our office on (03) 9603 0066.

*Nb. This case study is based on one particular individual’s circumstance and should not be taken as advice or used for all clients or scenarios.

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