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Guest Article by Craig Joslin, Founder of The Australian Expat Investor – supporting Aussie Expats to build their wealth while living overseas. Get Craig’s free Special Report – Tax Implications for Australians Living Abroad at http://www.austexpatinvestor.com/taxreport
Australian property is seen as an attractive investment option for Australians for a number of reasons.
- Well located property has historically delivered good returns over the long term;
- It is a stable investment that can be used as a security to obtain relatively low-interest loans;
- There are a number of tax advantages that come with investing in Australian property that are not available for other investment classes.
However, if you are an Australian living overseas some of the Australian tax treatments are different. Does this make investing in Australian property unattractive if you are living overseas? Definitely not. In this article, we will explore some of the key tax considerations when investing in property, and what some of the differences are when you move or live abroad.
1. Tax Deductions
When you rent out a property in Australia, you may claim tax deductions for the costs involved in maintaining the property. The tax deductions may take the form of cash deductions (where you have physically spent money on the property) and non-cash deductions (accounting for the depreciation or loss of value of the building and fittings).
Generally, the following are all allowable tax deductions if you rent out an investment property in Australia.
- Interest on the loan used to purchase the primary residence
- Property management expenses
- Maintenance costs
- Depreciation of the building and fittings
- Depreciation of any capital improvements you make to the house whilst renting
- Water rates, council rates etc
- Utility costs (electricity, gas) to the extent they are borne by the owner
- Land tax
Depreciation in layman’s terms is the reduction in value of the improvements (eg. buildings and fittings) of your rental property that you can claim as a tax deduction against your income. This does not mean that your property investment has lost value, but it considers that various improvements to your rental property (eg. curtains, carpets, kitchen cupboards etc) lose value over time due to various factors such as wear and tear, and will ultimately need replacing.
3. Negative Gearing
Negative gearing is a practice where an investor borrows money to buy an income producing investment (usually an investment property or shares), and where the cost of holding or owning the investment is greater than the expected income from the investment. Negative gearing is a form of financial leverage, where the investor expects (or hopes) the growth in the value of the investment will outweigh the cost of holding or owning the investment.
If you are an Australian resident for tax purposes and you have a negatively geared investment property, you can deduct your losses against other sources of income. As a result, you can reduce your overall taxable income and annual tax liability.
If you are a non-resident for Australian tax purposes, then Australian expats can still negatively gear property investments. What this means is that you can use any tax losses on property investments in Australia to reduce your taxable income from other Australian sourced income. If you are a non-resident for Australian tax purposes, then you may not have much other Australian sourced income. Consequently, if your tax losses are more than your Australian sourced income, these losses can be carried forward to future tax years. In most circumstances, this means that these tax losses will be carried forward until you to return to Australia and become an Australian tax resident again.
4. Capital Gains Tax
Any growth in the value of your property in Australia is subject to capital gains tax on the sale of the investment. Capital gains tax is charged at your marginal income tax rate.
If an Australian resident for tax purposes holds the property for more than 12 months, they are entitled to a 50% capital gains tax discount when they sell the property.
Non-residents for Australian tax purposes lose the 50% capital gains tax discount for any capital gain made during the period they are a non-resident. When selling your property you will either need to proportionately allocate the capital gain between the time you were a resident and non-resident. Alternatively, you can get a licenced valuation of the property on the dates you changed between resident and non-resident and vice versa.
Milk Chocolate purchase residential and commercial property in Australia on behalf of Australians living abroad, looking for a home or investment property. To see how we can help you get in touch here.
Disclaimer: This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions. To the extent permitted by law, we exclude all liability for any loss or damage arising in any way.
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