Ownership of foreign property is becoming extremely common in Australia. With the prices of Australian property increasing significantly, it’s not a surprise that people are inclined towards investing overseas.
Along with this, a lot of people who move to Australia hold onto their property abroad. Why? Because it can help them keep their property portfolio diversified. Whatever the reason, you must understand how the Australian tax on foreign property works.
So, if you want to keep your foreign properties a little secret in Australia, you will be disappointed to know that it may not actually be possible. In fact, the ATO (Australian Taxation Office) can easily track the cash flow movement of an individual in and out of Australia.
If you wish to understand the tax implications of owning foreign property in Australia, this blog is for you.
Capital Gains Tax (CGT) on Foreign Property
An Australian tax resident owning a property overseas may be subject to CGT while selling or disposing of that foreign property. The CGT rules for foreign property ownership are generally the same as those for domestic property.
When calculating the CGT liability, the following steps are usually involved:
1. Determining the Capital Gain or Loss
The capital gain or loss is calculated by subtracting the property’s purchase price and eligible acquisition costs from the selling price. Acquisition costs can include things like legal fees, stamp duty, and real estate agent commissions.
2. Applying CGT Discounts (if eligible):
Did you know that holding property for more than a year can help you get a CGT discount?
For properties held for longer than 12 months, Australian tax residents may be eligible for a CGT discount. This Capital Gains Tax discount can be 50% or 33.3%, depending on the individual’s circumstances.
3. Adding to Assessable Income:
The net capital gain is added to your assessable income for the tax year in which the property was disposed of.
The amount (capital gain) will be taxed at your marginal tax rate.
4. Foreign Tax Offset (FTO) (if applicable):
If you paid foreign taxes on the sale of foreign property, you may be eligible for a foreign tax offset in Australia. This is helpful in avoiding double taxation on the same income.
CGT on Foreign Property Ownership for Non-Residents:
Non-residents (for tax purposes) are subject to CGT on the sale of real estate in Australia. They may also be subject to Capital Gains Tax on other taxable Australian properties.
But, as of the last update, they are generally exempt from CGT on the sale of foreign property.
Exceptions and Special Rules
Keep in mind that special rules and tax treaties may apply to specific situations. The treatment of CGT on foreign property can also vary depending on the country where the property is located. Additionally, some rules may be different for Australian expatriates and temporary residents.
Taxation of Foreign Rental Income
The rental income generated by overseas property is generally considered taxable in Australia. The tax treatment for foreign rental income is similar to the taxation of rental income from Australian properties.
You must include all rental income you receive from the overseas property in your Australian tax return. This includes any rental payments you receive in foreign currency. The payment must be converted to Australian dollars using the prevailing exchange rate at the time of receiving.
You can claim deductions for expenses related to earning the rental income. These deductible expenses may include expenses related to the property’s rental income generation. These deductions are discussed later in the blog. It’s essential to keep accurate records of expenses to support your claims.
If you pay taxes on rental income in the country where the property is located, you may be eligible for a foreign tax credit in Australia.
The foreign tax credit is usually equal to the foreign tax paid on the rental income, up to the amount of Australian tax payable on that income. Foreign tax credits are helpful in avoiding double taxation.
The net rental income will be added to your assessable income and then taxed at your marginal tax rate. To get the net rental income, you only have to minus the deductible expenses from the rental income. The marginal tax rate depends on your total income and tax bracket.
When the expenses exceed the rental income, it results in a net rental loss. You can generally offset that loss against other income you have in Australia. This may reduce your overall taxable income. As a result, your tax liability may also be reduced.
Taxation of Foreign Rental Income for Non-Residents:
Non-residents (for tax purposes) are generally subject to different taxation rules for rental income from overseas property.
They are generally taxed at a flat rate of 32.5% on their Australian-sourced rental income. This includes income from Australian properties and some other taxable Australian property.
But they are generally exempt from Australian tax on their foreign rental income.
Reporting all your rental income from overseas property is necessary. It doesn’t matter if you are a non-resident.
Double Taxation Agreements (DTAs) and Foreign Tax Credits
Double Taxation Agreements are the agreements two countries have to prevent an income from being taxed twice. DTA or Double Taxation Agreements are also known as Tax treaties. But what does a DTA have to do with Rental income from overseas properties?
Suppose you are an Australian resident. You have an overseas property that has been generating rental income for you. As per Australian tax laws, you must report the foreign rental income on your Australian Tax return. If Australia has a DTA with that foreign country, the treaty may have provisions to determine the nation with the primary right to tax the rental income.
If, as per the DTA, the income is taxable in the country where it is generated, you may claim foreign tax credits in Australia for the already paid taxes. As a result, you get to avoid double taxation by offsetting the tax paid overseas against the Australian tax liability on the same income.
Along with this, if a foreign property is sold and the owner makes capital gains, the DTA between Australia and the other country may provide tax rights over the capital gains. This has a direct impact on whether you are subject to Capital Gains Tax (CGT) in Australia, that foreign country, or both.
The Double Taxation Agreement may also address issues related to foreign tax paid on capital gains. One such case would be providing foreign tax credits in Australia to avoid double taxation.
You can claim these when filing your Australian Tax Return if you are eligible for foreign tax credits under a DTA.
Deductible Expenses for Foreign Property Owners
Expenses related to your foreign overseas investment property are tax-deductible in Australia against the generated rental income. The expenses should not be of a capital nature.
Claiming a tax deduction on the rental expenses generated from overseas property is the same as doing it on domestic property. However, you can’t claim a tax deduction for the cost of replacing or improving something within or on foreign property. Why? Because the expense is completely capital in nature.
Here are some of the foreign property tax deductions that you can claim in Australia:
- maintenance expenses,
- property insurance,
- borrowing costs,
- property management fees,
- property agent fees,
- administration expenses,
- repairs (not replacements) and maintenance, and
- tax depreciation.
Although being able to claim these tax deductions may sound exciting, you must be aware of one thing. You won’t be able to claim any of these if you do not have accurate and detailed records to back them up. With such records, you can make the tax reporting process more straightforward.
You should consult a tax professional for personalized advice based on your circumstances. Tax laws can be complex, especially when dealing with international aspects. So, seeking expert advice can help you comply with all relevant regulations. You can reach out to Clear Tax Accountants, where you will get experienced professionals who can lead you throughout your tax journey.
Disclaimer: The information on this website is for general purposes only and should not be relied upon for making legal or other decisions. The advice provided in this article is general in nature and is not subject to the personal financial situation and needs of any individual. Clear Tax tries to keep the information accurate and up-to-date; however, you should bear in mind with changing circumstances, the accuracy and reliability of the information will not necessarily remain the same. The information is by no means a substitute for financial advice.
