Tax Considerations For Australian Property Investors
Foreign investors acquiring Australian property are required to account for the taxation matters on Australian property only. No foreign source income is generally taxable in Australia. The following issues need to be attended to.
Tax File Number
Once, you have acquired a property with the intention of earning income from rent, you must register with the Australian Taxation Office and obtain a tax file number. If you have not already done so, you will need to complete a Tax File Number Application in full, accompanied by the required proof of identity documents. Original documents are required and will be returned without delay, by registered mail. Alternatively, copies certified by the Australian Consulate can be provided. ATS can assist in this regard.
Income Tax Return
Australia's financial year is from 1 July to 30 June. Our laws require every person or corporation to lodge an income tax return if any income has been earned or any expense incurred within that period. The return is due for lodgement on the 31st October following the year of income. If you appoint ATS to handle your taxation affairs, we will obtain a special extension of time to lodge your return after 31 October without penalty. The return must state the gross income received from all sources within Australia and a claim may be made for any expenses relating to that income.
Australian Income Tax is levied on your Taxable Income not total income. Taxable Income is calculated as your gross rental income (from all properties owned) less any allowable deductions incurred in earning that income. If a surplus of income results, tax is levied at the prevailing non-resident rate of tax.
Common deductions you will be able to claim include
- Advertising for tenants
- Agents commission for managing the property
- Gardening and maintenance
- Insurance - property and contents
- Interest on loans used to finance the property
- Lease preparation costs, council rates and land tax
- Travel and car expenses
- Telephone, facsimile and postage
- Travel costs incurred when visiting Australia can be claimed, provided they are incurred principally to inspect the rental property and are reasonable.
Australian Income Tax Legislation requires that in order to claim any deductions, you must have documentary evidence to substantiate the claim. These records must be kept for five years after lodging the return to which they relate. Failure to do so may result in your claim being disallowed and penalties being charged.
The Australian Government also provides incentives for property investors in the form of additional tax deductions. These include
- Depreciation - on furniture, fittings and equipment used in the rental property
- Building Write-Off - 2.5% per annum of construction cost of new buildings
- Borrowing Expenses - amortisation over five years for the full cost of establishing a loan
It is important to note that if your expenses exceed your rental income then no income tax is levied. The annual loss may be carried forward indefinitely to offset future Australian income or capital gains. As our taxation system is federal based, any loss made on one property can offset the income or capital gain of another property regardless of the property's location in Australia.
Capital Gains Tax
In Australia, Capital Gains Tax is levied on profits made on the sale or transfer of assets. When you sell your property, the excess of the sale price over the purchase price is a capital gain. For anyone living permanently in Australia, Capital Gains Tax applies to any assets located anywhere in the world. For those living out of Australia, including Australian expatriates and foreign nationals holding Australian Residency Visa's, only profits made on Australian based assets such as property is taxable. No Capital Gains Tax is payable on listed shares.
When determining how much of the capital gain is taxable, allowance is made for any selling costs and improvements. Should a capital loss be incurred, then no tax is applicable and the amount of the loss is available to be carried forward indefinitely to offset any future capital gains. However, if a surplus still exists and the property has been owned for longer than twelve months, then half of the gain is included as part of your taxable income and may be further reduced by any income or capital losses made either during the same financial year or any previous year.
2012 Budget Announcement
In the 2012 Federal Budget there was an announcement made that will remove the 50% Capital Gains Tax Free Concession for Non Resident Taxpayers (including Australian Expatriates). This change became effective from 8th May 2012. As a result of these changes now becoming law we have summarised the main issues below:
• Property owned prior to the 8th May 2012 will still enjoy the 50% CGT Free amount for profits to that date.
• A sworn valuation may need to be arranged and we have arranged a bulk deal for our clients. You can register for this by emailing email@example.com
• I would only suggest arranging a valuation if you intend to sell your property in the near future.
• If you sell the property when living in Australia as a Tax Resident, the 50% CGT Free benefit will still apply to all gains but will be reduced on a pro-rata basis for any time spent living abroad after the 8th May 2012. Hence if you do not need to sell while living abroad then you should keep your property until you return as it will improve the overall position.
Goods and Services Tax
The rate of GST in Australia is set at 10% and is charged upon the value of the good and service. Importantly under law, the price you are quoted will always include GST unless it is clearly stated otherwise, so in most cases you will not need to be concerned that an additional amount will be charged.
Residential Property Investment
GST is not levied on the rent collected on residential property, interest on any loan taken out to acquire the property or on the government services charges. GST is imposed on the provision of maintenance services, property management and other ownership costs, however the yearly additional cost for a property investor will be negligible.
GST is also charged when a new property is first sold by anyone in the business of property development. This will be already factored into the price quoted unless otherwise stated. Purchasers should not be concerned with the additional cost as the value and quality of Australian construction will still remain one of the highest in the world. It also ensures the longevity of the significant tax incentives offered by the Australian Government to new property investors.
Most importantly for foreign owners is the fact that no GST is levied when you sell your residential property investment.
Commercial Property Investment
For owners of Commercial property, it may be required for you to charge your tenant GST if your annual income from rent is in excess of A$75,000. In such cases you will be required to register for GST with the Australian Taxation Office and on send the GST collected less any GST that you may have paid on your property expenses, on a monthly or quarterly basis.
Also when you buy and sell your Commercial property, there may be a requirement to charge GST on the sale price, so you must ensure you seek advice to determine the impact, particularly as the price is deemed to include GST unless otherwise stated.
If you intend on doing any Property Development in Australia, then you will need to fully assess the GST implications. This area is very complicated and should only be undertaken after seeking and obtaining quality advice.
Operating a Business
GST will need to be considered if you are operating a Australian business from abroad or intend to move to Australia. You will need register with the Australian Taxation Office and report monthly or quarterly if turnover is in excess of A$75,000. GST will need to be charged on all Australian Sales, excluding a few industries such as Health Services, and you will be entitles to offset GST paid on services and supplies by your business.