FAQ

Here you will find common sense answers to the most common questions asked by our members. Answers are provided by the appropriate expert in that area.

I bought a property in Australia and my mother is living in it, can I claim my interest in my taxes?

I bought a property in Australia and my mother is living in it, can I claim my interest in my taxes?

It is very common these days for people to purchase property and have a family member live in the property.

This can have advantages in having someone you trust look after your property, giving you the ability to stay there during visits to Australia as well as fulfilling family obligations to support your parents or other relatives.

Australian tax law is very simple, in so far as it says that in order to be able to claim any costs, then you much receive some income.  Therefore if there is no rent collected on the property from your relative, then you can not claim any interest or other property costs.

This would mean that if you do chose to have family members living in your house and they do not contribute any rent, then all costs of the property are not allowed as a tax deduction at all.  Given that interest is usually the largest cost, it would mean that it is preferable to have a low or no mortgage on a property that is solely for use by a family member, especially a parent.

If you do charge some rental then it is possible to claim all costs of the property in your Australian taxation.  One major issue here though is that where the property is rented to a relation, the Australian Tax Office requires you to declare as income whatever the true market value of the rental is, regardless of what you may collect.

So even if you only receive a below market amount of  say A$100 per week rental, in order to be able to claim full expenses you will need to declare the true market value, as can be determined by a Real Estate Agent, in your tax return.  If that is higher than the actual amount received, then the higher figure would be put in your tax return.

This means you need to establish what the market rental is and what your total costs of ownership are.  If the costs are greater than the market rental it is worth declaring the property in your tax.  If the costs are less than the market rental, then likely you should leave the property out and treat it as a family arrangement.

Regardless of what method you chose, the property will still remain subject to Capital Gains Tax on eventual sale, so you also need to be mindful of the implication thereon.

In some cases, especially where it is genuinely your parents or relatives home, you may be better to have the property in their name as they would be entitled to Capital Gains Tax Free Status as their Principal Residence.

The decision as what to do can be based on many factors including debt level, availability of finance, type of property and family obligation.  Everyones situation will be different, so it is strongly recommended that you seek professional advice prior to any contractual commitment to evaluate the best option for your circumstance.

The ability to accrue tax benefits exists on property that your relations may live in, all you need to remember is that the property needs to be treated as a proper commercial environment.  The Australian Tax Office doesn’t mind you helping your family, they just don’t think it is fair that they help subsidise the lower rent you may want to offer.

I have recently got a letter asking if I need to pay Land Tax on my Australian property, what is this for?

I have recently got a letter asking if I need to pay Land Tax on my Australian property, what is this for?

In Australia the Federal Government is entitled to receive Income Tax and Capital Gains Tax and this is managed through an annual lodgement of a tax return.

Under the Australian Constitution, State Governments are not entitled to charge any taxation against income or capital receipts, however they are entitled to raise levies or duties on activity within their state.

One of the major levies for each state is Land Tax.

For many people living in Australia, they are unfamiliar with land tax as it is not charged on the family home in any of the States as it is usually only charged on vacant land, rental property or commercial property.

To qualify for the family home exemption you need to have been actually living in the property on the date of determination (different for each State) so it is very difficult to achieve this if you are living overseas.  Some states provide for the family home exemption even when abroad but will usually require that the property is not rented out during the period overseas.  If rent is collected then Land Tax is likely to occur if you own more than one rental property in the same State.

Each state has a different rate of Land Tax, usually based upon the unimproved value of the land of the property in a similar calculation to the annual local council rates.

You will usually find that there is a tax free threshold on offer that will mean that for anyone with just one property (over and above their family home) that they are under the tax level and have no Land tax liability.  This can prove advantageous if you have property in a number of different Australian States as you get a new threshold for each State of ownership.

In addition, the land tax on an apartment will be substantially less than that of a house as the unimproved land value is shared over the many owners and creates a lower individual value for tax purposes.

Land Tax is calculated on the cumulative value of all of the property owned by a person in the state of location so the more property you own the higher the rate of Land Tax and the cost can escalate sharply.

The annual cost can vary from a few hundred dollars to many thousands, and each State Revenue Department is quite active in seeking out non payers and recouping any Land Tax arrears. 

If you think you may have a potential Land Tax liability you will need to contact your property manager or the State Revenue office as soon as possible to confirm if you are over the relevant threshold for your State.  If they find you first the penalties can be quite expensive.

A Land Tax cost isn’t a deterrent to purchase, rather a nuisance.  It can however become expensive if you have built a substantial property portfolio in one state and needs to be considered when working out your cash flow on your rental property.

Knowing that Land Tax is due would not make me change my investment decision as any good house will grow sufficiently to justify the additional cost of Land tax, however it would certainly warrant a review of my investment strategy to allow for multi State property ownership and consideration of a sensible mix of houses and apartments to keep your taxable land value down.

I will be moving to Australia shortly and expect to be receiving an inheritance soon after I arrive, what Inheritance Tax will I have to pay?

I will be moving to Australia shortly and expect to be receiving an inheritance soon after I arrive, what Inheritance Tax will I have to pay?

I am glad to report that Australia is one of the very few western countries that does not charge any inheritance tax or death duty.

As such you will not have any government cost when you receive your inheritance.

Unfortunately this may not protect you against any duty that may be levied in the country you receive the inheritance from, such as the United Kingdom, but there will be no additional impost in Australia.

Even though there may be no inheritance tax issues in Australia, you still need to be mindful of the potential future capital gains tax and income tax that could become an issue if you receive an asset rather than just a cash benefit.

In cases where you receive cash, your only concern in Australia is if that cash is placed on deposit, either in Australia or overseas, as any interest earned would need to be declared each year in your Australian tax return if you are living in Australia as a tax resident.  This is regardless of whether you actually transfer the money to Australia or leave it overseas.

The tax cost on this would depend on your other income, such as salary, as we have a marginal tax rate system in Australia.

If you receive your inheritance by way of transfer of the asset to your names, such as shares or property, then on the initial transfer there will be no tax consequence.

When the asset generates an income, such as dividends or rent, then this would need to be declared in your Australian income tax return, once again taxable at your prevailing marginal rate.

Upon eventual sale of the asset, there is Capital Gains Tax to bring to account.  For Australian tax purposes, an offshore inheritance of an asset is deemed to be given to you at the market value on the date you inherited it.  Only profits above this amount would be subject to Australian taxation on sale.

For example, if you inherit your parents home in London that they may have bought originally for £45,000 but when you received it the value was now £350,000, the for Australian tax purposes the “tax cost” is £350,000.  If you sold the property later for £375,000 only £25,000 of the gain would be subject to Australian Capital Gains Tax, the reset would be tax free.

If you had kept the property longer than 12 months from date of inheritance before selling, then a further concession of half the taxable component would be tax free, so you would only need pay tax on £12,500 at your prevailing marginal rate.

This methodology would apply to any type of inheritance asset including property, shares, investments or artworks.

It is important that when you do receive any asset as an inheritance that you ensure you are given a formal valuation to confirm the value at time of receipt so you can properly establish your starting point for Australian Tax purposes.

Apart from that, you have no other obligations to concern yourself about in Australia.

I have been offered an “interest only” repayment on my Australian property loan.  Is this a good idea?

I have been offered an “interest only” repayment on my Australian property loan. Is this a good idea?

Most Australian expatriates remember how expensive our home mortgages were when we were living in Australia, as there was no tax relief available for interest costs on our private home.

While you are an expatriate, things are very different.

When you are renting the Australian property out, all interest costs are fully tax deductible for you in Australia, however any additional repayments that reduce the balance of your loan are not a tax deduction.

An interest only loan will always be a lower monthly repayment, which can make it easier on your cash flow. 

It is not a case that you are best to always be in debt, rather you need to understand the importance of being debt free or low debt on property in Australia when you are living in it, not while it is rented.  As an expat living in the property is not an option until your eventual return.

While a property is collecting rent in Australia any loan that was taken to help with the purchase is fully tax deductable, even if you had lived in the home for some time in the past.  With rather high tax rates for non residents, starting at 29%, then the tax deduction is usually very welcomed.

You should continue to accumulate funds in order to be able to pay the loan off at some future date when you actually move in.  Doing it earlier can cause grief on return if you choose to live in a different property to the one you have been paying off.  In this case you may be forced to sell a quality investment just to release the cash to assist with being low debt on the new property.

Paying off the principal of any loan should never be considered a bad thing to do, just perhaps not the most efficient use of your money while the property is rented. 

If you have a loan sourced from Australia, an alternative to repaying the loan is to use an “Offset” account, where an account with your savings in it is linked to your loan and you are only charged interest on the net balance.  This achieves exactly the same savings as extra repayments however leaves the loan balance unchanged and gives you far greater flexibility as you can withdraw your funds from the offset account if a better option comes along later.

You may be surprised to learn that the overall performance of your property investment will be improved when you have a higher loan against it.  This is a combination of reduced taxes and leveraging benefits that in some cases can almost double the rate of return achieved after tax each year.

As a result, delaying the decision to reduce your loan until the date you move in could prove to be a very rewarding decision and set you up in a stronger financial position on your return to Australia.

Our customised “Property Tax Estimator” can quickly demonstrate the advantages of cost implications of reducing your loan, taxation issues and investment performance considerations.  It is available free on our website at www.smats.net

I am thinking of moving back to Australia some time soon. When is the best time to return from a tax perspective?

I am thinking of moving back to Australia some time soon. When is the best time to return from a tax perspective?

This is a question that I am often asked by clients. It is not often that you will have the luxury of choosing when to head back to Australia as other influences will take precedence including the availability and starting date of any Australian based employment, children’s school starts and the availability of somewhere to live.

Some people do have the good fortune to plan an arrival date and even take extended holidays prior to their permanent relocation to Australia, so if you are in that position, here are some of the main issues affecting the timing of your return from an Australian taxation perspective.

Full year means bigger value for tax credits

If you have made the most of your time abroad and acquired Australian rental property, it is likely that you may have accumulated tax losses (or credits as we refer to them).  You can use these to reduce your Australian salary tax and since we have a marginal tax scheme in Australia, where the higher your income the higher the tax rate, it is usually better to have a full years income to use your credits against so that the tax saving is at the higher rate rather than the lower.

This can be a significant difference and would encourage a return in the earlier part of the tax year, usually July to September, as the most tax effective.

Having a Super Return

If you return to Australia late in the financial year, say May or June, then one way to preserve your tax credits is to make an additional contribution into an approved Australian Superannuation scheme to offset your income for the month or two that you have been back during that financial year.

This will allow the credits to be available to carry forward to the next financial year for maximum effect.  This would require some additional thought as it could impact on your family cash flow but could be a substantial saving.

A Good Day on the Stock Market

On relocation to Australia, all offshore assets (property or shares) and any Australian shares become taxable but importantly this only applies to the excess above the market value on that day of relocation.

As such, it is always better to return to Australia during a more optimistic time where asset values are higher. 

Sadly if prices are down this could be detrimental, so if it is possible to postpone your arrival until things improve this should be done.  Realistically this is not easy to expect but is certainly worthy of consideration.

Home Improvements

If you are intending to move into a property in Australia that you own and have had rented, then you can claim costs of bringing the property “back to standard” after the rental period.  This may include painting, garden maintenance and general upkeep of the property but not significant items like carpets or kitchen upgrades.

The end of rental maintenance should be carried out within a reasonable period of when the tenancy ends, but can be done once you have moved in, and will allow a full deduction against your tax which will make it very cost effective.

I want to make a donation to the Queensland Flood Relief Appeal, is it tax deductable?

I want to make a donation to the Queensland Flood Relief Appeal, is it tax deductable?

I am pleased to hear that you have opened your heart and wallet to this important cause.  It never ceases to amaze me just how powerful Mother Nature is and how helpless we truly are when we are exposed to it wrath.

Be it the Australian Tsunami of 2006, the Victorian Bushfires of 2009 or the current misfortune of the Queensland Floods, we are reminded how fragile we are and how things can change so very quickly.

I am also inspired that out of these tragic events we always see the best part of humanity.  Our ability to cope with adversity, overcome misfortune, rebuild, recover and, most importantly, our willingness to help our fellow man.

The Australian Government, like almost every other Government, recognises the importance that donation and charity play in the modern world and as such any contribution to an Australian registered charity is a allowed as a tax deduction against your Australian income tax in the financial year that the payment is made.

This is a sign of recognition of the importance of the act as well as a manner of appreciation for the jesture.

You should note however that in order to claim a donation you need to have a taxable income in order to offset it against.

For many Australians living overseas, it is unlikely that you will in fact have any taxable income as your offshore salary is not taxed in Australia.

If you have an Australian rental property with a sensible level of finance on it, then you may also find that you are in a tax loss position each year with no tax payable in Australia and some tax benefit carrying forward into the future.

If this is the case then making a donation to any charity will not improve your Australian tax position as donations can not increase any tax loss position and therefor are essentially ignored once you have an income less than zero in your tax year.

If you have Australian rental property that is generating more income than the ownership expenses, including interest and depreciation, then the donation would be able to be used to reduce your net rental income and lower your annual tax liability.

To claim the deduction in the current financial year, the donation needs to be paid and cleared by the 30th June, Australia’s financial year end, and a receipt should be obtained and kept as proof of payment.

Regardless of your position, either being able to claim the deduction or not, the decision to make the donation should not be one based upon the ability to offset tax, rather it should be on the importance of the contribution.

Many of us living overseas are fortunate to experience more favourable circumstances than we expected, so it is seems fair to lend a helping hand to those less fortunate, especially when their position has come about from events that were totally out of their control.

I would hope we can all dig a bit deeper to help those that need it the most.

I have some shares in the UK, will they be taxable if I move to Australia?

I have some shares in the UK, will they be taxable if I move to Australia?

The Australian tax system is an all encompassing one.  Once you permanently relocate to Australia and become a tax resident then all of your income and capital gains from assets held both in and out of Australia will be taxable.

There are concessions for people that move on Temporary Visas to exclude overseas assets from being taxable, but this only applies while you are on the Temporary Visa.

Assuming you have a Permanent Visa, although he shares or other assets may become taxable there are some rules that ensure a level of fairness for you.

  • Any profits made prior to your arrival in Australia are not taxable.  Under the Australian rules your overseas assets are deemed to be acquired at the market value on your date of arrival to live permanently in Australia, so if that is higher than the original profit then it will soften the future Australian tax.
  • If you sell your shares after being in Australia more than 12 months, then half of any capital gains made above the market value on arrival will be free of tax.  This makes it very worthwhile to wait the year prior to selling any of your assets, especially if the value has increased substantially.
  • If you leave Australia within 5 years of your original migration and return to live overseas then any assets you had prior to your arrival are ignored for tax purposes provided they are sold after your departure, not during the time you lived in Australia.

You should be mindful that when you are living in Australia as a permanent resident, the sale of offshore assets is taxable even if the money is not brought down to Australia.  The transaction is taxable as a result of the sale, not the movement of funds to Australia.

Many people think it is best to sell offshore assets prior to migrating to Australia but this is not true.  Given that you only pay tax on future profits the only reason to sell should be a financial one, that is you are not confident in the assets future growth potential or you have a better use for the funds, such as buying your Australian residence.

The relocation is a good time to review your asset holdings and ensure they are performing satisfactorily and easy to manage from your new Australian home.

It may be appropriate to look at the ownership of your assets and consider the use of tax effective structures like Family or Discretionary Trusts, as it may be appropriate to shift ownership into such a structure, although you need to consider the UK tax consequences and transfer costs.  A professional Australian Tax advisor can quickly evaluate the merit of this.

In the modern world, you should be aware of the great information gathering powers of tax departments.  It is extremely likely that your offshore assets will be discovered so the option of “forgetting to mention” your overseas holdings is fraught with danger.

In truth, full disclosure combined with sensible tax planning can soften, or indeed eliminate, any potential tax issues in Australia, so your best option is to become aware of your tax position and plan accordingly.

How much can I borrow to purchase my Australian property?

How much can I borrow to purchase my Australian property?

The maximum loan to value ratio (LVR) that is available on an Australian property purchase depends on the your citizenship and the currency on which you choose to finance.

When buying an Australian property with an Australian dollar loan there are many options with lenders in Australia and overseas.

An Australian Citizen can borrow 80% of the value of a property under a normal loan offering, however they have the opportunity to borrow up to 95% of the value of a property if they qualify for Mortgage Protection Insurance.

For any foreign investors, finance is readily available for up to 80% of the value of the Australian property.

If you are living out of Australia, either as an Australian expatriate or foreign national, you have the opportunity to acquire your Australian property with a loan in other currencies such as USD, SGD, HKD, or GBP.  Usually the bank will only lend in the currency that you earn in rather than allowing you to choose any currency.

This may offer the opportunity to seek lower interest rates than those offered in Australian dollars however you must remember that you are taking the currency risk so movements in the exchange can add to the cost of borrowing or indeed give the potential to profit from exchange gains.

The banks will usually lend less than in Australian dollars, typically a maximum LVR of 75%, as they seek a buffer against the short term movement in the exchange.

In both lending options, you have the ability to use any current Australian property holdings as additional security for new acquisitions.  As such even though you may only be entitled to 80% or 75% lending on the new acquisition, the balance may be covered by another Australian property which would allow the bank to lend you the entire purchase price of the new acquisition provided there was enough security cover across all your property holdings, current and new.

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I am 60 years old, what sort of loan can I get?

I am 60 years old, what sort of loan can I get?

There are no age limits with Australian lenders so lending is possible for periods up to 30 years, even if you are above 60 years old or above.

The Australian property market has a long history as a safe and reliable form of security.

As such, Australian lenders have great faith in the capacity of the property to protect the loan and therefor they are willing to extend loan terms beyond the normal retirement age provided you can prove a capacity to service the loan at the time of application.

In assessing this, they take into account any regular income source, be it from employment or investment activity such as rental or dividends.

For anyone that has a reasonable financial standing, there are loan options available.

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All information provided is of a general nature only and does not take into account your personal financial circumstances or objectives. Before making a decision on the basis of this material, you need to consider, with or without the assistance of a financial adviser, whether the material is appropriate in light of your individual needs and circumstances. This information does not constitute a recommendation to invest in or take out any of the products or services provided by SMATS Services (Australia) Pty Ltd or any of it's related entities.