FAQ

You will be glad to know that Australia does not have any Inheritance Tax or Estate Duty so on that front there is nothing to pay.

You should however consider the possible implications for Capital Gains Tax as this may be imposed when you eventually sell the property.

Even though you live overseas, the property is subject to Capital Gains Tax upon sale.  When you receive the property through an estate, there is a “Cost Base” for tax purposes attached to it.

In calculating the cost base, it is necessary to consider what the property was used for prior to death.

If it was the persons primary residence (their home), then you are deemed to have acquired the property on the date of death at the true market value on that date.  When you subsequently sell the property, you will only have to declare profits above the market value.

In the same way, if the house had been purchased by the person prior to 20^th September 1995, when Capital Gains Tax was introduced, then the same market value cost base will also apply.

If the property had been used as a rental or investment property, then it is treated differently.  You are deemed to acquire the property at the original cost, so in essence the capital gains tax liability up to that point is effectively transferred to you.

When you sell, the entire profit from the original purchase price is taxable at that time.

In all circumstances, once you have owned the property longer than 12 months, then half of any gain will be free of tax and therefore reduce the liability significantly.

You can also use any other accrued losses built up whilst overseas to reduce any tax exposure which may mean that it is a good time to review your circumstances in the event of an inheritance.

Remember to also include as income any rental that you may start to receive from the property in your annual income tax return in Australia.

For all owners of property in Australia, a Land Tax is imposed by the State Government in which the property is located.

Each state has different rates and rules as to how much and when the Land Tax is payable, they all have very good information on their respective State Government websites.

Land Tax is not part of your income tax, which is a Federal Government responsibility, and is an expense of property ownership rather than a levy against the rental.   Unlike income tax, which we can plan to eliminate, Land Tax can not be extinguished as it is based on the property value and is a annual levy.

Because it is an expense, you should always be mindful of the cost as it will soak up some of your rental and potentially add to your holding costs.

Each state offers an exemption for the house you live in, so many expats have not experienced a land tax bill previously, but if you have begun renting your home out during your time overseas then land tax will be payable.

Most states levy the Land Tax based upon the “Unimproved Value” of the property, the same method that is applied for your Council Rates, and a threshold is offered so that in many cases if you only have one or two properties, you may well find that you are under the taxable level and no amount is payable.

Because houses have a greater land component, they will attract a higher tax value than apartments.

In all states, the more property you own, the higher the land tax rate, so as you start to accumulate a property portfolio, the cost of land tax can escalate.  This may encourage you to look to have a property portfolio spread across Australia where you can benefit from the tax free threshold in each State.

If you have not been paying Land Tax, it is essential that you check and see if you should be as it is your responsibility and penalties will apply if you are found out.   Most states issue their Land Tax Notices Between November and March.

In all states, when you sell the property you are required to gain clearance for land tax before the final sale can be transacted.

One common misconception amongst expatriates when it comes to Australian taxation, is what constitutes ‘the family home’ in order to be exempt from Capital Gains Tax (CGT).

Many people wrongly believe that they can move into their investment property for a period of time upon returning to Australia, and then claim it to be their residence and therefore non-taxable. This is simply not the case, CGT will always remain an issue that must be considered.

It is true that the Principal Residence is tax-free in Australia, but you should be aware that this only applies to those who are resident for tax purposes. If you are living abroad then this tax exemption cannot apply to you, if you are in fact a non-resident.

If you’re planning to buy a home in Australia that will one day become your residence, this home will be subject to CGT in the future for the proportionate period that the property was not your residence. Not renting the property does not help, it is still subject to CGT whether or not a tenant resides in the property.

For example, if you buy a house and rent it out for four years, then return to Australia and live in the house for six years before selling it, then CGT will be payable on 40 per cent of the capital growth – that is, four out of the ten years. This negative impact can be greatly reduced, or indeed eliminated, by your entitlement to 50 per cent exemption on the pro-rata amount after one year of ownership, and the ability to offset any tax credits built up over your time as an expatriate.

Some good news does apply if you lived in the house before you became an expatriate.  The tax office will continue to deem the property as your principal residence for up to six years – regardless of whether it is rented out or not – under the temporary cessation rules. If you are away longer than six years, then only the rent years after the first six will count towards the taxable pro-rata calculation.

It is not always easy to save up your deposit with all the many spending options available to you as an expatriate

The good news for you is that recently some banks in Australia have begun allowing Australian Expats and Overseas based Australian Citizens to borrow up to 90% of the purchase price of their Australian property.  You can call our office or visit our website to get more information on the banks that offer this facility.

This will certainly help if you are keen to enter the market sooner than later and take advantage of favourable conditions, particularly on the East Coast of Australia.

However, you get nothing for nothing.  The reason you can put in less than the usual deposit of 20% is that you are required to take out Loan Mortgage Insurance (LMI) and this will add to the cost of your loan.

That aside, if you really want the property and are willing to bear the cost, then this type of loan will help accelerate your purchase.

If you do decide to borrow the extra amount, then remember to fully assess the additional holding cost and try to reduce the loan to a reasonable level as soon as practical.

Another option you may have is to purchase a property before completion, this is called “Off the Plan” where you pay an initial deposit of 10% in most cases, and no more until the property is fully completed.

In some cases this can be one to three years and it then gives you time to save the remaining 10% required whilst knowing exactly what the purchase price is.

This can be a positive move if you believe the prices will rise in the future as you lock in a price, however make sure you have confidence in the price as if the market softens you can get caught out.  Bottom line is make sure you do your homework.

As a simple rule, it is usually best to buy off the plan when the market is in a “soft” cycle, and most risky when the market is very strong.  Purely because things are always likely to improve when bad, and bubbles burst when blown up too far.

Whether you decide to borrow the extra or buy of the plan, make sure you get the best property you can to give yourself the highest chance of financial success.

When you are living out side of Australia on a permanent basis, any interest that you may earn in Australia is not subject to income tax and you do not need to declare it in your tax return each year.

However, this is only when you have declared yourself as a non resident to the bank that pays you the interest and provided they have deducted a “Withholding Tax” (WHT).

For interest the WHT amount is 10% of the interest and will be deducted at the time that the interest is credited to your account.

If this is done then no further tax will be payable in Australia and, if you are required to declare it in the country you live, it may be possible to get a credit for the WHT to offset the tax in that country.

Many expatriates forget to tell their banks when they have left Australia and do not have the WHT charged, in which case you should declare the interest in your annual income tax return and you will be charged the 10% WHT at that time.

This is a common situation because we have usually informed the Bank of our Tax File Number while living in Australia as we are required to do, and they are wrongly assuming we are still in Australia.

You should be careful in this circumstance, as it is illegal for a non resident (even an expatriate) to use their Tax File Number to avoid WHT so you should inform the bank that you do indeed live overseas and make sure they begin deducting the WHT.

One option worthy of consideration is to hold your term deposit in an Australian Currency deposit in your country of residence, as then there are no requirements for WHT and the interest is not taxable in Australia as it is earned overseas by a non resident.

When you return to Australia later on, the original capital and any interest earned on your deposits during the time abroad will not be subject to any Australian tax, however you will need to declare the interest earned from the date of your return onwards, regardless of whether you bring the money into Australia or leave it in the offshore account.

Everyone who earns Australian Taxable income during the period 1^st July to 30^th June must lodge a tax return.  This includes wages and any rent that you may have received on your Australian property.  You will not need to include your Singapore income since moving here.

If you lived in Australia for part of the year, it is likely that you had earned a salary and paid tax on it.  For just about every expatriate, the first year that you come abroad will generate a tax refund entitlement as usually the tax deducted from your salary will be far greater than the actual tax payable.

It is important that you also consider some Capital Gains Tax issues on any shares that you may have when you left Australia.  Under Australian Tax Law you are deemed to have sold all your non property Australian assets at the market value on the date of departure.

If there is any capital gain, then you may be entitled to a 50% discount if the assets had been owned longer than 12 months.  The reason for the deemed sale is that these shares will become non taxable for you as you now become a non resident of Australia for taxation purposes.

It is possible to defer this capital gains tax calculation by making a written election in your return to wait until the sale of the shares sometime in the future, although this is usually not in your best interests.

In most cases, even the payment of some capital gains tax is not enough to soak up the full tax refund, particularly if you had a property rented out with a loan on it.

With the end of the Australian tax year just passing on 30^th June, you are required to lodge your return by the 31^st October if you do it yourself, or we can arrange an extension should you need additional time.

When a cash refund is likely, most people do not need any encouragement to come in and complete their tax return early

Under Australian Taxation rules, the Australian Taxation Office (ATO) does not care about where the money came from or indeed what security is provided, in determining the tax deductibility of the loan.

The only issue that matters is where the money went on the day the bank handed the cheque over to you.

For any loan, whether from a bank, friend or family, as long as you can show the money went to purchasing the property when it was advanced, then any interest cost is allowed as a tax deduction against that property when there is rent collected.

It does not matter that your loan maybe through an offshore bank, as long as the loan proceeds went to acquire your Australian investment property.

If the loan is in a currency other than Australian Dollars, then the tax claim is the interest cost converted at the appropriate exchange rate at the time

If you refinance the loan to another bank along the way, the ATO will follow the paper trail back to the original loan and preserve its original status.

The important thing to watch out for is when you make advance payments on your loan and then decide to get some of that money back, maybe to go on a holiday.

This causes problems because that redraw is actually a “holiday loan” as that was where the money went when the bank gave it back to you.  It may seem unfair, but that is how the ATO looks at it.

It is far better to resist the temptation to pay off your loan if you have some “spare cash”, as if you need it back it could have an adverse impact on your tax position.

This would not apply if you draw down for another Australian Investment property, as it would then become a tax deduction on the new property.

This has become the hottest question going around Australian Expatriate communities around the world.

In the May 2009 Federal Budget, Australian Treasurer Wayne Swan announced changes to the Foreign Exempt Income rules that affect Australian residents working abroad.

Importantly these rules do not apply to any Australian genuinely living overseas on a fulltime permanent basis as you would be classed as Non Resident for tax purposes and your foreign income is not subject to tax in Australia at all.

The current rules only apply to people living permanently in Australia, that is having their home and life base there, and commuting overseas for various periods to work on assignment or shift basis, such as a fly in fly out worker.  In this situation you would still be classed as a Resident for tax purposes in Australia.

Presently, income earned by an Australian tax resident overseas is subject to tax in Australia, however a special exemption applies where that income is taxed in the country it was earned and also the period of time abroad was more than 90 days at a time with only incidental trips back to Australia.

The changes due to come in to effect on the 1^st July 2009, will remove this tax exemption and make the foreign income fully taxable in Australia and allow a full tax credit for any tax paid on the income in the foreign country.

This will have a major impact for travelling workers in lower tax countries than Australia, such as Asia and the Middle East, and will require a rethink of their affairs.

Many will be financially forced out of Australia and take up permanent residence in the country of earnings and sever ties to Australia at least in the medium term.

If they decide to move abroad on a genuine basis and become true Expat status, then the offshore income will no be subject to tax in Australia, which is likely to be a more attractive option than becoming taxable on their current earnings.

For existing expatriates, there is no need to panic as the changes will have no impact on your situation, however you should be clear that you are indeed a genuine expat.

For this to be true you should:

• Have a genuine and permanent home in the country you live and work,
• Have an indefinite time period of intended stay abroad, usually around two or more years,
• Have your home life, career and majority of time spent in the country of earning,
• Have an appropriate visa for allowing you to live in the foreign country.

 

p>If you have these ticked off then you can sleep easy that your foreign earning will not be subject to Australian taxation while being earned or on your eventual return to Australia.  If in doubt make sure to contact us and we will be able to quickly establish your position.