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.

How will the new capital gains tax changes happening in June 2019 affect property owners financially?

How will the new capital gains tax changes happening in June 2019 affect property owners financially?

Since the May 2017 Australian Federal Budget, Australian Expats have been living under a cloud of fear that they may become taxable on their former Australian residence.

In short, the proposals only affect anyone that actually lived in their Australian property prior to relocation overseas. If you only ever rented your property then no changes are occurring.

For those that did live in the property at any stage, the current law allows a tax free entitlement for the period actually lived in the property, plus a potential further 6 years tax free whilst rented, and then calculated the taxable amount on a pro-rata basis with any other proportionate period when the property was rented being taxable.

The changes propose to make the full period of occupation taxable regardless of how long or short that may be, If the property is sold whilst the owner is living out of Australia. For example, if you lived in the property for 20 years in Australia then moved overseas and sold the property after leaving Australia, the entire gain on the property would be taxable, totally ignoring the many years of occupation and penalising you even if you have just been abroad for 6 months!

The proposed changes don’t apply if the property is sold prior to 30th June 2019 or if the property is sold once you have returned to Australia and living there as a tax resident (but not necessarily in the same property).

SMATS has been at the front line pressing Prime Minister Scott Morrison, who was the Treasurer at the time of the announcement, through submissions and representations in collaboration with Austcham HK. We have asked that the rules not be changed as the current law is adequate to capture investment related profits and the removal of a family home tax free status for simply living abroad is extremely harsh and unjust.

This has seen a delay in the passing of the legislation with the removal of the Bill from the Senate floor late in 2018. This was done largely on the fact there was great unfairness in removing a long time entitlement being lost and the risk of a forced sale through unforeseen circumstances, such as death, divorce or financial trauma, triggering an unwanted and unplanned tax burden.

Since then, the Opposition Shadow Treasurer has formally come out to support our requested change to exclude Australian Citizens and Permanent Residence Visa Holders.

The stalling of the legislation and Opposition support to our requests is extremely encouraging, however while the Government remains in review process and the looming election in May 2019 approaches, there is great difficulty for anyone considering selling their previous property to ensure that keep the tax free status if sold prior to 30th June 2019.

Some things to consider include:

  • Don’t sell if you never lived in the property, as the changes don’t affect you.
  • Don’t sell if you genuinely consider that you wouldn’t sell the property until at least you have returned to live in Australia as you would not be disadvantaged.
  • If you lived in the property for extended periods of times prior to moving abroad, then selling prior to 30th June 2019 is a real option for you if it was likely that:
    • You were going to sell the property sometime soon while still living overseas
    • You think the law may pass
  • Another option if you think that you want to keep the property long term as an investment but may want to sell it while still abroad, is to transfer the property to a Family Trust. This realises the tax free gains, retains the property in a tax effective vehicle and potentially frees up the equity for your next family home if you intend to upgrade. There is a stamp duty cost of approximately 5%, however that may be more cost effective than large Capital Gains Tax charge.

You need to carefully consider your options and try and predict your future intentions as best as possible.

I want to invest some money and wondering if it is better to have shares or property?

I want to invest some money and wondering if it is better to have shares or property?

This is always a hot topic of debate however the answer is very simple, you should have both.

It has been an eternal debate as to which investment is the better, and despite what many people think the long term return on shares and property is very similar.  There are some key tax issues to note in making a decision on which one you choose to make.

When living outside of Australia, there is no Capital Gains Tax on share sale profits nor is there any Income Tax on dividends received each year.  Shares enjoy a tax free status for Non-Resident Taxpayers which makes them an extremely attractive option for investment for many expatriates and foreign investors in Australia.  You should note that you may have tax issues in the country you are living in so best to check that as well, however many expatriate zones allow tax free status on international shares.

Tax free is a major positive but it is not the only one.  Other plus points include:

  • Shares are easy to accumulate as they can be bought in parcels from A$500 upwards,
  • It is also easy to sell shares that are listed on a Stock Exchange, with sale proceeds usually available within 3 days,
  • In many cases they can offer very attractive dividend yields.  At the current time this can be well above the interest rates on offer for bank deposits.

Nothing is perfect though and shares do have some negative issues including:

  • The market risk of shares which we have seen to be very volatile in recent past,
  • It can at times be very confusing as to what shares to buy as there are many options,
  • There is some level of management and effort required to monitor and adjust from time to time.

Nonetheless, shares can be a sensible part of any investment portfolio and well worthy of consideration.

Property has very different characteristics to shares.

Australian property will always be a taxable activity regardless of where the owner lives in the world, but is can be a very Tax Effective investment.

This is because the Australian Government allows all expenses on the property to be offset before any tax is levied on items such as interest on loans, maintenance, travel, agent fees and insurance.  In addition there are special write offs on the construction costs and internal fittings of a property that can ensure that no annual income tax is payable.

Capital Gains Tax is payable as well, however it can also be effectively managed through the accumulation of annual tax losses and multiple property ownership.  For more detail on these issues please visit our website.

Being tax effective is an advantage, but property has remained popular for other reasons including:

  • By nature “bricks and mortar” have been considered to be a safer investment class than other investment forms.  This is especially true for Australian property which has shown long term modest and sensible increases with few negative growth periods,
  • Banks are happy to lend 80% of a property value which can make the entry cost into property a lot easier, while at the same time improving your tax position and enhancing the overall return through the mathematical benefits of sensible leveraging,
  • At the end of the day, we all need somewhere to live, so acquiring property is very much an inevitable reality for all of us.  As it turns out, the earlier we buy, usually the more affordable the property is,
  • While living overseas, the ability to rent the property out during your absence makes it very affordable to hold a property.  The net ownership (rent minus expenses and interest) cost can be less than 1%pa of the purchase price which means a A$1 million property costs less than A$1,000 to own.  As long as the property appreciates more than this, then you are better off and for the more desirable areas the growth has consistently outpaced this holding cost making the decision to buy a smart one.

From the negative aspect, some of the things to consider include:

  • The initial entry price can be both scary and significant.  The first property you buy will usually need a 20% deposit plus up to 5% for purchase costs, which means you will need to commit a fair sum to enter the market.
  • Property by nature is a long term investment and this is especially true for Australian property as the safe market results in modest growth that in turn needs as long as possible to perform to its peak.  You should resist taking speculative positions in Australian property as you may be disappointed,
  • If you are seeking quick exist from property markets you may be disappointed, as it can take between 2-8 months from decision to sell until you receive the proceeds,
  • There are risks of being a landlord in all property markets.  Australia has excellent legals protections for owners and is considered a very safe rental market, but that doesn’t mean no risk or hassle in some cases.

The decision as to which investment choice is best for you usually starts with how much you have to invest. 

If you want to buy a property you need a substantial deposit (25% or equity in another property), so if you are still short of that you will have to wait on the sidelines.

As such, we usually suggest that you can consider accumulating your regular savings in shares along the way the, when you see the right property for you in your budget range, cash in your shares and grab the property, then start the share accumulation all over again for your next property.

Regardless of which option you choose, you will have a tax advantaged investment option from an Australian perspective and hopefully building wealth along the way to improve your financial future.

I have a property in Australia but it isn’t making me any money.  Do I have to lodge a tax return?

I have a property in Australia but it isn’t making me any money. Do I have to lodge a tax return?

It is a common misconception that if you are not making any profit on your Australian property that you do not need to lodge an income tax return.  This is not correct.

It is a legal requirement that you must lodge an Australian Income Tax Return every year that you receive any taxable Australian income. 

In addition, unlike Australian residents that can earn small amounts of annual income and still remain tax free, when living out of Australia there is no tax free allowance on your income, so you become taxable on your first dollar of net taxable income.  The Australian financial year ends on the 30th June each year.

If you chose to prepare the return yourself then you must lodge by the 31st October each year.  If you have a Registered Tax Agent, such as ATS, prepare your return then we have time extensions that allow lodgement through to April the following year.

Failure to lodge your return by the due date can lead to penalties of up to A$550 per year, per person even when there may be no tax payable.

You should not be concerned about the need to lodge an Income Tax Return, it is a simple process and can actually prove to your benefit in most circumstances.

For most people, the only taxable Australian income is likely to be the collection of any Australian property rental during the year, regardless of whether the rent is greater than the expenses or not.  In fact if the expenses on the property are greater than the income, the resultant loss needs to be calculated and lodged as it carries forward indefinitely to offset any future rental or other Australian income and capital gains.

This is a substantial planning benefit and greatly to your personal advantage to ensure you lodge correctly and record this each year.

It is very easy to use a sensible level of borrowing against your Australian property to ensure that a no income tax environment can be achieved.

In addition it may include Australian wages or consulting fees that were earned for services provided in Australia.  If you receive income from an Australian company while living overseas, and the income relates to services provided out of Australia, then that would not be taxable in Australia.

If you have earned any Australian bank interest that is not a taxable income, instead the bank should be deducting a Withholding Tax of 10% from your interest and then there is no further tax obligation or need to report in Australia.

Similarly with Dividends from Australian companies, if you receive “Unfranked” dividends then a Withholding Tax would apply and no further obligation.  If you have received “Fully Franked” dividends (where the company has paid tax prior to the dividend being paid) then no further tax obligation exists and no Withholding Tax is required to be levied.  Share in Australian Public companies are also Capital Gains Tax Free for Non-Residents.

Australian tax laws are very complicated but they are also quite fair and reasonable for people living overseas.  It is just important to be aware of your obligation to lodge, ensure that you have good guidance on your personal situation and seek professional support to ensure that your tax obligations are kept to reasonable levels.

I have bought a house in Australia that will be my home eventually.  When I go back how long do I have to live in it to become tax free?

I have bought a house in Australia that will be my home eventually. When I go back how long do I have to live in it to become tax free?

In Australia we have a special Capital Gains Tax Free status for a persons home, or Principal Place of Residence.

One of the great myths is that you only have to live in it briefly for it to become a tax free asset and sadly this is not the case.  It is not possible to extinguish the full gain by living in the property for any period of time, even though many people try and do this and run the risk of being caught out later.

You need to be very careful as the Australian Tax Office is now matching sale records to rental lists and is highly likely to prompt an investigation, even if it is a few years after the sale event.  Being caught out can be a very expensive mistake once penalties and back dated interest charges are imposed.

The actual position for Capital Gains Tax is if you have bought a property while living overseas and rented it out, then it is a taxable property on eventual sale no matter how long you may spend actually living in the property later on.

The way the tax calculation works will be on a pro rata basis so the longer you live in it the more of the gain will be tax free.  If you never move in, then the full gain would be subject to Capital Gains Tax.

You will be entitled to a tax free portion for the period of time the property is used as your principal residence.  For example if you bought this and rented for 4 years prior to return and then lived in the house for 1 year when back in Australia, then 1/5th would be tax free and 4/5th of the gain would be subject to capital gains tax.

If you can stay in it longer prior to sale then the taxable portion can come down significantly.

If instead of living in the property for just 1 year, you stayed for 5 years, then 5/9th would be tax free and only 4/9th taxable.  This tax free portion will continue to increase each year subsequent year of occupation.

The only exception to this rule is if you had lived in the property as your home from the time it was first acquired.  If that was the case then you may be entitled to a 6 year tax free period on Capital Gains tax even if the property was rented.  There are additional conditions on this so you should check with your Australian tax advisor to see if you may qualify.

You should also remember that once you have owned any asset in Australia more than 12 months then you will also enjoy a further 50% tax free allowance on the Capital Gain.

I have had situations where some people choose to move back in to the property briefly to try and reduce the potential Capital Gains Tax.  Sometimes the cost and inconvenience of moving in and then out of the house is greater than the tax saved, so you need to make a rational decision as to whether it is indeed worth living in the property or simply moving into your preferred residence the first time.

I have heard that fixed interest rates in Australia are lower than the floating rate on my loan.  How can that be possible?

I have heard that fixed interest rates in Australia are lower than the floating rate on my loan. How can that be possible?

When borrowing to buy an Australian property, lenders in Australia usually offer the opportunity to either take a floating (or variable) interest rate that will change from time to time, or to fix your interest rate for set periods of up to 5 years.

There are times when the fixed rate may become more attractive than the floating, and vice versa, and the main influence on how the rates are calculated usually comes down to two main issues, Expectation & Availability.

Expectation is quite simple, it is whether the “market” believes interest rates will rise or fall in the future.

Fixed rates do try and predict what the future rate will be.  Issues like the current interest rate policy of the Reserve Bank and state of the local economy can influence interest rate outlook.

In the current environment, there is an expectation that Australian may experience another rate reduction during the coming year, so we can see this being priced in now.  It does not matter if the rate reduction actually occurs, just that the market believes it may happen is enough.

Availability comes down to how much money the banks have in reserve ready to lend to prospective borrowers.  During 2011 in Australia, lending output was soft as the property market was in the main procrastinating on their buy decisions, hence at the current time the Australian banks have too many funds on deposit and not enough lent out.

The bank finds themselves in a position that they have interest cost on the deposit but no revenue coming in.  That reduces their profit and costs them money so they need to encourage more lending by in essence having a “sale” on the interest rate.  Once the lending picks up and they are start making a profit on the lending margin, they will tend to be less generous with the fixed rate offerings.

A perfect situation for borrowers is when we see low interest rate policy from the Reserve Bank and low lending output from the banks.  We saw this occur around March 2009 during the Global Financial Crisis when the 3 year fixed rates in Australia dropped to 5.19%pa.

The variable rate was also low at the time but not as low as the special fixed rates on offer, however there was belief that rates may reduce further which did not occur.  Within 6 months the fixed rate had risen to almost 7%pa even though variable was still around 6%pa. 

A combination of higher rate expectation, as the Reserve Bank continues to lift rates, and reducing availability, as more people took advantage of improved conditions and began to borrow once again,  quickly shifted the fixed rate offering from low end to high end.

A similar situation will no doubt occur in Australia this year as activity picks up, even though the RBA is likely to hold rather than lift rates through 2012.  This may mean that the fixed interest rate is an attractive option for any Australian property investor.  To review your loan or check the current interest rates on offer visit our website at www.smats.net

I recently received a penalty notice from the Australian Tax Office for not lodging my tax return.  Is there anything I can do about this?

I recently received a penalty notice from the Australian Tax Office for not lodging my tax return. Is there anything I can do about this?

Many people do not realise that it is a legal requirement to lodge an Australian Income Tax Return if they receive any taxable income in Australia.

For most people living out of Australia, this would only be rental property income as overseas income would usually be non taxable.

It is a common myth that if your expenses are greater than your income (such as interest costs) that you do not need to lodge a return.  This is not true.

Even if you have just A$1 of rental income you are required to lodge a tax return and report this, even if you have more expenses than income.

For many years the Australian Taxation Office (ATO) did not have the resources to adequately police this and many non lodging taxpayers were not contacted so they felt they had no reason to lodge.  In fact it was general policy in the past that if no tax was payable then no fine would be imposed.

This changed in financial year 2000 where the ATO changed the rules to allow them to fine a taxpayer for not lodging a return even where there was no tax payable.  Until recently we have not seem them act on this ability, however with more staff available and a recent upgrade in their computer systems, chasing up non lodgers is now a priority task.

If you did receive any Australian sourced income prior to June 30th then you must lodge a return declaring the income and claiming any expenses by 31st October if you do it yourself, or if you engage a Tax Agent such as ourselves, then you have an extended period until April the following year.

Even if you did not receive any Australian income but in past have lodged Australian Tax Returns, then it is prudent to advise the ATO that a return is not necessary so they do not send you any penalty notices or demands.

If you don’t then a fine of up to A$550 per person, per year outstanding may be imposed.

If you have been charged a late lodgement fine, then it is possible to have it remitted in part or full by making a request to the ATO.  They are generally quite lenient, however you will need to explain why the return is late and also promise to lodge promptly in the future.

There is no guarantee that they will reduce the penalty, but form our experience they are reasonable in this regard at least for now, however we do expect them to be tougher on this in the future.

You should note that they will not reduce any penalties until the required Tax Returns have been completed and lodged.  If there is tax payable, then there may also be late payment penalties that need to be considered.

Attending to your tax return lodgement is not a complicated matter so should not be feared nor put off too long.

If you have outstanding tax returns then it is sensible to contact either the ATO or an Australian Registered Tax Agent like us, to discuss your situation and let them know when the returns will be lodged.  This will ensure that you can keep up to date with your requirements and hopefully have a minimum of penalties imposed.

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

Australian Property Investor Magazine
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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.