Overseas property ownership is becoming more common in Australia.
Whether you acquired property before coming to Australia, inherited property from a deceased relative or simply purchased it somewhere as a refuge from Australian life, it is important to remember that foreign ownership comes with a number of tax consequences. in Australia.
Failing to disclose the existence of your overseas property to the ATO carries severe penalties, so here are my tax tips for easy living.
Tax treatment of income and rental deductions
As an Australian resident, you pay tax on all your worldwide income. Therefore, you must declare any rental income you earn from your overseas property on your Australian tax return.
If you have paid foreign tax on your overseas rental income, you will often be able to claim tax offset for the foreign tax paid against your Australian tax. This avoids the so-called double taxation.
Deductions can be claimed for your overseas rental property in the same way as for a property in Australia. That means items like local rates, utility bills, repairs/maintenance and agency booking fees can be deducted from your rental income.
Additionally, you can also claim a deduction for the interest you pay on a foreign mortgage.
However, it is important to note that if you pay the foreign mortgage directly from Australia, you can only claim a deduction for the interest if you pay withholding tax to the ATO in relation to the interest you pay.
The interest withholding tax is 10% regardless of the country in which the recipient is based (although it can be reduced, sometimes to zero, if there is a double taxation treaty in force with the overseas country) and is imposed when they pay the interest.
Travel costs to inspect an income-producing property (including flight and meal expenses) are NOT deductible.
Remember, you can only claim deductions for periods when the property is rented or is actually available for rent. Periods of personal use cannot be claimed. Additionally, when the property is rented at a below-market rate (to friends or family, for example, who might pay you a nominal amount), income tax deductions for that period will be limited to the amount of rent received.
Where only part of the property is rented, deductions are limited to those expenses that relate directly to the rented area or to a proportion of the expenses that relate to shared areas that are available for you and your guests to use ( like a living room or kitchen).
Capital gains tax
Overseas property is subject to Australian capital gains tax (CGT) when disposed of. If you have owned the property for more than 12 months, you will receive the 50% CGT discount, which effectively halves the amount of tax you pay.
If you are also subject to foreign tax on the disposition of your foreign property, you will get a credit for the foreign tax paid in the form of foreign tax offset; This is also discounted by 50% if the property qualifies for the CGT discount.
Capital gain is basically the difference between the original cost (converted to Australian dollars on the date of acquisition) and the sale proceeds (converted to Australian dollars on the date of sale). In addition, certain acquisition and sale expenses (for example, real estate agent fees) may be added to the original cost.
When completing your tax return, you must ensure that all required questions about foreign source income and assets have been answered completely and correctly.
Original documents, such as foreign income tax returns, income records, and expense receipts or invoices, must be retained at all times. You may be required to submit these to the ATO if requested.
What happens if you are a temporary resident?
Temporary residents are those residing in Australia on a temporary visa, such as an employment-related 457 visa. Special rules apply to any foreign income earned by temporary residents.
Unlike other tax residents, temporary residents do not have to pay taxes on their foreign income, with the exception of certain short-term foreign employment income. Therefore, if you own an investment property abroad and have a temporary visa, you will not pay tax on rental income.
Additionally, temporary residents do not have to pay capital gains tax if they dispose of an asset while in Australia, unless the asset is taxable Australian property (such as Australian investment property). Therefore, there is no need to declare foreign ownership on your Australian tax return.
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