Australian property tax and expatriate tax expert STEVE DOUGLAS explains how foreign currency loans can be subject to margin calls.
Q. The bank has made a margin call on my foreign currency loan, is this tax deductible?
A. With Australian dollar interest rates rising higher than loans in Singapore, Hong Kong or US dollars, many investors opted to “switch” their loan to a foreign currency, in the hope of saving money. In truth this isn’t always a real saving, as the currency may move against you. While the Australian dollar was strong you would’ve been sheltered – and indeed even benefited. But the recent devaluation of the Australian dollar has caught many borrowers out, increasing their overall debt.
In short, banks are willing to lend a maximum of 80 percent against an Australian property in Australian dollar equivalent, or 75 percent if you choose to borrow in a currency other than Australian dollars. This is because all currencies fluctuate and the lower lending-percentage covers some of the risk.
When we saw the Australian dollar fall almost 10 percent in a two-week period in August 2008 followed by a similar reduction in September, loans held in “cheaper” foreign currencies became a larger debt in Australian dollar terms – breaching the 80 percent maximum limit. Banks moved quickly to protect their position, making margin calls. This request for an additional repayment – or security – to return the lending ratio below the 75 percent foreign currency maximum, can amount to many thousands of dollars and would have been a nasty shock for many.
If you don’t have access to additional funds, the bank may convert your loan into Australian dollars – resulting in you owing more than when you first drew down the loan! In essence this is similar to an interest cost, as it’s somewhat covered by the lower interest rate you enjoyed during the period of foreign currency. However, as you’re likely to be a non-resident for tax purposes, this margin call is not tax-deductible against your income tax, further worsening your position. At best it may be considered a capital cost. The silver lining is currency gains are not taxable. So if you were fortunate to have cashed out of your foreign exchange when the Australian dollar was strong, any profit is clear of tax.
Ironically now the dollar has corrected downwards, these loans may have become worthy of consideration – if you have the resources and time to manage them appropriately. To determine the best lending option for you, use the unique Foreign Currency Loan Assessor and detailed information available at www.aussieproperty.com.
Steve Douglas is the co-founder and Managing Director of Australasian Taxation Services (ATS), established in Singapore in 1995. ATS provides specialist taxation services to people of any nationality investing in Australian property, as well as Australian expatriates living overseas. Areas of specialisation include the Australian taxation aspects of property investment, as well as expatriate and migration planning.