Australian property tax and expatriate tax expert STEVE DOUGLAS explains the tax implications of using an Aussie loan for overseas property investment.

Q. I’m buying a house in London using a loan from Australia, can I claim the interest against my Australian tax?

A. The Australian property market has fared better than most markets through the global financial crisis and lending has remained accessible. This, coupled with a strong Australian dollar, has encouraged many to use their equity in Australia to finance a property purchase outside of Australia – either as a residence or investment. There are no restrictions in doing so, as long as you’re able to prove to the bank you’re financially competent and can afford the additional borrowing.

          From an Australian tax perspective, the interest on the new loan is not tax deductible – as long as you’re living abroad. This is regardless of whether you reside in the property or rent it out. However, when you return to Australia this situation may change, since as a resident you will be taxed on your worldwide income and capital gains. When something is taxable in Australia, all costs incurred in making that income is tax deductable. So, if you used the loan to purchase an overseas property and rented it out upon your return to Australia, the loan now becomes fully deductable against your overseas rental income. This makes a big difference to your tax position and your debt reduction strategy.

          During your time abroad, you should consider how long you intend to hold on to the property and if you’re still interested in keeping it upon your return to Australia. Keeping the debt at the highest level is the prudent course of action if you intend to rent it out once you return – maximising the loan value and tax effectiveness. If you decide to sell the property prior to, or upon, returning to Australia, consider debt reduction – especially if it’s your place of residence. In this way you’ll minimise holding costs and avoid building up additional equity.

          Your biggest challenge is deciding which option is best, as your circumstances may suddenly change. Usually, it’s wise to maintain a low or no debt reduction option – until the time comes to relocate to Australia. Then, you can weigh up the best choice, given the prevailing conditions at that point. If you do decide to keep the property indefinitely upon your return – which is often the case – borrowing will be the smartest move, to help keep your Australian taxation to a minimum.