Investing in bricks and mortar verses shares

Looking to invest your well-earned cash? Australian property tax and expatriate tax expert STEVE DOUGLAS discusses the pros and cons of investing in shares versus property and offers advice on making a practical decision to get your wealth portfolio into shape.

The question of where one should invest their money, whether in property or shares, has been a topic of discussion for quite some time and is still a widely discussed matter. Despite how many people believe the long term return of shares and property are very similar, there are some key tax issues you need to take note of before making a decision.
When living outside of Australia, there is no capital gains tax on profits made from the sale of shares. Nor is there any income tax on dividends received each year. Non-resident taxpayers who invest in shares usually enjoy a tax-free status, making this an extremely attractive investment option for many expatriates and foreign investors in Australia. Many expatriate zones allow tax-free status on international shares, but you should note that you may still face tax issues in the country you are living in, so it’s best to clarify and check on the matter first before you make a decision. Having a tax-free status is a major positive, but it’s not the only advantage. Other plus points include the following:
 
• Shares are easy to accumulate as they can be bought in parcels from A$500 upwards.
• It’s easy to sell shares listed on a stock exchange, with sale proceeds usually available within three days from the sale. In many cases shares can offer very attractive dividend yields, which currently can be well above the interest rates on offer for bank deposits.
 
 
Nothing is perfect though, and there are a few issues you need to take note of before investing in shares. The market risk of shares can be very volatile, as proven by outcomes in the recent past. And because there are many share options in the market, it can get confusing when you need to make choices as to which shares to buy. Nonetheless, shares can be a sensible part of any investment portfolio and well worthy of consideration.
Property, on the other hand, holds very different characteristics in comparison to shares. Owning Australian property will always be a taxable activity regardless of where you live. But it can be a very tax-effective investment, as the Australian government allows property-related expenses, such as interest on loans, maintenance, agent fees and insurance on the property, to be offset before any tax is levied. In addition there are special write-offs on the construction costs and internal fittings of a property, ensuring no annual income tax is payable. Investing in property has remained popular for other reasons, including the following:
 
• By nature ‘bricks and mortar’ have been considered a safer investment choice 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 percent 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 returns.
• While living overseas, the ability to rent the property out during your absence makes it very affordable to hold a property. The net ownership cost (rent minus expenses and interest) can be less than one percent per annum of the purchase price, which means that 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 financially better off. And for the more desirable areas in Australia, the growth has consistently outpaced this holding cost, making the decision to buy a smart one.
 
From a negative perspective, there are a few issues you need to consider. The initial entry price of property can be both scary and significant. The first property you buy will usually need a 20 percent deposit plus up to 5 percent for purchase costs, which means you will need to commit a fair sum to enter the market. Secondly, property by nature is a long-term investment, which is especially true for Australian property as the safe market results in modest growth that in turn needs as long as possible to perform at its peak. Also, a quick exit from the property market can be difficult – it can take between two to eight months from decision to sell and receive the proceeds.
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 of 25 percent or equity in another property. So if you are short of that amount, you will have to wait on the sidelines.
As such, it’s best to consider accumulating your regular savings in shares along the way, and when you see the right property for you in your budget range, cash in your shares and grab the property. Then, launch your share accumulation all over again for your next property. As an Australian, regardless of which option you choose, you will have a tax-advantaged investment option and will be able to build wealth along the way to improve your financial future.
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Posted by smats Wed, 02 Apr 2014 03:27:00 GMT


Buying property in Asia vs Australia

Are you an Aussie citizen looking to acquire property in Asia? Australian property tax and expatriate tax expert STEVE DOUGLAS highlights differences to consider when renting or buying in Asia versus Australia.

For an expatriate living abroad, finding suitable long-term accommodation at a reasonable price can be quite frustrating. Landlords can prey upon an expat tenant, knowing that they may have a larger disposable income than someone in the general market. If you intend to be in one overseas location for many years, it may well be worth it to consider purchasing, rather than renting, a property to live in. As you consider this option, it’s important to take note of some relevant factors to better protect yourself over the long term.
 
Understand the local market Australia has the good fortune of a strong legal system and a stable, modestly growing property market. Most Australian expatriates are accustomed to this and take it for granted, often believing that the rest of the world is equally safe. Sadly, this is not the case, so before considering any property purchase, you should ‘localise’ your thinking to the country you are looking to buy in. This is true whether you intend to occupy the property or are purchasing it for an investment.
 
Legal issues Although most countries have clear and defined ownership laws when it comes to property, you need to investigate to ensure that you are legally allowed to own the property. It is very common to find restrictions for foreigners on certain types of property, a stronger tendency to leasehold property than freehold, and a significant variance in buying methods from country to country. You should seek independent legal advice prior to signing for any purchase or making a deposit on a property. In many cases, if the deposit is made and the sale does not proceed, you are likely to forfeit your deposit entirely – an expensive mistake that could have been averted by some preliminary advice prior to committing.
 
Affordability Unless you are fortunate enough to be paying cash for the property, it is essential to arrange for your finance in advance of searching for a house. Lending practices in Australia are very simple, and 80 percent of the purchase price is readily available through banks. When buying overseas as an expatriate, though, getting a loan is not easy. It’s best to have your approvals in place to confirm access and amount of any loan so you can quickly assess your budget. In addition, many markets will require shorter loan terms, often driven by age restrictions. As a result, even when interest rates are low, the actual monthly repayment could be significantly more than your rental amount. 
 
Growth and risk prospects The Australian property market has proved itself to have stable growth, and even in times of crisis, only a modest decline is observed. Asian markets, however, tend to have a long history of boom and bust rather than stable price points. This is why you need to be confident that you are buying into your particular market at a ‘safer’ than an ‘unsteady’ time. If you buy at the right time you could be incredibly happy, whilst getting in near a peak could spell a financial wipeout.
 
Rent replacement When you are already committing significant funds to paying rent, swapping over to ownership is genuinely worth considering. It’s safer than just ‘investing,’ as even if the property doesn’t grow much in value, it is still better than paying rent, which you never get back. It can also be re-assuring that you control your destiny, and no landlord can ask you to move out or drastically increase your rent amount. The longer you intend to be overseas, the more appealing the concept of ownership over rental becomes, all aspects considered.
 
Tax issues on return to Australia Don’t feel concerned about keeping the property if you decide to return to Australia. Fortunately, the decision can be made solely on the property’s financial merit rather than for fear of tax consequences. If you hang on to it and rent it out, the property is taxable in the same way an Australian property would be, with full deductions for interest and ownership costs (including building allowances if it was constructed after 1985). For capital gains tax, only profits after your return to Australia are subject to tax, so you will need a sworn valuation of the property when you repatriate.
 
All in all, if you are fortunate enough to have the financial capacity to acquire a property in your country of posting, then it is definitely worth considering, provided you properly review the risks and financial aspects relevant to the market at that time.
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Posted by smats Fri, 21 Mar 2014 09:24:00 GMT


Aussie land tax

Are you liable for paying land tax on your Australian property? Australian property tax and expatriate tax expert STEVE DOUGLAS answers this question and discusses the circumstances under which one could qualify for land tax exemption in Australia.

In Australia the federal government is entitled to receive income tax and capital gains tax, which is managed when taxpayers lodge an annual income tax return. Under the Australian Constitution, state governments are not entitled to charge any tax against income or capital receipts; they are, however, allowed to raise levies or duties on activities within their state. One of the major levies for each state is land tax.
 Land tax is similar to local council rates, which are based upon the unimproved value of the land and charged regardless of whether or not the property generates revenue (the surplus after costs). Many residents who live in Australia are usually exempt from land tax, as it is not charged on the family home in any of the states. Land tax is usually charged on vacant land, rental property or commercial property.
To qualify for the family home exemption, residents must have been actually living in the property on the date of determination (different for each state), which can be problematic if you are living overseas. However, some states allow tax exemption of the family home even if the family is based abroad, but this will usually require that the property not be rented out during the period the family is based overseas. If rent is collected, land tax is likely to be imposed. Fortunately, each state has a tax-free allowance – no land tax is collected if the unimproved value of the property is less than a certain threshold amount. The table below offers a guide of the current rates in place across Australia.
 
 
The value used to assess land tax bears no resemblance to the actual property value; it’s merely a figure nominated by each government as to the value of just the land. Land tax is calculated on the cumulative value of all of the property owned by a person in the state where the property is located, so the more property you own in each state the higher the land tax rate. Another important issue to remember is that land tax on an apartment will be substantially less than that of a house, as the value of the unimproved land is shared over the many owners and creates a lower individual value for tax purposes. This can be helpful in determining what type of property you may wish to purchase. 
Each state’s revenue department is usually quite active in seeking out non-payers and recouping any land tax arrears. You should be receiving an Annual Assessment from the state government where your property is located, seeking clarification on the use of the property and confirming the tax value. 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 determine whether you are over the relevant threshold for your state. If they find you first, the penalties can be quite high, and state governments tend to be less willing to reduce penalties, even if you were unaware of your obligation.

 

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Posted by smats Wed, 29 Jan 2014 02:02:00 GMT


Housing framework

Looking to buy a property in Australia and wondering if you should do so under your personal or company name? Australian property tax and expatriate tax expert STEVE DOUGLAS offers his professional expertise on the matter.

For most people looking to acquire a property in Australia, buying in their personal name has usually been the best option. Changes announced back in the May 2012 Australian Federal Budget by the Labour Government changed the choices available to foreign investors. Prior to May 2012 any capital gains made on Australian property enjoyed a 50 percent tax-free allowance. In addition, the personal tax rate for non-residents started at 29 percent, which was lower than the company tax rate of 30 percent. This changed in July 2012, when the minimum non-resident rate rose to 32.5 percent, making it higher than the corporate rate.
Apart from income tax rates, the taxation treatment is the same regardless of which entity you elect to use to purchase property. Income tax will always be levied on net taxable income, which is calculated as rent minus ownership costs, less interest and expenses, and then full reduction of any depreciation allowances available on the property. With the potential higher tax rate on individuals as the purchaser, it is now appropriate to consider the use of a structure when acquiring an Australian property. Some of the various structures and their pros and cons are listed below.
 
 

The use of structures is not for everyone, and the complexity of a structure may not be warranted for a simple property investment. Seek professional advice prior to any decision about a structure. Not only can it affect future tax considerations, but it may have an adverse effect on your finance options as well.

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Posted by smats Mon, 30 Dec 2013 06:46:00 GMT


Aussie money transfers

Are you looking to send funds to family back home in Australia but worried about being taxed for it? Australian property tax and expatriate tax expert STEVE DOUGLAS offers his professional expertise on the matter to clear up any doubts you may have.

For both Australian expatriates and foreign nationals, the movement of capital between countries will attract no taxation consequence in Australia. This is true for transfers during expatriate assignments as well as remission of savings accumulated while living outside of Australia. The only time the Australian government will consider taxing foreign income of an Australian expatriate is when the expatriate is working abroad on a short-term assignment (usually less than two years), and thus still considered to be living in or connected to Australia. In this case, you are treated as a Tax Resident and taxed on any income you receive worldwide.
If you have moved overseas on a long-term basis, the Australian government will not tax you on any income from a non-Australian source, so you can send any amount of money home without any tax consequences whatsoever. Even if you send money back to family members, they will not have to pay tax as long as the money is not for services rendered. Simply gifting them or loaning them money is not a taxable activity. If you’re staying put in the Lion City this holiday season and looking to send money home, here are a few options to consider:
           
• TRADITIONAL BANKS You can use your current bank to convert your foreign currency and then transfer it to your Australian account. This is often very expensive as the banks apply a hefty margin against the prevailing exchange rate, usually about one to three percent of the amount being sent. It is relatively quick and easy, though, and you should definitely ask for a better margin if you are sending a large sum.
• FOREIGN EXCHANGE BOOTHS You will find booths to accept your cash and swap it for your desired currency at every airport and scattered around popular tourist centres in Singapore. You will notice that these booths offer a very poor conversion, applying a margin of more than four to five percent to the prevailing rate. The margin, however, is somewhat justified due to the convenient retail locations of these booths.
• ONLINE FX SERVICE In the modern financial world there are now many options to establish an FX account with online providers such as the SMATS FX, which can establish an account to verify your identity and then allow you to regularly transfer funds from one currency to another. The process is simple. You ask your bank to transfer the foreign currency to the FX service account. Your bank then converts the funds to Australian dollars and forwards them to your nominated account. By transferring funds this way, you can save a considerable sum as the margin applied can range between just 0.5 to 1.5 percent. The ability to apply a lower margin is due to the lower operating costs of an online service and the large volume of exchanges brought on by the very competitive pricing of the service.
 
Many mistake the need to declare cash taken to Australia with some sort of taxation consequence. The Cash Transactions Reporting rules require anyone leaving or entering Australia with more than the equivalent of A$10,000 in cash to declare it at the airport. This rule is in place as an anti-terrorism measure rather than to combat tax evasion. In fact, you can legally bring in much more cash than the declaration amount, as long as you can show a legitimate source for the money.
If the amount is electronically transferred to Australia rather than sent in cash, then there is no restriction on the amount sent, as anti-terrorism measures have already been taken by the sending bank or institution to verify your identity in accordance with international convention. In recent times, the Australian Taxation Office has been accessing the records of funds sent back to Australia and using them to question the authenticity of the sender’s residency. A letter is usually sent to the address on record, seeking verification that you are indeed living overseas on a permanent basis and are therefore not taxable for the funds transferred.
If you do receive one of these letters, it is essential you respond appropriately and confirm your tax status. It is strongly recommended you seek professional assistance for this. It could be especially complicated if you are sending funds home regularly for your spouse or children who may have returned to Australia before you. And if you complete your offshore period and return to Australia, you are legally entitled to leave funds abroad and transfer them gradually at your discretion. You will be required, however, to report any interest or earnings on your offshore capital each year if you are living in Australia as a resident for tax purposes. This would apply to you, regardless of whether you brought the income into Australia or left it overseas.
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Posted by smats Tue, 26 Nov 2013 02:39:00 GMT


Low Aussie interest rates announced 2013

Australian property tax and expatriate tax expert STEVE DOUGLAS discusses why the current low interest rates in Australia attract foreign investors eager to enter the Aussie property market and just waiting for the low.

Q:I heard news of how Australia’s fixed interest rates are now at an all-time low. Should I consider fixing my interest rate now or wait for rates to drop even further?
 
A: When the Reserve Bank of Australia (RBA) reduced the Official Interest Rate in August 2013, it pushed Aussie interest rates down to their lowest in 50 years – thus creating an advantageous opportunity for investors and owner occupiers to fix their interest rates at a reduced level for a long term. Australian lenders currently allow fixing rates for periods of up to five years, and most banks now offer an attractive three-year fixed rate of five percent per annum.
The occurrence of these changes are owed to the RBA’s decision to lower the official interest rate to provide economic stimulus to a sluggish Australian economy that started weakening in the beginning of 2013. The lower rates bring about a great opportunity for potential investors, as the best time to fix rates is when they are declining and before the next upward trend begins. The RBA has felt comfortable with their decision so far due to the low levels of inflation currently being experienced in Australia. This was a similar pattern to what occurred in 2008 when the RBA reduced interest rates to protect Australia from the global financial crisis.
 
The following graph reflects how interest rate reduction in Australia quickened in response to the severity of economic conditions at the time. You will also notice how the interest rate rose soon after fears of a recession abated. This led to a series of rate increases from October 2009 to November 2010, which slowed the general economy and led to the recent decreases, the last being August 2013.
 
Those keen on investing are advised to make a quick move. The latest rate cut could be the last for a long time to come, as the recent federal election may serve as a stimulus to the Australian economy and hence diminish the need for further rate reductions. The Consumer Price Index (CPI) is another key indicator, which points to how the interest rate movement may not drop any lower. The RBA is strongly focused on keeping inflationary pressure in Australia to a minimum and has always used interest rates to manage the CPI to stay in an acceptable target range.
The sluggish Australian economy, assisted by a strong Australian dollar keeping the cost of imports low, has kept inflation in check. The recent rate cuts triggered a correction in the Aussie dollar, which is welcomed by exporters but unwelcomed by consumers because imported goods will now be more expensive, leading in turn to a lift in inflation in this sector. In the short term, this has been offset by the lower interest rates, which has a deflationary effect because of lower housing costs due to cheaper interest on housing loans. Combined, these factors have a nullifying effect to soften the overall inflation number.
In the near future, inflation may be harder to control as housing prices begin to lift due to an interest rate-led rally in the market. A recent increase in the Aussie dollar will soften this impact in the short term. In the long term, however, there is more likely to be a lift in inflation, which in turn will encourage the RBA to consider increasing interest rates to moderate the economy and keep things in balance. This would appear more likely than a reduction, but hopefully we can all enjoy the current low interest rate environment for at least a few more months.
In any case, you should be mindful that fixed rates will move before the RBA takes any action because the rates are more linked to market expectations than the actual rate the RBA announces, which directly impacts the variable lending rates the banks offer. In addition, as lending activity increases, there will be fewer low-cost funds available, and banks will be required to offer higher deposit rates to attract lending capital. This in turn will push fixed rates up for borrowers.
As such, it would be wise for anyone with an Australian property loan to watch the interest rates very closely and check with their banks about the current fixed rates. If you would like assistance to review your current loan, email Australasian Taxation Services at finance@smats.net for a free review of your lending options.
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Posted by smats Thu, 31 Oct 2013 08:20:00 GMT


The 2013 Australian Elections

Australian property tax and expatriate tax expert STEVE DOUGLAS shares his professional wisdom and thorough review of the recent Australian elections and discusses the repercussions for Australian expat and foreign investors.

On Saturday, September 7, the Australian public had the opportunity to vote in the Federal elections to either return Prime Minister Kevin Rudd or replace him with the Liberal Party candidate, Tony Abbott. When the last few votes were counted late on Election Day, it was clear that Australia had handed Mr Abbott a clear and decisive victory. His party achieved success, gaining almost 90 out of 150 seats in the Lower House, which controls government business, up from the 73 votes they held after the 2010 election. This is an important result for Australia, as it brings to an end four years of uncertainty that began when the Labour Party replaced Kevin Rudd, their Prime Minister elected in 2007, with Julia Gillard, who then led them to the 2010 election.
In 2010 the Labour Party won fewer seats than the Liberals. However, a last minute deal with the Greens Party and two key independents allowed the Labour Party to form a minority government. This time was heralded as a new age of co-operation, but sadly the dream did not play out in reality, and Australia has had three years that most would like to forget, eventually culminating in a public ‘divorce’ between the Labour and Greens early in 2013.
The Labour Party tried their best to bring in major change initiatives such as the Mining Tax, Carbon Tax, National Disability and generous improvements to health and education, but somehow they were not able to make the numbers work. Over the past three years, they missed their financial budget predictions by A$20 billion a year, blowing out the budget and leaving Australia with a large government debt burden that is now over A$300 billion, a significant sum considering Australia was debt free when the Labour Party came to power in 2007.
The ongoing problems with border protection and refugee intake added further fuel to the fire. With poor results in the opinion polls, the Labour Party once more changed leadership, replacing Gillard with Rudd in a last attempt at damage control. The result of this effort was an underperforming Australia. In the end an entirely new political change was something that everyone seemed to recognise as a necessity to steer Australia’s financial situation back on track.
The Liberals, though, should not be too overconfident with their victory in these last elections, as the electorate did not flock overwhelmingly towards them. The Liberal National Coalition increased their primary vote by just two percent from the 2007 result. The Labour Party’s vote reduced by 4.2 percent, and the Greens also lost ground with a fall of 3.4 percent. However, this leadership changeover brings relief as it may mark an end to the era of financial uncertainty in Australia.
    From the perspective of Australian expatriates and foreign nationals investing in Australia, the last six years under the Labour Party have been challenging, especially on the taxation front. Poor leadership under the Labour Party has led to a sluggish property market, suppressing gains in most areas. Some key changes implemented by the Rudd and Gillard Governments that affect expatriate and foreign investors include:
  • Changes to the Exempt Income Rules in July 2009 to capture as taxable income any earnings by Australians working abroad temporarily.
  • A more aggressive interpretation of residency rules by the Australian Taxation Office.
  • Removal of the Foreign Buyers Restrictions, thereby lifting maximum sales restrictions of the previous 50 percent of apartments and allowing 100 percent sales to foreigners in any project.
  • Removal of the 50 percent tax free concession on capital gains for foreign investors and expatriates from May 2012.
    As a result, it is fair to say that expatriate and foreign investors have been harshly dealt with by the outgoing government. Leading up to the election, Australasian Taxation Services (ATS) lobbied both the Labour and Liberal Parties to fix some of these issues, especially the removal of the capital gains tax concession. The Liberal Party has been pragmatic and open to review this situation, so ATS remains confident that the change of government may indeed lead to positive outcomes for many expatriate and foreign investors. If you’d like to join ATS’ cause to have the Capital Gains Tax Concession returned, visit the online petition at www.cgtchange.com.

     Overall, the Liberal Party regaining power has had an immediate effect, with business and consumer confidence indicators already rising this early in the changeover. This is because in the last two years in particular there has been a tendency for buyers to procrastinate under the uncertainty of the political situation. As such, we may see a strong surge of activity in a low supply market that will put prices under upward pressure. If the Liberal Party can restore trust, confidence and stability, then the natural strengths of the Australian economy will shine through to enhance the nation as a desirable and investment-safe country.

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Posted by smats Mon, 07 Oct 2013 09:55:00 GMT


Do you need to lodge an Australian tax return?

Australian property tax and expatriate tax expert STEVE DOUGLAS discusses the circumstances under which you may need to lodge an Australian tax return as an Aussie citizen living in the Lion City.

Q: My family and I moved to Singapore in December last year. Do we still need to lodge an Australian tax return even though we’re based here now?
 
A: If you earn a taxable Australian income within the Australian financial year, which runs from July 1 to June 30, you will definitely need to lodge a tax return. Failure to do so will result in a fine of up to A$550 per person for each year, so it’s very important to check your income history. When you are living overseas as an expatriate or if you are a non-Australian citizen investing in Australia, you will be classified as a ‘non-resident’ for Australian tax purposes. If you fall under this category, taxable purposes and items are much less for you when living out of Australia as compared to Aussie-based citizens whose assessment relates solely to an Australian-sourced income, which includes:
 
Wages or director’s fees for work performed in Australia
Profits from any Australian-based business activity
Rent you may have received on an Australian property
 
If you have a rental property in Australia, don’t forget to lodge a tax return, even if the expenses on your property are greater than the rent. This is to your own advantage, as you will benefit financially in the future when your tax return report is carried forward. The Australian Taxation Office has recently been allocated millions of dollars for tracking property owners who rent out their property but fail to declare it on their tax return. So it’s best not to take any risks and delay lodging your tax return; the authorities will be able to identify and chase you up with potential fines if you do so.
If you are sure you are going to be living abroad for an indefinite period (over two years, according to the Australian Taxation Office), you will not need to declare any non-Australian-sourced income from the date you left Australia to take up your overseas posting. However, if you are just on temporary assignment, the Australian Government will tax your overseas earnings.
It’s important to note that after your first year of staying abroad, you will be entitled to a tax refund on the tax you paid for the few months of salary earned in Australia just before relocation. Do not let this boon slip away; complete your tax return early. You are required to lodge your tax return by October 31 if you decide to file it yourself. However, if you need additional time, seek Australasian Taxation Services, who can arrange for an extension of time to file.
While completing your tax returns, consider some capital gains tax issues on any shares you may have had when you left Australia. Under Australian tax law you are deemed to have sold all your Australian non-property assets at market value on the date of departure, even if you haven’t actually sold those assets. If there is any capital gain, then you may be entitled to a 50 percent tax discount if the assets had been owned longer than 12 months. It is possible, however, to defer this capital gains tax by making a written election in your tax return, requesting officials to delay taxation until the sale of the shares sometime in the future.
Lastly, make sure you inform your banks in Australia of your status as an expatriate living abroad. As a non-resident your earned interest is no longer subject to income tax. It does, however, attract a 10 percent Non-Resident Withholding Tax, which the banks will deduct at the time interest is credited into your account. Once the 10 percent is paid, no further tax is applicable on this interest in Australia.
 
Be informed!
Australasian Taxation Services will be holding the 7th Annual Australian Market Update Seminar on September 25 at Pan Pacific Hotel Marina with two time slots – 4:40pm and 7pm. This free event will focus on how the federal election will impact the Australian economy and property markets. Register now at www.smats.net
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Posted by smats Tue, 24 Sep 2013 09:28:00 GMT


Aussie Capital Gains Tax update

Australian property tax and expatriate tax expert STEVE DOUGLAS shares his professional expertise and opinion on the recently implemented Aussie Capital Gains Tax changes and discusses the repercussions for Australian expats and foreign investors.

Since the 2012 Australian Federal Budget announcement, Australasian Taxation Services (ATS) has been making a number of important submissions and has petitioned to suspend the Australian Government’s removal of the current 50 percent tax free concession for foreign investors and Aussie expatriates owning property in Australia. Sadly, despite our efforts, the legislation confirming this change was passed through the Australia Senate, making this change official as of June 28, 2013. Removing the 50 percent tax free concession for foreign investors, in my opinion, is actually a major disappointment for all foreigners investing in Australian property. Below is a simple summary of the key aspects of what the new tax change spells for foreign and expatriate property investors:
 
• Current 50 percent tax free concession on capital gains will be removed for foreign investors and expatriates for gains made after May 8, 2012.
• Any gains made prior to May 8, 2012 will still be entitled to the 50 percent discount. A valuation, however, may be required to confirm this.
• Australian expatriates will have a pro-rata reduction of the 50 percent discount to exclude periods of ownership while living outside of Australia after May 8, 2012.
 
     Unfortunately, these tax alterations mean that foreign investors and expatriates will not be entitled to the same benefits as Australian-based investors. Despite ATS’ submissions to the Government and Treasury, putting together a petition comprising of almost 3,000 signatories, these new Aussie Capital Gains Tax (CGT) changes were still pushed through, almost without discussion or attention. One reason why the Aussie Government evaded our lobby to have this change called off could be because of the Government’s belief that a tax discount is not necessary to attract foreign investment into Australia. This is, however, an optimistic stance and a significant risk to take, with Australia seeing over A$19 billion of foreign investment into the property market each year and taxation concessions having always proven to be a major factor in any investment decision.
     It is essential for Australia to encourage foreign investors to acquire property. Foreign investments provide multiple benefits, including valuable economic activity in Australia’s important construction industry (only foreign investors are permitted to acquire newly constructed property), stability in property markets through consistent increase in the supply side of the market, and significant government revenues from GST, Stamp Duty, and both direct and indirect taxes worth billions of dollars each year.
     The following table is a tax and return analysis of an Australian property over a five-year period with different levels of borrowing, and the annual increase in the property value estimated at seven percent per annum. You’ll see in the section where the maximum 80 percent lending option had been taken, the after-tax return reduced from 17.08 percent per annum to 14.05 percent per annum, which is a fair difference. However, the 14.05 percent per annum after-tax return remains very attractive to any investor, especially when the level of financial safety and stability experienced in the Australian property market is very high.
     It also highlights the importance of maintaining a sensible level of debt on your property, as being debt free reduces the after-tax return by over half, to 6.59 percent per annum.
     At a time when the Federal Budget has blown out to multi-billion-dollar deficits and the mining economy continues to slow, Australia can ill afford to risk a slowdown in foreign investment. As such we believe the chances of having this change reversed in the name of fairness and economic sense remains high. ATS therefore aims to push on with petitioning to have this change reversed and to increase the numbers supporting our efforts – until it cannot be ignored. If you have yet to join our cause, I urge you to do so, as the upcoming election will provide us another opportunity to try and have the incoming Government review this. For further information or to join our petition, visit www.cgtchange.com
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Posted by smats Fri, 26 Jul 2013 10:35:00 GMT


Gain insight into the 2013 Australian federal budget

Australian property tax and expatriate tax expert STEVE DOUGLAS shares his knowledge about the recently announced Australian Federal Budget and its implications on property investment for Australian expats and foreign investors.

On May 14 this year, Australian Federal Treasurer Wayne Swan presented his sixth federal budget in Canberra. The previous year the government had promised a surplus return from efforts to take advantage of the mining boom and share prosperity with all Australians. This, however, did not occur. Instead, the Labour government delivered its sixth consecutive deficit of an estimated A$19.4 billion – a large variance from the expected A$1.5 billion surplus announced 12 months earlier. This follows last year’s A$44.4 billion deficit, which was higher than the original budgeted deficit amount of A$22.6 billion.
     Rather than the announced return to surplus, the federal government is now expected to stay in deficit for a few more years, with expected debits of A$18.0 billion in 2013/14 and A$10.9 billion in 2014/15 before an expected small surplus of A$0.8 billion in 2015/16. In the 2012 budget, revenue was expected to grow by 11.7 percent, largely on the back of the new mining and carbon taxes. Although both of these taxes misfired, the government did achieve an impressive 6.2 percent increase in revenues, which perhaps would have been a more realistic level to forecast in the first place. 
     This revenue uplift does give hope for a potential return to surplus, which is essential to assist in repaying the build-up of government debt since the global financial crisis in 2008. Below is a breakdown and review of actual and budgeted forecasts from 2011-2014.
     Expenses are set to rise sharply in 2013 and 2014, increasing by 6.5 percent per year. GDP growth in Australia was in line with forecasts, and, by world standards, unemployment remained low at the forecasted level of 5.5 percent. Inflation was the winner over the year, coming in at 2.5 percent against a budgeted 3.25 percent. This was due to a sluggish domestic economy, with prices kept low, and a high Australian dollar, which made imports cheaper.
     Consequently, the Reserve Bank of Australia reduced interest rates over the past 12 months by a full one percent, taking the official interest rate to the lowest it has been since 1959 and representing great value for any Australian property borrower, especially on long-term, fixed interest rates, which are now under five percent per annum for a three-year locked period. This lower interest rate will no doubt have a stimulative effect on the economy and has resulted in the drop of the Australian dollar. These elements could combine to put upward pressure on inflation and then lead to a potential raise in rates in the latter part of the year, which, as an investor, could be a strong reason to consider fixed rates. The main announcements affecting people living overseas, are summarised below:
  • University fees payment discounts of 10 percent upfront and five percent will cease from January 1, 2014.
  • A new 10 percent non-final withholding tax will be kept from Australian property sales of over A$2.5 million, pending lodgement of the tax return and calculation of any capital gains tax payable. The extra will be refunded or the shortfall charged.
  • Tightening of current thin capitalisation rules that help offshore investors through companies and trusts pay a 10 percent interest withholding tax rather than the higher corporate rate of 30 percent or the personal tax rates from 32.5 percent.
  • Improved computer data matching capabilities for the Australian Taxation Office to track property rentals and sales to ensure tax returns are being lodged.
  • Additional funding for the Australia Taxation Office to review offshore business holdings where tax avoidance may be taking place.
     Many expatriates had hoped that the announcement last year to discontinue the current 50 percent Capital Gains Tax Free Allowance for foreign investors would be called off. However, this did not occur on Budget night, but Legislation has been submitted and is moving through Parliament. Australasian Taxation Services (ATS) has made a number of important submissions and petitioned to suspend this change, gathering almost 3,000 signatures on an online petition (www.cgtchange.com) to help have this change stopped. However, if this change is not stopped, it will only affect gains made after May 12, 2012. Any gains prior to this date will still enjoy the 50 percent tax free incentive.
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Posted by smats Tue, 25 Jun 2013 02:50:00 GMT

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Australian Tax & Property Advice

With Steve Douglas, specialising in taxation & migration planning

Smats

Profile

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.

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