STEVE DOUGLAS outlines the tax implications of having members of your family live in your Aussie property
Q Can I claim housing tax benefits if a family member is living in my Aussie property?
A Allowing a family member to live in your Aussie property while you’re working overseas provides peace-of-mind. You’re leaving your home to someone you trust, you have a place to stay when you return on short visits and it’s also a way to fulfil family obligations such as supporting your parents or relatives.
Under Australian tax law, to be eligible to claim any outgoing costs you must receive income on the property. So, if you’re not collecting rent from a relative who is occupying the property, you’re not entitled for any tax deductions. And since interest is usually the biggest cost factor, it’s wise to have a low – or no mortgage – on your property, especially when you receive low or no income from the property.
If your family members are paying tenants, the Australian Tax Office requires you to declare the true market value of the rental property as income, regardless of what you may decide to charge. So, if the rental is A$100 per week and the true market value is higher, you’ll have to declare the higher income to be eligible to claim any interest or other property costs. The true market value of your property can be determined by a Real Estate Agent.
Once you’ve established what the true market rental is and the total cost of ownership, it’s worth declaring the property in your tax return only if the costs are greater than the market rental. If it’s less, it’s best to leave the property out of your tax return altogether and treat it as a family arrangement. Regardless of which path you choose, your property will still be subject to Capital Gains Tax upon sale. And if the property is genuinely your parents or relatives’ home, it’s best to transfer the property into their name and make it their principle place of residence. They will then be eligible for the Australian Capital Gains Tax-Free Status. Your decision will be based on a number of factors, so take into consideration level of debt, availability of finance, type of property and family obligation.
Everyone’s situation is different, so it’s best to seek professional advice to evaluate your best options prior to any contractual commitment. While the Australian Tax Office doesn’t mind you helping your family, it will not subsidise the lower rent you may offer a relative and thus, it’s best to treat the property as a proper commercial environment.
STEVE DOUGLAS of Australasian Taxation Services highlights some of the tax issues and changes in the recent Australian Federal Budget, which could affect expatriates, intended migrants and foreign investors.
Personal Tax Rate Unchanged For the first time in nine years, there were no reductions in Australian personal tax rates, however, from 1 July, 2013 top tier earners – those above A$180,000 – will enjoy a reduced tax rate of 40 percent. The current A$37,000 to A$180,000 income bracket will merge into a single rate of 30 percent. Non-resident taxpayers and the 15 percent rate will not incur a tax-free threshold – rather, it will be a single rate of 29 percent up to A$37,000 of taxable income. Provided you’re genuinely living abroad for extended periods, Australians will continue to enjoy tax-free offshore salaries.
Property Gearing & Tax Credits Full deduction for all costs, including interest and the allowance to write-off construction costs, remains unchanged for property investors. Together with sensible tax planning and debt management, a nil tax environment can continue to be enjoyed on an Australian property investment for offshore-based expatriates and
investors. Upon your return to Australia, you can then use property investment as a tax planning tool to provide for a tax-free salary. These rules for expatriates and intended migrants also remain unchanged.
HECS Discount Reduced The current early payment discount option for outstanding University loans will be reduced. Effective 1 January, 2012. The current upfront discount will reduce from 20 percent to 10 percent, while the voluntary repayment discount will decrease from 10 percent to five percent. If you have surplus funds, reducing your HECS debt prior to the change may appear appealing. In effect, it remains a low cost loan with interest charged at the rate of inflation, which is approximately three percent per annum at present.
The Flood Levy For resident and non-resident taxpayers the Flood Levy applies only to the financial year ending 30 June, 2011. No levy will apply if your taxable annual income is A$50,000 or less. There will be a 0.5 percent charge for income between A$50,001 and A$100,000 and one percent for income more than A$100,001.
For further information and to read about other announcements made during the 2011 Australian Federal Budget, visit 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.
STEVE DOUGLAS outlines the implications of Land Tax on Australian property.
Q Do I need to pay Land Tax on my Australian property?
A While the Australian Federal Government is entitled to Income Tax and Capital Gains Tax, State Governments are only entitled to raise levies or duties on activities within their state – such as Land Tax. As such, State Revenue Departments tend to be active in chasing non-payers to recoup arrears.
Many people living in Australia are unfamiliar with Land Tax as it’s charged only on vacant land, rental property and commercial property rather than the family home. To be exempt you need to be living in the property on the date of determination. And because this date varies state-to-state, it’s difficult to ascertain, especially if you’re living overseas. Some states offer the family home exemption even when you’re abroad provided you’re not renting out the property. However you are still liable for Land Tax if you’re renting out a property and own more than one rental property in the same state.
Land Tax is calculated on the cumulative value of all the properties you own in each particular state. So the more property you own, the higher the Land Tax rate and annual cost, which can range from a few hundred to several thousand dollars. Each state has a different Land Tax rate, usually based on the unimproved value of the land of the property. But you can be in a tax-free threshold and not be liable for Land Tax if you own just one more property above your family home. This ruling is beneficial if you have properties in a few Australian states, since you get a new threshold for each state. Also, the Land Tax on an apartment is substantially less when compared with that of a house. This is because the unimproved land value is shared between multiple apartment owners, creating a lower individual value.
If you believe you have a potential Land Tax liability, contact your property manager or the State Revenue office to confirm if you’re over the relevant threshold for your state. If you don’t, the penalty can be expensive.
Land Tax isn’t a deterrent to a purchase, it’s just a nuisance. But it can become costly if you’ve built a substantial property portfolio in one state, so always take Land Tax into consideration when calculating your cash flow on a rental property. The expense of Land Tax shouldn’t make you change your investment decision−as the capital growth of any worthwhile property should justify additional costs. But always take Land Tax into consideration when reviewing your investment strategy. To keep your taxable land value at a manageable level, you may want to allow for multi-state property ownership and a sensible mix of houses and apartments.
STEVE DOUGLAS highlights the pros and cons of an interest-only loan repayment model.
Q Is it wise to opt for “interest-only” repayments on my Australian property loan?
A Interest-only loans offer lower monthly repayments, benefiting immediate cash flow. But it’s not best to always be in debt. It’s far more important to be debt free, or low in debt, when living in your Australia property – not while it’s being rented out.
Home mortgages “Down Under” are expensive, because there’s no tax relief available for interest costs on private homes. But non-residents renting out their Australian property assets do enjoy a complete tax deduction. However, any additional repayments to reduce the balance of your loan are not tax deductable.
While a property is collecting rent in Australia, any loan to help with its purchase is fully tax-deductable even if you’ve lived in the home in the past. With tax rates starting at 29 percent for non-residents, this tax deduction is very welcome. But it’s best to only repay the loan when you decide to move into the property yourself. Paying a loan off earlier can cause grief upon your return, should you choose to live in a different property to the one you’ve been paying off. You don’t want to be forced to sell a quality investment because you need access to cash to service a loan on a new property.
Paying off the principal of any loan is an inefficient use of your money, as long as the property is being rented. If your loan is sourced from Australia, an alternative to repaying it is to use an “offset” account. This links your savings to your loan, only charging interest on the net balance. It achieves similar savings as extra repayments, but doesn’t change the loan balance. This gives you greater flexibility, as you can withdraw funds from the offset account if the option of a better property arises at
a later date.
The overall performance of your investment will improve when you have a higher loan against it. This is due to a combination of reduced taxes and leveraging benefits, which can sometimes almost double the annual rate of return achieved after tax. As a result, delaying the decision to reduce your loan until the day you move in could prove to be a very rewarding decision, strengthening your financial position upon your return to Australia.
For a quick demonstration on the cost advantages of reducing your loan, taxation issues and investment performance considerations, check out the free, customised, online Property Tax Estimator at www.smats.net.
Returning to Australia and want to enjoy the best tax benefits? STEVE DOUGLAS reveals timing is everything.
Q From a tax perspective, when’s the best time to return to Australia?
A It’s not often you have the luxury to choose when to head back to Australia. Factors such as the start date of your Australian-based employment, your child’s school term and finding a place to live usually prove to be a challenge. But if you’ve had the good fortune to overcome all these issues and have set a date for your return, here are the main issues you may be affected by – depending on your timing – from an Australian taxation perspective.
Full year = bigger tax credits If you’ve made the most of your time abroad and acquired an Australian rental property, you may have accumulated tax losses or credits which you can use to reduce your salary tax. Australia’s marginal tax scheme works on the basis: the higher your income, the higher the tax rate. So it’s better to have a full year’s income to use against your credits to enjoy tax savings at a higher rate, rather than a lower rate. This makes a world of difference, because you’ll be able to get your returns in the earlier part of the tax year – usually between July and September.
Your super return If you return to Australia late in the financial year, say May or June, one way to preserve your tax credits is to make an additional contribution to an approved Australian Superannuation scheme. This offsets your income for the month you return and the next. It also allows you to carry your credits forward to the next financial year. However, while you’ll enjoy substantial savings, your family’s immediate cash flow may be affected.
A good day on the Stock Market Upon relocation to Australia, all offshore assets (property or shares) and any Australian shares become taxable. But this only applies to the excess above the market value on your day of return. As such, it’s always better to return to Australia during a time when asset values are higher. If prices remain low, postpone your arrival until things improve. Realistically this may not be easy, but it’s certainly worth considering.
Home improvements If you’re moving back into your own property which you previously rented out, you can claim costs of bringing the property “back to standard”. This includes painting, garden maintenance and the general upkeep of the property, but not significant items such as carpets or kitchen upgrades. The final rental maintenance should be carried out within a reasonable period after the tenancy ends, but can be done once you’ve moved in and is fully deductable from your tax.
STEVE DOUGLAS explains how Australian charitable donations can be offset against income tax.
Q Can I claim taxes on my donation to the Queensland Flood Relief Appeal?
A The Victorian bushfires of 2009 and the current Queensland floods are a reminder of Mother Nature’s power over us and how helpless we are when exposed to her wrath. But such tragic events also bear witness to the best of humanity – our ability to cope with adversity, overcome misfortune, rebuild, recover and most importantly, our willingness to help our fellow man.
The Australian Government, like almost every other Government, recognises the importance donation and charity play in the modern world. As such, any contribution to an Australian-registered charity is allowed as a tax deduction against your Australian income tax in the financial year the payment is made. This is in recognition of the importance
of your donation and is also a manner of appreciation for your gesture.
But in order to claim a donation you first need to have a taxable income to offset it against. If you’re an Australian living overseas, it’s unlikely you’ll have any taxable income as your offshore salary is not taxed in Australia. And if you have an Australian rental property with a sensible level of finance on it, you might realise you’re in a tax-loss position each year, with no tax payable in Australia and some tax benefits carrying forward into the future. If this is the case, donating to a charity will not improve your Australian tax position, as it can’t increase any tax-loss position and will be ignored once you have an income less than zero in your tax year.
If you have an Australian rental property generating more income than your ownership expenses, including interest and depreciation, the donation can be used to reduce your net rental income and lower your annual tax liability. To claim the deduction in the current financial year, the donation needs to be paid and cleared by June 30, which is Australia’s financial year-end. Remember to keep the receipt as proof of payment.
Of course, the decision to make a donation should never be based on the ability to offset tax. Rather it should be on the importance of the contribution. Many of us living overseas are fortunate to experience favourable circumstances, so it’s fair to lend a helping hand to the less fortunate, especially when their circumstances are borne from events out of their control. In these trying times, let’s all dig deeper to help those in need.
Don’t shy away from investing in the strong Aussie dollar, cash in on it – advises STEVE DOUGLAS.
Q Is it wise to wait for the strong Australian dollar to weaken before investing in Australian property?
A There’s always an excuse –market bubbles, interest rates, or fluctuating currency – to delay a decision to invest. But the cost of procrastination is more than you think.
From a taxation perspective, the many incentives on offer to reduce tax on future Australian salary require time to accrue and achieve the best result. And from an investment perspective, the Australian property market continues to achieve sound and stable growth, so delaying entry can prove more costly than any potential currency cost. Quality lending can in fact act as a natural currency hedge, by minimising the deposit required and your exposure to high currency cost on the funds required, rather than the full purchase value. When using sensible lending, your cash outlay is limited to a 20 percent deposit, plus a five percent allowance for stamp duty and legal fees.
Depending on which direction you think the currency might move, or how much it may be overvalued, it’s important to figure out what’s holding you back. Say you purchase an A$500,000 property, for which you require 25 percent for deposit and costs, with the remainder covered by an Australian dollar loan. If you feel the Australian dollar is currently overvalued by 10 percent and would improve that much in the next 12 months, then the additional cost of acting now would be 10 percent of the cash required (A$125,000), which is A$12,500. So if you wait a year for the currency to improve – and assuming it does – you’d be better off by A$12,500. But if the property grows by an average rate of seven percent per annum over the next year, it will be more expensive. Because when calculated on the total purchase price of A$500,000, your property would be worth A$35,000 more in 12 months if it achieves average growth. Hence the net cost of delay is the potential increase in property value – A$35,000 less the assumed currency cost of A$12,500, resulting in A$22,500. Remember, this could be a cost or an additional profit.
The cost of delay is often far greater than any potential currency loss. You can always make additional reductions to your loan when you feel the Australian dollar has reached a better value. And an Australian property with available equity can provide a full hedge on your next purchase, as the deposit can be borrowed against your current property holdings. This ensures you don’t need to convert any currency, so you won’t experience issues with currency fluctuations.
STEVE DOUGLAS suggests ways to stay on top of Australia’s rising interest rates.
Q Australia’s interest rates are rising – should I switch my loan from a variable interest rate to a fixed rate?
A Australia’s recent rise in interest rates has catapulted it above most other global markets. With the Reserve Bank of Australia’s latest rise in November 2010, the base lending rate in Australia is now 4.75 percent per annum and the standard lending rate is approximately 7.8 percent per annum, inclusive of the banks’ margins. Surprisingly, this remains at the lower end of historic averages.
It’s possible to fix your interest rate over a specified period – usually up to five years – which means any further increase wouldn’t affect you. This is useful if you want the certainty of knowing your interest costs regardless of changes. Or if you believe rates will rise even further and want to save money, since your fixed rate will remain unchanged. Certainty has its own value. Most people aren’t concerned about the savings but do prefer to have a set expense. But you’re still taking a chance, albeit on a wider platform. The current three-year fixed rate is 7.09 percent per annum, which is a considerable saving on the standard variable rate. Additionally, most banks offer substantial discounts to valued customers. After allowing for discounts, a typical Australian-dollar loan should near 6.97 percent per annum narrowing the gap between fixed and variable interest rates.
If you fix your interest rate you’re hoping rates will continue to rise or stay the same. If rates reduce, fixing your terms could cost you more in the long run since you’re locked into a potentially higher rate. And cancelling a fixed-rate agreement comes at a risk of incurring early repayment penalties.
It’s challenging to predict which way rates will go, but observing market movements can make your decision easier. Many factors influence interest rates including health of the economy, inflation, exchange rates and the availability of capital. In general, when the fixed rate is lower than the variable, the market is suggesting rates will remain the same or reduce. When the fixed rate is higher than the variable, the market is predicting rates will rise. The most important issue is to ensure you have the most cost-efficient loan available.
Australasian Taxation Services’ Specialist Mortgage division can review your loan and compare it with what’s on offer and provides current variable and fixed interest rate updates.
Call to arrange a free, no-obligation assessment.
STEVE DOUGLAS urge you to know your entitlements before selling your Aussie property, to enjoy maximum tax benefits.
Q. Once I move back to Australia I intend on living in my property before selling it. How long do I have to live there before it’s tax free?
A. Under Australian Capital Gains Tax rules, your family home or Principal Place of Residence is free of Capital Gains Tax on the condition you’ve not rented it out for a while. In such a case, tax-free status is only allowed on a pro-rata basis. Your home is tax free only for the time you resided there, the rented period remains taxable. For example, if you rented out your property for four years and moved back in for one year prior to selling, only one-fifth of any gain is tax free; the remainder taxable. But as long as you’ve owned the property for more than 12 months, you’re still entitled to the usual half tax-free allowance on the taxable portion.
While there’s no minimum time for living in the property, the authenticity of the period will have to be supported with documentation such as electrical accounts, removalists’ invoices, license address and electoral roll address. You might also be able to take advantage of some special rule. If you’ve lived in the property prior to moving abroad or renting it out, it can still be considered your primary residence for up to six years even if you rented it out during this period. In such cases you’ll have to obtain a valuation when you originally move out, which becomes your new cost base for tax purposes. So any capital gains from the original purchase price up to the new valuation will remain tax free. If you sell the property within the six years no tax is applicable. But if sold after, it will be pro-rata from the time you left, to the time of sale. This could be a minor cost – so don’t sell just to protect yourself against potential tax issues.
For Australian tax purposes, you can only nominate the property as your home if you’ve actually lived in the property while being an Aussie resident. If you move back into the property, the pro-rata tax-free period will be increased even further. While living abroad, protect yourself against Capital Gains Tax through sensible planning – such as further acquisition and debt management. Don’t be afraid of its effects as Australian tax rates have recently reduced significantly. Even the full tax cost may be far less than you thought it might be. But if you can legally reduce the potential cost, this should be investigated and considered.
STEVE DOUGLAS reveals the importance of confirming Resident or Non-resident status in Australia, for tax purposes.
Q. As an Australian citizen working in Singapore, is my income taxable in Australia?
A. In July 2009 the Rudd Labour Government changed the process of determining taxes on foreign income earned by Australian Resident taxpayers living aboard. Under the old rules, if an Australian worked abroad for more than 90 consecutive days and already paid tax in the country of earning, their income was exempt from being taxed in Australia. But now, foreign income is fully taxed in Australia, with a credit given for tax paid in the country of earning. However, these rule apply only to Australian Resident taxpayers – Australian citizens temporarily working overseas. If you have confirmed Non-resident status, such rules do not apply.
The Australian Taxation Office (ATO) has recently increased its audit activity in this specific area, sending letters to all Australians working abroad. While these letters are intended to be “soft” audit checks on the accuracy of your income tax return, they can be confusing. The letter suggests your residency status has been found to be as an Australian Resident and therefore, all offshore income is automatically taxable and inaction on your part will result in additional costs. If you have an intention to remain overseas in the long term and receive such a letter, do the following immediately:
• Contact the ATO, preferably through your tax agent.
• Make it clear you’re a Non-resident for tax purposes and therefore your foreign income is not taxable in Australia. You will not be required to alter past lodged returns.
• Submit a completed Residency questionnaire to confirm your claim. Once this is done, the matter will be concluded in
If you decide not to respond to the questionnaire, the ATO will issue an amended assessment. This will include any income they’re aware of – including money transfers back to Australia – and you may be imposed with a sizeable tax and penalty cost. While you can dispute this matter, it will be a long and troublesome process – easily avoidable by confirming Non-residency status at the time you receive the questionnaire.
The ATO is easy to deal with on these matters as long as you remain attentive, cooperative and polite, so don’t feel threatened by the difficult but mandatory administrative process. If you have any doubts or concerns about your situation ask your tax advisor for advice, or contact ATS for assistance.