Tax on foreign income

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
your favour.

     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.

 

 

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Posted by smats Tue, 09 Nov 2010 07:05:00 GMT


Property purchase rules

 Australian property tax and expatriate tax expert STEVE DOUGLAS explains why setting up a company to purchase property requires careful consideration.

Q. I’m thinking of buying a property in Australia. Should I set up a company to do this?

A. Using a legal structure to purchase property is a very personal decision and should be based on a number of issues. These include legal protection, succession planning, transferability – and of course, taxation. As a general rule it’s not ideal, as the company will not benefit from the 50 percent Tax Exemption on Capital Gains. If a legal structure is deemed necessary, a Unit Trust or Family Trust would be more appropriate.
     The nature of the property also makes a difference. If it’s commercial rather than residential, a legal structure may be more suitable – particularly when multiple owners are coming together to make the purchase. In this instance a record of a defined unit allocation can help to determine each individual’s ownership of the asset. With residential property, it’s usually best to make an acquisition in your personal name. This is because if you can keep the debt levels high on the property during the time rent is collected, it can prove very tax effective – both during your time abroad and upon your return to Australia. Buying in your own name is also essential if you wish to take advantage of the Principal Residence Exemption on Capital Gains Tax rule. This can only apply if you live in the property some time in the future, upon your return to Australia.
     Setting up a legal structure may also incur the loss of any benefits in building up tax credits on excess holding costs. In such an instance, any tax losses can become trapped in the entity, disenabling you to offset any personal salary income against these losses, upon your return to Australia.
In all cases, the use of a structure should be carefully considered. If your only reason is to obtain an artificial tax benefit – which some schemes and Hybrid Trusts promote – you may find yourself in trouble with the authorities. The
Australian Tax Office has the power to look through and void the entity for tax purposes.
The current system and legal incentives for purchases as an individual already promotes the ability for you to enjoy a tax-free investment. So if tax avoidance is your sole motivation, using a legal entity could prove detrimental – you may just outsmart yourself!

 

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Posted by smats Mon, 30 Aug 2010 09:39:00 GMT


Should you declare your Aussie property income?

Australian property tax and expatriate tax expert STEVE DOUGLAS explains how Aussie property owners can determine if they need to submit an Australian tax return.

Q. I’m an Australian living in Singapore and recently rented out a property I own back home, so I understand I’ll be liable for Australian tax. Will the Australian Tax Office calculate tax owed on a base income of my Australian rent earnings, or on my overseas earnings?

 

A. Usually when you’re genuinely living outside of Australia for an indefinite or extended period, you’re considered Non Resident in Australia for tax purposes – regardless of the fact you may be a citizen. When this occurs, the only taxable activity is usually the rental property income and any earnings from services performed in Australia. You do not need to declare your offshore earnings to the Australian Taxation Office.  

If you’re only in Singapore on a temporary assignment, you may still be classed as Resident for tax in Australia. In this instance you’d need to declare all offshore Income and you’ll receive a credit for any Foreign Tax paid on it, when the Australian tax payable is calculated. This only applies if you intend to remain overseas for the short-term, so you need to be clear on your long-term plans.

Legally, if you’re earning rental income in Australia, you’re required to lodge a tax return each year to declare income earned and detail any expenses relating to the property – such as interest, agent fees, maintenance, rates and even travel expenses for inspection. Usually once all expenses are deducted there’s a shortfall. This shortfall can then be carried forward into future years when you return home, offsetting rental profits, capital gains on sale, or even income tax on an Australian-earned salary. You may also qualify for special building write-offs and depreciation allowances on your property, which can further enhance the tax effectiveness of your investment. Such incentives make purchasing Australian property an attractive proposition and it shouldn’t be underestimated as a powerful financial planning option.

If you choose to lodge your tax return yourself, the due date is October 31 of each year. If a Registered Tax Agent, such as ATS, prepares it on your behalf, you’ll usually enjoy an extension for submission until April of the following year. Make sure you do lodge your Australian tax return each year. The penalty for not doing so is A$550 per year per person and you may lose out on the tax benefits you’re rightfully entitled to.

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Posted by smats Mon, 26 Jul 2010 03:48:00 GMT


Australia Budget 2010: Tax roundup

Australian property tax and expatriate tax expert STEVE DOUGLAS highlights the tax implications of Australia’s recent 2010 Budget.  

 

With the release of the Australian Federal Budget in May 2010 some tax issues and changes will affect expatriates, intended migrants and foreign investors.

 

Personal Tax Rate Reductions 2010 saw minor reductions in personal tax rates, with a lift in the second threshold from A$35,000 to A$37,000 and a reduction in the tax rate in the second top tier from 38 percent to 37 percent. Although a minor cutback it’s still significant, as the Government reaffirmed its campaign promise of a 40 percent top from July 1, 2013 and a move to merge the current “A$37,000 to A$180,000” bracket into a single 30 percent rate.
          The Government also clearly stipulated it will maintain the previously stated reductions. Non Resident taxpayers will not be affected by the tax-free threshold and the 15 percent rate. Instead, there’ll be a 29 percent flat rate on the first A$37,000 of taxable income.

Company Tax Rate Reductions Effective July 1, 2013, Company Tax will be reduced from 30 percent to 29 percent and 28 percent shortly thereafter. Small businesses will receive the 28 percent reduction ahead of larger corporations.

Mining Super Tax The Government will be introducing a new, controversial 40 percent Mining Tax of all profits above a yet-to-be-confirmed Government stipulated return. One of the key recommendations of the Budget, this move may prove to be challenging to implement and is currently receiving great pressure from the mining industry and State Governments.

Quicker Investment Write-off for Small Business Small businesses will enjoy an immediate deduction for capital investments under A$5,000 – an increase from the current A$1,000.

Property Gearing & Tax Credits Deductions for property investors remain unchanged, allowing a full deduction for all costs including interest. In its brief to the Henry Tax Review, the Government stated this as a clear direction to preserve current benefits. This ensures with sensible tax planning and debt management, a nil tax environment can continue to be enjoyed on all Australian property investments made by offshore-based expatriates and investors. Further information on the Budget can be obtained at www.aussieproperty.com

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Posted by smats Thu, 24 Jun 2010 08:01:00 GMT


Enjoy tax incentives on your superfund

Australian property tax and expatriate tax expert STEVE DOUGLAS explains how to enjoy tax incentives on your superannuation fund.


Q. I’m depositing funds into my Australian superannuation fund – will I get a tax deduction?

 

A. Overseas residents can still make a contribution to their Australian superannuation fund and it can be claimed as a tax deduction. But some important factors should be considered.

            Contributions can only be claimed as deductions to a maximum that will take your taxable income to nil. For example, if your taxable income from property rental or other taxable items is A$3,000, even if you contribute A$10,000 to your superannuation fund, you’re only able to claim A$3,000. This is important to remember, as you’ll need to notify your superannuation fund manager to ensure they deduct the correct amount of contribution tax and record the balance as a personal contribution. Should you fail to do so, you might end up losing 15 percent of your contribution unnecessarily.

            Maximum annual deductions are A$25,000 if you’re 50 years old and younger and A$50,000 if you’re older. Make your contribution before June 30, as the funds must first be cleared to ensure a tax deduction.

            If you have no other taxable income or a tax loss, then a superannuation contribution will create no tax benefit, as it can’t increase a loss any further. In such a case, it’s better not to make a contribution unless your sole intention is to increase your retirement savings.

            In most cases, cash is better invested under your personal name, as there’s no tax on dividends or capital gains on share investments in Australia for persons living outside of Australia, whereas your superannuation fund may be taxed if invested in contributed funds. Furthermore, if you’re still facing a sizeable mortgage on your intended Australian residence, it’s wiser to keep the money out of the superannuation fund so it can be used to reduce the debt on your home. You can then make additional future contributions from the cash flow savings of having a low or zero private mortgage.

            Superannuation is an important part of retirement in Australia and comes with some special tax incentives. But it needs to be balanced with your overall objectives. Don’t be overly concerned if you’re not contributing to a superannuation fund while overseas, as long as you can see some increase in your overall financial circumstances. Focus on building an increased savings base that can be used to financially support you upon your return to Australia. Once you’re confident funds are sufficient to ensure a comfortable lifestyle, then consider making voluntary contributions into your superannuation fund.

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Posted by smats Mon, 31 May 2010 08:34:00 GMT


Tax on refinanced property

Australian property tax and expatriate tax expert STEVE DOUGLAS explains the tax implications when refinancing your property loan.


Q. If I refinance my Australian property loan, will I lose my tax deduction?


A.
Refinancing your property usually improves the interest rate or general terms on the loan and is also advisable if you wish to use the built-up equity in your property to assist with the purchase of another property. What matters most is what the original drawdown of the loan was used for. Any subsequent change or refinance keeps the original purpose and appropriate tax treatment. If you increase your loan, a pro-rata allocation of the loan against the different uses is made and applied against each expense. It’s irrelevant what the loan is secured against, or what it may be called, the sole deciding factor is what the money was used for.

          If you borrowed A$80,000 to buy a property for the purpose of renting, the bank advances the money to the settlement agent, so it’s clear the loan is designated for that property and since it’s rented, you can claim a tax deduction. If you borrow an additional A$20,000 to renovate the property, the loan will be considered as part of the property expenditure. Thus, interest against the new total of A$100,000 still remains tax deductable.
          But if you borrow another A$25,000 to go on vacation, using the equity in the house as collateral and increasing your loan to A$125,000, you’ll not be allowed to claim this amount – since it’s for private purposes. You’ll incur a pro-rata claim of 100/125, or 80 percent, of the interest as a deduction and the remaining as private with no claim allowed.
          Should you decide to use the equity to help with a deposit on another rental property, that portion would be a deduction against the new rental property – not the original one. If you refinance with another bank later, this ratio comes with the new loan as the original use is tracked forward. It doesn’t matter how many times this occurs, each time a redraw or refinance happens you simply recalculate the ratio and bring that forward.

          If the loan is in a single amount any repayment will be allocated in the ratio of the loan use. So if you wanted to pay off the A$25,000 holiday loan, only 20 percent would be allocated to reduce that portion on a proportionate basis. To avoid confusion, split such loans.

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Posted by smats Wed, 28 Apr 2010 06:27:00 GMT


How to claim on renovations

Australian property tax and expatriate tax expert STEVE DOUGLAS explains how to claim rental property renovation expenses.


Q. Can I claim renovations on a rental property against my income tax?

 

A. It’s always a good idea to renovate your property regularly in order to improve the quality of your asset and boost its capital value and revenue generation capabilities. Under Australian taxation rules you’re entitled to claim any expenses incurred in renovating or improving a rental property as either a full income tax deduction, or as a depreciation write-off over a period of years. But you need to establish if the renovation is a “maintenance” issue, or was undertaken to “improve” your asset.

          If you’re fixing something that’s general wear-and-tear, worn or damaged – including painting, gardening, replacing a broken item, plumbing repairs or general maintenance – this is considered to be a repair. As such, the cost of the repair can be written-off in full during the year the expense is incurred, reducing your income tax immediately.

          Expenses incurred during refurbishment – such as new carpets, a dishwasher or even structural changes and building additions – are allowed as an annual depreciation amount, based on the life expectancy of the item, determined by the Australian Taxation Office on an annual basis. Some expenses may be claimed over a short period of two years, while others such as structural changes and additions, will need to be claimed over a 40-year period.
          To determine the merit of spending on improvements or renovation, you should aim to recoup the interest cost of the capital spent. If you don’t think you’ll able to increase the rental accordingly to justify your maintenance expense, it may be wiser to preserve the property in its current state. For example, if the interest rate is 6 percent per annum and you intend to spend A$10,000 on improvements, then you should expect to receive an additional A$600 per year (A$11.54 per week) in rent, at the least. If the repairs are needed to keep the property in a satisfactory rental condition, go ahead and undertake the necessary costs to keep it in order.

          If your intention is to sell your property, a refurbishment can do wonders to catapult its market value, or act as equity to assist with your next property purchase. In any case, it’s always worth keeping your rental property in good shape – a happy tenant will continue with you in the long haul. The tax man will always allow a claim – one way or another – so there’s no excuse not to look after your property.

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Posted by smats Wed, 31 Mar 2010 09:43:00 GMT


Overseas property interest rebates

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.

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Posted by smats Wed, 24 Feb 2010 07:29:00 GMT


Benefits of using a buyer's agent

Australian property tax and expatriate tax expert STEVE DOUGLAS explains the benefit and tax implications of using a buyer’s agent.

Q. I’ve just purchased a property in Australia using a buyer’s agent. Is their fee tax deductable?

 

A. Buyer’s agents are often qualified real estate agents, who’ve moved away from “selling” property and choose to work independently, representing buyers seeking particular properties or those with specific requirements.

          Having someone on the ground who’s connected to the industry is beneficial if you live overseas, are unfamiliar with an area, or don’t have the time required to view and “hunt” for properties in person. Buyer’s agents charge approximately two percent of the final purchase price. And most are aware they need to justify their fee – so they tend to negotiate aggressively, to acquire the property at a price lower than you would be able to, covering the cost of their service.

          From a tax perspective a buyer’s agent fee is treated the same way as other acquisition costs, including stamp duty and legal fees, so can’t be claimed against your income tax. But if you bought your property in Canberra and rented it out as a leasehold title, purchase costs – including a buyer’s agent fee – can be claimed against any rental income. 
          For all other states, a buyer’s agent fee is a full capital cost. Any tax benefit won’t be against your income tax, it will be against future Capital Gains Tax (CGT) – upon the eventual sale of the property. All purchase and sale costs are taken off the sale price to establish a Net Capital Gain, which is the only portion subject to tax. This CGT offset may not be as attractive as a direct income tax deduction, but it does offer you some tax benefit. However, if you don’t intend to sell the property in the foreseeable future, this benefit may be a long way off from being recognised.
          Don’t forget, if you’ve acquired this property as your intended family home upon your return to Australia, the cost may not have any tax benefit – as the property may not even be subject to Capital Gains Tax under the primary residence exemptions. As such, when using a buyer’s agent the primary issue is value for service. Ensure your agent understands and fulfils your requirements and is capable of finding the right property for you and negotiating on your behalf. They should be able to achieve a better result than you could have done. And in most cases do.

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Posted by smats Wed, 24 Feb 2010 07:24:00 GMT


Smart tips for tackling investment property loans

Australian property tax and expatriate tax expert STEVE DOUGLAS gives smart tips for tackling investment property loans.

 

Q I’m thinking of reducing my loan on an Australian investment property to save on interest. Is this a good idea?


A
Reducing your property loan isn’t a bad idea, but it can lead to drawbacks later.

·         In Australia, investment property loans are fully tax-deductible, while loans for land or private property you currently reside in – or intend to in the future – are not. So it would be wiser to reduce the loan relating to the property you intend to live in. Any dollar you pay off an investment property loan is one you may have to borrow back, to pay for your family home.

·         Once you “trap” equity in a particular property you cannot get it back again.

·         A reduction in interest cost results in a dip in tax deductions, which can greatly impact investment performance as well as the tax cost of your property. As someone living abroad, your starting tax rate is 29 percent of your rental profit – since this is high you are able to legally reduce your overall tax rate, by maintaining a sensible debt level.

·         Future tax protection from the accumulation of annual tax losses will be reduced, leading to greater capital gains tax costs or higher taxes on your return to Australia.


         
A wise alternative is to consider an Offset Account. Rather than paying off the loan, stream the amount into a separate savings account linked to your loan. Interest is then only charged on the net balance. For example, if your loan is A$300,000 and you’ve deposited A$40,000 in your offset account, you’d only pay interest on A$260,000. Another advantage is if you want your money back at any point, the loan remains intact. So, if you remove funds from the offset account it will increase the net balance, resulting in a higher interest cost – fully-deductible against the rental property the loan was originally used for.

          Offset bank accounts are available at all Australian banks and are a simple and effective way to manage your money during a time of investment uncertainty. You’ll pay reduced interest and have control over your money. If you find an investment opportunity set to outperform your interest savings you can withdraw your funds. If not, leave the money there and enjoy the savings! 
          Use the Property Tax Estimator tool at www.smats.net to quickly assess the merits of reducing your loans by comparing different borrowing levels. You’ll be surprised to learn reducing your loan can in fact be a disadvantage.

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Posted by smats Wed, 24 Feb 2010 07:20:00 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.

Contact Info

Australasian Taxation
Services Pty Ltd

10 Jalan Besar
#17-01 Sim Lim Tower

Singapore 208787

 


Tel: 6293 3858 

Fax: 6293 4332

Web: www.smats.net 

Email: tax@smats.net