Property ownership can be a great way to build wealth. However, if you’re an expat, property investments can be complex, and it pays to do your research. Whether you are considering keeping the former family home when you relocate or buying property as an investment, there are a few factors to weigh up when deciding whether it is the right move for you.
Finance can be more difficult to obtain
If you require finance for your property purchase, it’s worth noting that it can be more difficult to obtain. Lenders may discount foreign income when determining how much they are prepared to lend you, so it can be helpful to speak to a mortgage broker before you approach lenders to understand your best options.
There may be tax implications in your country of residence
While you are a tax resident of another country, it is important to understand local tax treatment of your Australian property. While Australia has double tax agreements with most of the main destinations for Australian expats, likely meaning you avoid paying tax twice on the same income, understanding the rules in your jurisdiction is critical. For example, for Australian tax purposes, the sale of your main residence is exempt from Australian tax if sold as an Australian tax resident. However, for US citizens, the exemption is more limited for US tax purposes.
Advice from an accountant and a financial adviser who understand both locations can be really helpful to ensure you don’t end up with unexpected tax liabilities in either country.
Rental income is subject to Australian income tax
If you own an Australian investment property, you will pay Australian income tax on rental income and be required to prepare and lodge an Australian return, even if you are a non-resident for tax purposes. The income tax rate for this will fall between 32.5% to 45% and it’s important to factor this in when considering property investment as a source of income.
Therefore, it will be important to consider how the property should be structured to manage the tax implications. For example, individual ownership versus the use of a trust or company structure may be considered.
Consideration may also be given to making concessional (deductible) superannuation contributions from the rental profit to reduce the Australian tax liability.
Negative gearing can be beneficial, but shouldn’t be the focus
If you are a non-resident for Australian tax purposes, the wage you earn overseas will likely be taxable in your country of residence, so, in many instances, the income from your Australian property may be the only source of income that is taxable on your Australian return.
If your expenses, including interest repayments, are more than your income in a given tax year, your losses can be carried forward to offset future Australian income. This may be beneficial when you return to Australia, particularly if you are a high-income earner. However, the goal of your investment really should be to generate income or achieve capital growth.
Capital gains tax on eventual sale can be high
A big drawback for Australian property investors who are non-residents for Australian taxes is the capital gains tax (CGT) on eventual sale of the property.
For Australian tax residents, assets held for more than twelve months attract a 50% discount on capital gains. However, any capital gains accrued after 8 May 2012 on taxable Australian property while you are a non-Australian tax resident will not be eligible for the 50% discount and will be fully assessable at your Australian marginal tax rate.
While you are overseas, the lowest CGT rate on your investment property is 32.5% and can be as high as 45%. Even if you sell the property when you’re an Australian tax resident, your capital gains will still be assessed at these tax rates for any gains accumulated while you were a non-resident. Accordingly, it will be important that advice is received to determine the optimal holding structure.
It’s worth noting that this treatment applies to taxable Australian property only. Other asset classes, such as shares, do not attract this treatment and are often not assessed for Australian capital gains while you’re a non-resident for Australian taxes.
CGT exemptions no longer apply if you sell the family home while a non-resident
For Australian tax residents, the family home is exempt from capital gains on eventual sale. Even after moving out and renting the property, there is typically the option to treat the former family home as your primary residence for up to six years and therefore avoid capital gains tax, but you can only claim one property as your residence.
However, following rule changes effective 30 June 2020, if a former Australian family home is sold and the owner is a non-resident for Australian taxes at the time of sale, an exemption for capital gains is no longer available. And an exemption would not be applicable even for the period of ownership where the owner was an Australian tax resident. (Exceptions may apply if your partner or child aged under 18 passes away, you or your spouse are diagnosed with a terminal illness or if the sale is as a result of separation).
For example, Jane purchases a property as her primary residence in 2013. She moves to San Francisco in 2018 and rents out her property. She sells the property in October 2020 and, at this time, she is a non-resident for Australian tax purposes. Jane is not eligible for a CGT exemption for her former home and she will be assessable for full capital gains from original purchase in 2013. If Jane were to wait to sell the property when she is an Australian tax resident again, then normal primary residence capital gains exemption would be applicable.
Stamp duty and land tax
It is also important to consider the stamp duty and land tax implications of purchasing Australian property.
Foreign persons (broadly, non-Australian citizens or permanent residents) are usually liable to an additional foreign stamp duty tax of 8% on the purchase of an Australian property.
Land tax may also apply to the property where the property is an investment and exceeds the relevant land tax thresholds in each state.
Keeping overseas property on your return to Australia can be complex
If you are thinking about keeping an overseas property when you are an Australian tax resident again, there are a few things you need to navigate.
The overseas property is assessable on your Australian return, and you’ll likely also need to continue lodging a return in the country where your property is held. If Australia has a double tax agreement with that country, you’ll probably avoid paying twice on the same income, but if no agreement is in place, you can be taxed twice.
Income and capital gains will be assessable in Australian dollar terms, regardless of the currency the asset is held in. This means that currency conversion will impact the amount of tax you pay. If you’re planning to reside in Australia long-term, having a substantial overseas asset can be risky as currency movement can also impact your end return.
If you have a foreign currency debt when you become an Australian tax resident again, you may also be subject to additional taxes. This may occur where the foreign currency loan is less (in Australian dollars) at the time of repayment compared to when the loan was taken out (or when the loan became assessable for Australian tax).
Advice is critical
Property ownership is a major commitment and can be very rewarding; however, it can be complex for expats. The timing of any property purchase or sale can make a huge difference to your tax liabilities and, ultimately, your ability to meet your financial goals. It is important to speak with an accountant and a financial adviser who is experienced with expat matters.
If you are thinking about making a property move as an expat or on your return to Australia, get in touch to discuss how we can help you make the most of your investment.
General advice warning
The information provided in this blog does not constitute ﬁnancial product advice. The information is of a general nature only and does not take into account your individual objectives, ﬁnancial situation or needs. It should not be used, relied upon, or treated as a substitute for speciﬁc professional advice. Apt Wealth Partners (AFSL and ACL 436121 ABN 49 159 583 847) and Apt Wealth Home Loans (powered by Smartline ACL 385325) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.