The Essential Guide on Overseas Investment Property Tax Deductionsamir@propertytaxspecialists.com.au
We have seen a steady increase in Australians looking to buy property overseas in the last few years. With Australian property prices increasing, it’s no surprise that people are seeing this as an opportunity to invest abroad.
Beyond that, many people who immigrate to Australia choose to hold onto their property abroach because it’s a great way to keep their property portfolio diversified.
But what does this mean for your tax implications and your Australian tax return?
Well, if you own property overseas worth more than $50,000, you will have to indicate this on your tax return (Item 20) and you will have to declare any rental income or capital gain (and losses) generated from owning the property overseas.
In fact, the Australian Tax Office (ATO) can track your cash flow movement in and out of Australia. So, you’ll have to stay on top of your documentation and have it readily available in the event of an ATO audit.
Thankfully, as an Australian buying property overseas, you may be eligible for some tax deductions for your rental property expenses.
This guide will help you clarify what overseas investment property tax deductions you can and can’t claim.
How Is An Overseas Investment Property’s Rental Income Taxed in Australia?
Before exploring the available tax deductions for your overseas property investment, here’s what you need to know about the rental income that is taxed in Australia.
If you’re an Australian resident for tax purposes, any income you derive outside of Australia (i.e your Global Income) is considered assessable income and must be declared on your income tax return (under item 20) the same as you would for Australian domestic income.
This is likely true for the country in which the property is located. In other words, you may also end up paying foreign tax on the rental income generated from the investment property in the country where it is located.
Fortunately, to avoid double taxation, Australia has entered into Tax Treaties and agreements with some other countries. This is called a double tax agreement.
As a result, the ATO introduced the foreign income tax offset in July 2008. So, if you already paid foreign tax in the country that you generated the income, you may be eligible to claim a foreign income tax credit.
The foreign tax offset system allows Australians to reduce their Australian tax liability on the investment property rental income if they’ve already paid tax on the same income in some other countries (i.e. those who are parties to the double tax agreement with Australia).
If you’ve paid tax in a foreign country and it doesn’t exceed $1,000, the offset amount will likely cover the cost of the foreign tax. However, if it exceeds $1,000, you may have to pay tax on the excess amount or calculate the maximum tax offset limit you are able to claim.
Foreign tax can be a complex requirement, and in some cases, the foreign income may not even be assessable in Australia in terms of the double tax agreement. If you’re unsure about your Australian tax obligations, you should seek professional advice from a tax agent, such as ourselves at Property Tax Specialists.
Can You Claim Overseas Investment Property Tax Deductions in Australia?
Yes, expenses you incur related to your overseas investment property are tax-deductible in Australia against the rental income, provided that the expenses aren’t of a capital nature.
In other words, you can claim a tax deduction on the rental expenses the same as you would if the property were in Australia. But you’re not entitled to claim a tax deduction for the cost of improving or replacing something on or within the overseas property because that expense is entirely capital in nature. However, you can claim this on depreciation or building allowance over the lifetime of the asset.
The ATO is particularly vigilant about claiming expenses described as repairs when they are considered to be improvements.
For example, fixing a broken glass on a window is considered a repair. But, replacing the whole window frame is an improvement.
Here are few overseas investment property tax deductions you can claim in Australia:
- property management fees,
- maintenance expenses,
- property agent fees,
- administration expenses,
- property insurance,
- repairs and maintenance,
- borrowing costs, and
- tax depreciation.
If you would like to know more about each deduction, make sure to check out our 11 investment property tax deductions you can claim.
It’s also worth noting that each tax deduction specifically relates to Australian tax legislation. You’ll need to engage the services of a tax agent in the country in which your overseas property is located regarding your tax implications, eligibility to claim tax deductions, and what tax deductions you can claim there.
What About Negatively Geared Overseas Properties?
Previously you weren’t allowed to offset the loss from foreign investments against income (and investment income) generated in Australia. You could only deduct the loss from other foreign income.
However, as of July 2008, property investors are allowed to offset a loss from their overseas property against their annual income – including Australian derived income from various income sources including investment properties.
This is, once again, a relatively complex topic, so you’ll need to seek professional advice from a registered tax agent or consultant.
If you are an Australian tax resident and have rental income from property outside of Australia, it may be possible to claim a tax deduction for the expenses associated with said rent.
However, there is a limit to what you can claim. For example, capital improvements on an overseas property is not a tax-deductible expense, and may have other tax treatment.
There are several provisions in tax legislation that allow for overseas investors to avoid double taxation and to verify.
But how the Australian tax system interacts with overseas tax systems is relatively complex and quite specific. So, suppose you’re thinking about investing overseas or have already purchased an overseas investment property. In that case, you may want to consider seeking professional tax services in both Australia and the country in which your property is located.
This way, you can be sure to fulfil your tax obligations and make the most of any tax minimisation strategies, such as claiming overseas investment property tax deductions.
Our registered tax agents here at Property Tax Specialists specialise in providing advice on the best way to manage and structure your portfolio to maximise your investment returns and avoid unnecessary tax.
We know the rules inside and out, so you don’t have to. We make sure your investment property portfolio complies with regulations and meets the necessary reporting obligations.
To discuss any matter relating to overseas investments, your tax obligations, and available tax deduction, get in touch today.
Please note that every effort has been made to ensure that the information provided in this guide is accurate at time of writing. You should note, however, that the information is intended as a general guide only, providing an overview of general information available to property buyers and investors. This is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.