Investing in overseas investment properties is fast becoming a trend among Australians. Anecdotally, more and more Australian investors are turning to property markets in the US, New Zealand and other countries where the real estate markets have been battered by the global financial crisis. Many perceive that properties in these countries are now undervalued and represent good bargains for future growth.
Here are some frequently askedquestions to help investors with their investment decisions:
No, but the self-assessment system requires you to disclose certain information regarding the property in your tax return, such as the rental income derived, rental expenses incurred, and capital gain or loss on the sale of the property.
2. What are the Australian implications of transferring large sums of money to buy the overseas property?
There are no Australian exchange controls in terms of transferring funds outside of Australia, but check with the local authorities in the jurisdiction to which the funds are being transferred to ensure that you are complying with the relevant country’s domestic exchange control requirements.
With respect to overseas property, you will need to ascertain, firstly, if Australia and the jurisdiction in which the property is located have a double tax agreement (DTA). The provisions of the DTA are important as they override if the DTA and domestic law contradict each other.
The amount of FITO available is generally subject to a limit. For simplicity, the law provides that if the total foreign tax paid does not exceed A$1,000, the offset amount is generally the amount of foreign tax paid. If the foreign tax paid exceeds A$1,000, you may choose to adopt a FITO amount of A$1,000, in which case, any excess offset that may otherwise be available under a full calculation will be disregarded. Alternatively, a full calculation may be performed to determine the maximum amount of your FITO entitlement.
Further, under limited circumstances and depending on the country in which the property is located, the relevant DTA may grant that country the exclusive taxing right over the rental income, which means that the income is simply not assessable in Australia.
For instance, the cost of repairing an investment property (but not initial repairs when the property was first purchased) to restore it back to its original state is generally deductible against the rental income derived.
Care should be taken when calculating the taxable income because what is deductible under Australian income tax may not necessarily be so in the foreign country and vice versa. Accordingly, it may be advisable to enlist the help of a local accountant to assist you in this area.
Previously, any net foreign loss incurred by an Australian tax resident could only be offset against other foreign income of certain classes.
There are transitional rules that govern how certain foreign losses incurred before 1 July 2008 may be converted to ordinary tax losses to be offset against Australian domestic income. These rules are complex and certain calculations are required to determine how much of the foreign losses may be converted to ordinary tax losses and utilised.
Similar to the treatment of rental income derived in respect of an overseas investment property, the taxation treatment of any capital gain derived upon the sale of the property will be determined by the DTA between Australia and the country in which the property is located.
Notably, the CGT rules applicable to an overseas investment property will be the same as those applicable to properties located in Australia. If the overseas property has been held for at least 12 months before it is sold, the 50% CGT discount may apply, provided that it is held by an individual or a trust. If a capital loss is incurred, the capital loss may be carried forward into the future indefinitely to offset any future capital gain you derive.
Conclusion