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Aussie Expat Investor
Question: I have a question regarding tax responsibilities when owning a property in Australia while living overseas.
I am an Australian citizen, and about nine years ago I bought a property (mortgage) where I lived for about two years. I then moved overseas permanently. I moved to Japan where I lived for just over five years. About a year and a half ago, I moved again, this time to Europe, where I am currently living.
During this whole time (almost seven years), I have kept my property in Australia, and for most of the time (the last five to six years) I have had a tenant living there and paying rent. The rent has been used solely to pay off the mortgage, plus I have had to send money from overseas regularly to be able to cover the property management fees, council and water rates, strata fees, plus the difference between mortgage repayments and the rent I have been receiving from the tenant.
I have no plans to move back to Australia, and during my whole time overseas I have paid my taxes in the countries where I have been living.
I was wondering what my tax obligations are when living permanently overseas but owning a property in Australia (which used to be my permanent place of residence), from which I am not making any real income (as all income received from the rent is used to pay mortgages, management fees, etc).
I would appreciate any help/information you could give me on the matter. Honestly speaking, this is something I should have done a long time ago, but I was younger and less interested in responsibility back then.
This is a very interesting question as it involves three different issues that need to be carefully looked at. Firstly, your Australian residency status for tax purposes must be considered. This is a question of fact and is one of the main criteria that determines an individual’s liability for Australian income tax.
As you have moved overseas to live permanently, with no intention of returning to Australia, it is likely that you would be considered a foreign resident of Australia for taxation purposes. Other factors, including your family and employment ties, maintenance and location of assets and social arrangements are considered in this determination. If you are considered a foreign resident for tax purposes and have an investment property located in Australia, you are required to lodge an Australian income tax return.
Secondly, your property, which was purchased as your main residence, has been leased for most of the period while you have been overseas. As the property is negatively geared, it is unlikely there would be any tax obligation to pay. However, any tax losses can be carried forward to offset against any taxable income in future years (when you return to Australia or earn Australian taxable income).
Thirdly, upon your departure from Australia, a capital gain event was triggered and you were deemed to have disposed of your taxable Australian asset (your house) at its market value at the time of leaving. Having said that, you do have an option to defer any capital gain/loss until a ‘taxing point’ in the future (generally when the property is sold).
CGT ON A DUPLEX
I’m interested in building a duplex with the intention of living in one for at least 12 months and then selling. I would then move next door to the second dwelling, which would have been rented out for the same period. What would be the tax implications when selling the second property after 12 months of it being my principal residence?
A property established as your main residence (MR) will be exempt from capital gains tax (CGT) when sold at a profit.
To be exempt from CGT a property has to be established as an MR. This usually includes occupying the property for at least three months after acquisition, having utilities registered in the owner’s name, including electricity and telephone. Registering with the electoral commission using that address is also a stronger indicator that it is your MR.
Nil change in tax exempt status occurs when a development application (DA) is lodged for subdivision and/or construction of a duplex. Moving into one of the dwellings, on completion of construction, maintains the tax exempt status of the duplex nominated as the MR. However, the second duplex becomes subject to CGT if sold at a profit at any later time.
If you happen to move into it to establish the second dwelling as your next MR, then the capital gain derived on its subsequent sale would have to be apportioned between the time the second residence was occupied as an MR and the total time the property has been owned.
In its simplest form, capital gain is calculated as the difference between the net selling price and the cost base. The cost base will include the original purchase price, stamp duty, legal fees, construction costs, part of the DA fees, building inspection fees, etc.
For tax to be payable in the first place, there has to be a sale for a price that is higher than the cost base.
Where the second dwelling is sold immediately after completion of construction, the ATO is likely to consider that you were carrying on the business of property development. This means any profit on the sale will be taxed as ordinary business income. The disadvantage of this is that no 50% discount is available as is the case when the gain is considered to be of a capital nature and the property was owned for longer than 12 months.
Note that where there is an ‘intention’ to sell at a profit, any gain is taxed as business income, regardless of how long the property was owned. A taxable capital gain is included on your tax return as normal income. When added to your income it may push you into a higher marginal tax rate.
- Shukri Barbara