Tax Q&A - Aussie Expat Investor & CGT on Inherited Property

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I would like your advice on the following situation please. I am an Australian citizen, currently living and working overseas in a tax-free country. I am considering purchasing a house back in Australia as an investment property – what tax complications should I take into consideration before getting involved in the purchase of the investment property? Would I need to advise the tax department prior to the purchase or wait until tax time? Where should I go for answers?

A: Although you are an Australian citizen living and working overseas, for Australian tax purposes you are assessed as a non-resident. What this therefore means is that if you purchase a house in Australia for income producing investment purposes (as an Australian nonresident for tax purposes), you will be assessed on your Australian income which includes assessable income (and allowable tax deductions) derived from the Australian investment property.

If your property is negatively geared, you cannot offset this Australian tax loss against your overseas employment income. The loss is carried forward in Australia and may be available to use when (and if) you return to Australia and assessed as an Australian resident for tax purposes. If your property is positively geared then you will be assessed based on the Australian Taxation Office’s (ATO) non-residents rates which start from a marginal tax rate of 32.5% with no taxfree threshold.

In determining the net profit or loss of the property, the rental income can be offset by allowable tax deductions relating to the property such as council rates, water rates, land tax, insurance, repairs and maintenance, interest expense on the loan, depreciation and borrowing costs.

What must also be taken into consideration is the capital gains tax treatment if you decide to sell the property in the future. The capital gains tax treatment and assessment is different and this depends on whether you are a resident or a non-resident for tax purposes in Australia. If you sell the property whilst you are still overseas (ie a non-resident in Australia for tax purposes), then you will not be eligible for the 50% capital gains tax discount concession and you will be taxed on your marginal non-resident individual income tax rates which start from 32.5% with no tax-free threshold.

However, on the other hand, if you return from overseas and are deemed an Australian resident for tax purposes at the time when you sell your property in the future (assuming that this property is held in your own individual name and not in a company, trust or a superannuation fund) and if you have held the property for at least 12 months, you will be eligible for the 50% capital gains tax discount concession and assessed on the resident marginal individual tax rates with a tax-free threshold applied.

Following the capital gains tax considerations, if you purchase the investment property whilst overseas as an income producing investment and then you decide to return to Australia (and become an Australian resident for tax purposes again) and you wish to live in this property by nominating it as your principal place of residence, then, for the period that you have been using this property as your principal place of residence it will be free of capital gains tax if you sell the property in the future.

However, there may be a pro-rated capital gains tax still applicable for the period of use as an income producing investment property. For example, if you purchased the property and used it as an income producing investment property for three years, you then returned to Australia to live in this property as your principal place of residence for seven years for which you then decided to sell the property.

The assessable capital gains tax applies to 30% of the overall capital gain you may have made from the sale of this property because it was used as an investment property for 30% of the overall total ownership period. Prior to the purchase, you will not be required to advise the Australian Taxation Office as the assessable income and allowable tax deductions for this property will be reflected and lodged via your annual income tax returns.

– Angelo Panagopoulos

I inherited 8 acres of vacant land from my mother who has died. If I sell it for $140,000 do I have to pay capital gains tax? The land is in Queensland. I don’t own any other properties and am currently renting. My mother owned the land for 40 years and she died in 2012. I’ve owned the land since August 2013 and had to pay rates on it. What are my CGT obligations if I want to sell it?

A: Generally, with property there are no tax impacts until a disposal/sale happens and a ‘CGT event’ occurs. Capital gains are calculated as the difference between the sale price and the cost base. The cost base includes the purchase price, stamp duty, legal fees, pest and building inspections. Cost base also includes the cost of repairs immediately after acquisition. Any capital renovations are also considered part of the cost base. For non-productive land the cost base also includes rates and taxes paid.

With inherited real estate, one of the fi rst considerations is the date of when the property/land was fi rst acquired by the deceased. If acquired before 19 September 1985, then the cost base for the benefi ciaries will be the market value on the date of death (DOD). This is the case here. The market value can be determined by having a valuation carried out, preferably by a qualifi ed valuer.

Where disposal is made within two years of date of decease, there will be no CGT impacts. So the proceeds are obtained free of tax by the benefi ciaries. The two-year period is to allow for probate and other legal issues to process. Where a disposal is made after the two years from the date of decease, CG is calculated as described above.

Capital gains is considered income and is added to your tax return. So the rate applicable to it depends on your other income and the marginal tax rate it pushes you into. Depending on your personal circumstances this may be negligible.

– Shukri Barbara

The comments above are of a general nature only and not to be acted upon without advice from your property tax specialists. 

The Experts:
Angelo Panagopoulos is apartner at Wilson Pateras Chartered Accountants.
Shukri Barbara is principal advisor at Property Tax Specialists.

This article was published in the June 2014 edition of Your Investment Property magazine. You can subscribe to the magazine here


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