Lodging Tax Returns when Working Overseas
Q: I am an Australian citizen and own two properties (both mortgaged) on the Gold Coast in Queensland. I live and work overseas, and have done so for 10 years. Both properties are rented. Am I required to lodge a tax return in Australia? I have no future plans to return to Australia any time soon, if ever. What should I be doing, if anything?
A: If you go overseas and cease to be an Australian resident, some of your assets (generally those that are not considered taxable Australian property) are deemed to have been disposed of for CGT purposes. On the date you became a non-resident, it is deemed that you have disposed of all the assets that are not ‘taxable Australian property’, even if you haven’t sold them. Your investment properties in Queensland are considered within the definitions to be Australian taxable property, which means that these will not be subject to the deemed disposal provisions (therefore you do not have a deemed CGT liability).
However, if you are a non-resident for Australian tax purposes and if you actually sell these properties, you will have realised a CGT event, which means that you may be liable to pay CGT. The tax implications in this situation are that, as a non-resident of Australia, you will be ineligible for the CGT 50% discount concession, which means that your CGT liability will be assessed on the full capital gain on the properties. Furthermore, Australian tax non-residents are also ineligible for the tax-free threshold, meaning that your marginal tax rates will apply from $1 onwards.
While you are an Australian non-resident for tax purposes and you own these properties, you will still be required to lodge an Australian income tax return as a result of owning Australian investments and also earning assessable investment income in Australia (and also incurring expenses related to earning assessable Australian income), even though you are no longer living in Australia.
If your two Queensland properties are negatively geared, you will not be able to offset these Australian losses against your overseas income. Rather, these negatively geared tax losses will accumulate and roll over annually in your Australian tax returns until required in the future.
Tax on Redeveloping an Existing Property
Q: I’m currently looking for a tax accountant to advise on a tax-related matter. The scenario is as follows:
- I bought a property with an old house on the land for $500k in February 2014.
- Then I decided to knock down the house and rebuild as a block of four townhouses.
- I’m planning to sell all four units for a total selling price of $1.6m.
My concern is: what are the taxes applicable in this case?
- The total cost to build the townhouses is approximately $1.25m. Therefore the income before tax is approximately $350k.
Could you please advise me on this matter? What is the best way to minimise tax?
A: As I require more specific details, I will be making the following assumptions:
- The property development project will be 18 months.
- You have borrowed the full amount of the property’s purchase price plus the construction costs for the four townhouses.
- All sale and cost amounts are GST inclusive.
- The interest expense on the loan for the 18 months will be $100,000.
Additionally, I am not sure whether the total cost of $1.25m to build the townhouses also includes the cost of the land ($500,000), so I will provide calculations for both scenarios.
As you are embarking on a property development with a view to selling and making a profi t, this will be a business enterprise and you must therefore be registered for GST.
Since your intention is to sell all four units, then you can claim the GST input tax credits on the construction costs and you must also pay GST on the units when they are settled. If the construction cost of the townhouses ($1.25m) does not include the purchase price of the land ($500,000), then your actual cost is $1.75m. If you subtract the GST portion of $159,091, your GST exclusive cost is therefore $1,590,909. The GST of $159,091 on the construction costs can be claimed as refundable input tax credits when you lodge your business activity statements.
With a GST inclusive sale price of $1.6m, this will therefore amount to a GST exclusive sale price of $1,454,545, and the GST amount of $145,455 must be paid to the ATO when your business activity statements are lodged following settlement of these units. With an interest expense on the loan of $100,000, you will actually have made a loss of $236,364 in this particular situation.
If the construction cost of the townhouses is $1.25m, which also includes the cost/purchase price of the land, then your GST exclusive cost will be $1,136,364, which will entitle you to refundable GST input tax credits of $113,636. In this case, your profit will be $218,182, on which you will be assessed for income tax liability at your marginal income tax rates, and/or if your structure is under a company it will be at a 30% tax rate and amount to $65,455. As this is a business enterprise you will not be eligible for the capital gains tax discount concessions either.
When it comes to property development, I often see many of my clients fail to include GST in their overall calculations, profit margins and also cash flows.
There are ways to minimise tax and I can assist and advise you in this area; however, I would need to review your structures and specific situation/circumstances before I could provide you with specific advice.
The tax expert:
Angelo Panagopoulos is principal at Hamilton Reid Chartered Accountants, specialising in property and taxation, asset protection and ownership structures.
The views provided are of a general nature only and should be considered as general education. Readers should not act on the information above without obtaining professional advice relevant to their circumstances. The article is intended as information only.
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