The Australian tax guide to owning foreign property

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The ownership of overseas property is increasingly common in Australia. Whether you acquired property before coming to Australia, inherited a property from a deceased relative or simply bought somewhere as a bolt-hole from Australian life, it's important to remember that foreign property carries with it a number of Australian tax consequences. Failing to disclose the existence of your overseas property to the ATO carries stiff penalties, so here are my tax tips for an easy life.

Tax treatment of rental income and deductions

As an Australian resident, you are taxed on all your worldwide income. Therefore, you must declare any rental income that you derive from your overseas property in your Australian tax return.

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If you've paid tax overseas on your overseas rental income, you will often be able to claim a tax offset for the foreign tax paid against your Australian tax. This prevents so-called double taxation.

Deductions can be claimed for your overseas rental property in the same way that they can for an Australian property. That means that items like local rates, utility bills, repairs/maintenance and agency booking fees can all be deducted from your rental income.

In addition, you can also claim a deduction for the interest that you pay on a foreign mortgage. However, it is important to note that if you are paying the foreign mortgage direct from Australia, you can only claim a deduction for the interest if you pay withholding tax to the ATO in relation to the interest that you pay. Interest withholding tax is 10% irrespective of the country that the recipient is based in (though it can be reduced - sometimes to nil - if there is a double tax treaty in force with the overseas country) and is imposed when the interest is paid.

The costs of traveling to inspect an income-producing property (including flight and meal expenses) are NOT deductible.

Remember, you can only claim deductions for the periods the property is rented out or is genuinely available for rent. Periods of personal use can't be claimed. In addition, where the property is let at less than market rent - to friends or relatives for example, who might pay you a token amount - income tax deductions for that period will be restricted to the amount of rent received.

Where only part of the property is let, deductions are restricted to those expenses which relate either directly to the rented area or to a proportion of expenses which relate to shared areas which are available for both you and your guests to use (such as a communal lounge or kitchen).

Capital gains tax

Overseas properties are subject to Australian capital gains tax (CGT) when disposed of. If you have owned the property for more than 12 months you will receive the 50% CGT discount, which effectively halves the amount of tax that you pay.

If you are also subject to tax overseas on the disposal of your foreign property, you will get a credit for the overseas tax paid in the form of a foreign tax offset; this is also discounted by 50% if the property qualified for the CGT discount.

The capital gain is basically the difference between the original cost (translated to Australian dollars at the date of acquisition) and the sales proceeds (translated to Australian dollars at the date of sale). In addition, certain expenses of acquisition and sale (eg estate agent fees) can be added to the original cost.

Other obligations

When completing your tax return, you must ensure that all mandatory questions regarding foreign source income and assets have been answered fully and correctly.

Source documents such as foreign income tax returns, records of income and receipts or invoices for expenses must be retained at all times. You could be obliged to produce them to the ATO on request.

What if you are a temporary resident?

Temporary residents are those who reside in Australia on a temporary visa, such as a 457 employment related visa. Special rules apply to any foreign income earned by temporary residents. Unlike other tax residents, temporary residents do not have to have to pay tax on their foreign income, with the exception of certain short term foreign employment income. Therefore, if you own an overseas investment property and are on a temporary visa, you won't be taxed on the rental income

In addition, temporary residents do not have to pay capital gains tax if they dispose of an asset whilst in Australia, unless the asset is Taxable Australian Property (such as an Australian investment property). Foreign property therefore doesn't need to be declared on your Australian tax return.

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Mark Chapman is director of tax communications at H&R Block, Australia's largest firm of tax accountants, and is a regular contributor to Money. Mark is a Chartered Accountant, CPA and Chartered Tax Adviser and holds a Masters of Tax Law from the University of New South Wales. Previously, he was a tax adviser for over 20 years, specialising in individual and small business tax, in both the UK and Australia. As well as operating his own private practice, Mark spent seven years as a Senior Director with the Australian Taxation Office. He is the author of Life and Taxes: A Look at Life Through Tax.

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