By Jarrod Rogers CPA
We often receive questions from foreign owners of Australian properties, such as this: “I am a resident of the UK and I own a property in Melbourne. I do not live in Australia and do not have Australian citizenship. I work and pay tax in the UK. Do I have to pay tax in Australia on the rent I earn?”
Yes… sorry. Australia taxes anything it can, as a rule.
“But I don’t even live in the country…”
It doesn’t matter if you don’t live here. In fact, if you don’t vote, you can’t complain, so they’ll tax you even more, as a rule. But read on, and we’ll explain how to keep things nice with the Australian Taxation Office (ATO for short) and how to ensure you don’t pay more tax than you need to.
If you are too busy for the details, here is the quick version.
If you are a foreign resident and you earn rent from an Australian property:
- You should lodge a tax return each year and include your “net rental income”, that is, rental income minus rental deductions. Deductions include loan interest, holding costs, estate agent’s fees and repairs.
- The financial year in Australia ends on June 30
- If the property is less than 20 years old it could be worth getting a tax depreciation report. This report outlines how much you can write off for the decline in value of the building and the assets inside it. Not all properties can benefit from depreciation deductions.
- Your income in Australia is subject to tax at a rate of 32.5% (foreign resident tax rate). This rate gets higher if you earn over $87,000.
- If you sell the property and make a capital gain – that is, the sale price exceeds the purchase price – then the profit is taxable.
- If you sell a property in Australia for more than $750,000 you are taxed at the time of sale but you can get a refund of some or all of the tax by lodging a tax return.
- If a property is jointly owned, the co-owners include their share of the rent in their tax return. Each owner needs to lodge a separate tax return. There is no such thing as a joint tax return in Australia.
- If you need assistance you can book an online consultation with one of our experienced Australian accountants. We have clients all over the world and make ourselves available to talk with foreign residents.
Australian tax on rental properties with foreign owners
The Australian tax system imposes tax on rental income earned by foreign property owners as well as on profits when a property is sold.
The two basic rules in the Australian tax system are these:
1. If you are an Australian resident (for tax purposes) the government can tax you on income from anywhere in the world
2. It you are a foreign resident (for tax purposes) the government can tax your Australian sourced income
Rental income from an Australian property is Australian sourced income, so rent is taxable.
How much tax does Australia charge on rent earned by a foreign landlord?
The rate of tax on rent starts at 32.5%. Unlike Australian resident taxpayers who can earn a fixed amount of income tax free, a foreign resident is taxed from the first dollar earned. The tax rate remains at 32.5% on the first $87,000 you earn and then rises to 37% (2016-17 tax rates).
Can I claim expenses against Australian rental income?
Before you get too discouraged, I should point out that you are not taxed on the total rent you receive. You only have to pay tax on your net rental income, which means your income minus your rental deductions.
You can deduct expenses like: owner’s corporation fees (also called strata fees), estate agent fees, local government taxes (called ‘council rates’), water rates, insurance, repairs (but not improvements), gardening, advertising and more.
If you used a loan to buy the property then the interest you pay is tax deductible (just the interest, not the whole loan repayments).
If you bought land and built a property you can write off the costs of construction and the assets inside over the lifetime of the building. These “decline in value” deductions reduce your net rent and therefore reduce the tax you pay. Depending on when you bought your property you can also write off the costs that the previous owner paid to build, improve or furnish your property. You can ask a quantity surveyor to prepare a report for you detailing the deductions available.
It is important to ensure you are include deductions for all your claimable rental property expenses.
Australian tax on the sale of a property
If a foreign resident sells an Australian property then a “capital gains tax event” or “CGT event” has occurred. This can mean you have to include a capital gain or capital loss in your tax return.
Capital gains tax for foreign property owners (Australia)
The capital gains tax rules tax property owners on the increase in value of an asset they own in Australia. This applies to foreign residents as well as Australian residents. In fact, the tax rules are more harsh for foreign residents.
A capital gain is equal to the capital proceeds (the sale price) minus the cost base (the purchase price plus purchase and sale costs among other things).
Here’s an example:
- A foreign resident buys a property for $700,000
- Stamp duty and other purchase costs total $30,000
- The property is rented for a few years then sold for $800,000
- Selling costs (estate agent’s fees, legal costs) are $20,000
At first glance, the gain is $100,000 (bought for $800,000, sold for $700,000). But once you add the other costs the gain is much lower.
Total costs are $700,000 + $30,000 + $20,000 = $750,000. This is the cost base. The capital proceeds are $800,000. That leaves a gain of $800,000 minus $750,000 = $50,000.
The tax on the gain at 32.5% is $16,250.
For properties bought before May 2012 a discount can apply to the gain. Or if you were an Australian resident for part of the time you owned the property a discount can apply. This is complex to work out, but the gain is between 0% and 50%.
Enforcement of tax on the sale of Australian property
When a property owned by a foreign resident is sold for over $750,000, tax is payable immediately. In the past, many foreign owners have sold property in Australia without paying any tax. It is now the purchaser’s responsibility to pay directly tax to the Australian government by withholding some of the sale price.
From 1 July 2017 if a foreign owner sells a property for more than $750,000 the purchaser must withhold 12.5% of the price and pay it to the ATO. The seller is only entitled to receive 87.5%. To get the other 12.5% the seller must lodge a tax return and declare their capital gain (or capital loss).
Let’s expand the example above. A property is sold for $800,000 with a resulting tax bill of $16,250. Under the old rules, the seller would receive $800,000 from the buyer and many months later (or maybe never) would lodge a tax return and then pay the tax they owe.
The system from 1 July 2017 is as follows:
- Property sold for $800,000
- Buyer pays 87.5% of the agreed price to the seller ($700,000) and pays 12.5% ($100,000) to the ATO.
- The seller lodges a tax return.
- The ATO assesses the tax bill of $16,250.
- The taxpayer has a credit for $100,000 so the ATO pays a refund of $83,750.
- If the seller has other tax debts the refund will be used to offset these debts
Australian tax advice for foreign resident property owners
Australian tax can be complex, especially if you live in another country. And it can be expensive to get it wrong.
Beyond Accountancy can help. We offer online appointments that allow foreign residents to speak one to one with experienced Australian accountants. We can help lodge outstanding tax returns and advise you on ways to legally ensure you don’t pay more tax than you need to.
If you have not lodged tax returns in the past and now realise are years overdue, don’t stress. We can help you catch up – it’s one of our specialties. In fact, we once helped a Hong Kong resident catch up on 10 years of Australian tax returns. He made an innocent mistake but was penalised for being late. We successfully negotiated with the ATO to waive penalties of $80,000 on the grounds that it was an honest, one-time error which he did his best to fix once he was aware.
If you are interested in getting assistance please book an online appointment via our website. If you have queries prior to booking please use the contact form to get in touch.