Overseas property investment presents a substantial money-making opportunity that might not be available here at home. However, investing in these properties can seem like a lot of work, especially when it comes to tax.
The way the Australian government handles overseas property investment is relatively straightforward, but there are some elements you need to take into account. A deduction in a foreign country, for example, might not apply here at home.
Here’s a basic overview of the tax implications of foreign property investment to help you better understand the system. It’s always a good idea to see an accountant when you’re handling a vast portfolio, but this article should provide you with some clarity.
Investing in Overseas Property
Many overseas property investment opportunities come in the form of rental properties. For example, if you purchase a home in the UK and rent it out, you have to report your earnings on your annual taxes.
You need to include any income you receive from your overseas property, regardless of the property you buy.
This income includes rent, associated payments (such as goods or services), and transactions that take place in another country.
You will be able to make deductions for repairs and depreciation, but the government won’t allow you to claim certain improvements on your overseas property. Thankfully, the government also protects you against double taxation through their foreign tax offset rules (more on this below).
Interest in Foreign Entities
Overseas property investment isn’t the only foreign income you have to report on your taxes. You must also report any dividends from foreign investment and any interest you receive from a foreign bank account.
Those who regularly travel to their rental property likely have an overseas bank account for managing funds and it’s important to note that you have to report interest from these accounts on your tax returns as well.
Tax Offset Rules
Thankfully, the Australian government considers the taxes you’ve already paid on your overseas property investment when you file your income taxes in Australia. This consideration is called tax offset, and it protects you from double taxation.
You will be able to claim a tax offset for taxes you paid in a foreign country on your Australian tax returns. You must have actually paid or be deemed to have paid the foreign tax, and the income must be included in your tax return.
If you do not include a foreign investment on your taxes it’s possible that you will face double taxation in the long run, alongside a potential penalty for failing to report the income.
What Happens When Financial Years Are Different?
It’s entirely possible that the foreign country in which you invested has a different fiscal year than the one in Australia. This will lead to you paying your foreign tax a year before or after you pay it in Australia.
You can only claim the offset after you’ve paid your foreign tax. This is only a hassle when you pay the foreign tax after you’ve paid in Australia. You will be able to request an amended assessment for the financial year if this happens.
You can claim the amended assessment up to four years after you pay your tax in Australia.
Keep The Exchange Rate in Mind
Stay on top of the exchange rate if you have an overseas property investment. It’s worth considering the rate before investing to see how it may affect your finances over time.
Before you include a foreign income amount on your tax return, you must convert it to Australian dollars. This can be done using the rate of exchange at the time of the transaction, or the average rate for a period of time. The ATO publishes an annual list of exchange rates that you can use.
There are hidden costs when it comes to overseas investments, and the exchange rate could be one of them. This, along with renovations and repairs, can end up costing you more than you earn in rent once you convert the funds.
While foreign investments are a good opportunity to make passive income, they can be risky. Make sure you know all of the risks associated with your property before you buy.
Capital Gains Tax
Australian residents are taxed on capital gains for overseas assets. That means that if you sell your overseas property investment, you’ll have to report the profits (if any) on your tax return.
Capital gains are actually not a standalone tax; rather, they are included in your assessable income, which is then taxed. If you’ve already paid foreign tax on capital gains, you might be eligible for a tax offset.
Handling Your Overseas Investment
Working with an overseas agent or manager to handle your property can make overseas investments much easier to deal with. It’s hard to manage tenants when you’re half a world away, so finding a property manager you trust can be a massive help.
You will still have to pay taxes on your earnings if you use an agent, but picking the right one can provide some peace of mind.
You may also want to use an accountant when it comes time to report your earnings. Understanding all of the deductions, offset rules, and earnings/losses can be a bit confusing if you do your taxes yourself, and you open the door for mistakes and penalties.