FAQ

In the modern era it is becoming increasingly common for people to keep a holiday home in Australia and visit it for extended stays during the year.

If you have purchased a home in Australia and you have decided not to relocate permanently then you will still be considered a non resident for tax purposes and will remain so until you chose to have a more permanent presence.

As a non resident, your worldwide income is not subject to tax in Australia, only Australian sourced income such as wages while living there or rental or capital gains on an Australian property.

If you have a holiday home that you do not rent out during periods when you are not using it, then there are no income tax requirements for you and you will not be required to lodge an Australian income tax return unless you do some paid employment during your stay in Australia.

You will however be subject to capital gains tax on the eventual sale of the property if you make a profit over cost of purchase, acquisition costs, any paid improvements to the property and selling costs.  If you have owned the property more than 12 months half of any net capital gain will be free of tax, the balance subject to normal marginal rates with the opportunity to do some effective tax planning to keep this to a minimum.

If the property is rented out in your absence, then you must lodge an annual income tax return each year declaring the rent received.  You will be allowed to deduct all expenses of ownership including maintenance, rates, electricity and interest on loans.

The expenses need to be reduced on a pro rata basis to remove the period of time that you kept the property for your own personal use.

You are entitled to claim costs relating to the property during periods of vacancy provided that it was “available for rent”.  That would need to be evidenced by such things as a formal listing with a property manager, advertisements stating the property was available and appropriate communication showing evidence that you tried to find tenants.

The rental system is well established to cater for short term lets, so you will find good support should you choose this option and it can ensure the financial cost of the property is kept to a minimum and maybe even turn a profit.

If you intend to keep the property just for your own personal use, it is usually best to have no mortgage on the property as you would want to minimise the cost of ownership.  That does not mean you need to leave the capital idol, as it can be used as collateral for further investment decisions including Australian property or other prudent investment options.

Using the equity in your holiday home to acquire an additional Australian investment property that is rented on an ongoing basis, can prove very tax effective as proper planning in this way can protect against potential capital gains tax on the sale of either property.

This needs to be done with due consideration and a clear understanding of the financial and tax implications, so it would be wise to seek professional advice to ensure you make the best decisions to suit your circumstances and maximise the benefits of your Australian property choices.

Australian property finance is a well establish, competitive and highly regulated activity.

As such, the costs involved are very reasonable when arranging your loan.  Costs would be split between the set up fees and the ongoing loan.

Loan Set Up

Typically there is an Establishment fee or Application fee when your loan is approved with a bank.   This is typically between A$300 to A$750.  At various times some bank offer incentives and reduce this if you are lucky.

Most banks do not require this to be paid until they have assessed your application and have confirmed their willingness to provide the loan.

This is true for both a formal application and also if you are seeking a pre approval prior to purchase.

If you use a Licenced Finance Broker, such as Specialist Mortgage, you should not be charged a brokerage fee, as the bank would normally remunerate the broker and therefor there is no need for any additional direct charge by the broker.  At Specialist Mortgage we do not charge any brokerage fees to our clients.

When the loan is approved and progresses to draw down, there will be additional costs such as loan documentation, property valuation fee and settlement attendance fees.  These are usually very modest and in many cases included in the application fee.

Under Australian lending regulations, the bank is required to clearly detail all potential costs when they make the loan offer so there should be no surprises for you.

Ongoing Fees

Many banks offer special packages that include discounted interest rates.  It may be that an annual bank fee is charged for you to obtain this, and is worth considering as it may lead to substantial savings.  Once again, the bank is required to advise you of all potential ongoing fees on the loan, including monthly charges and statement fees, in advance.

When we review your lending options we compare all the interest and fee options available to you between the banks and find the one that is best suited to your circumstances.

Click here for more informaiton on Australian Property Finance

When it comes to investment it is easy to find an excuse to delay a decision as there is always one to be found.  Market bubbles, interest rates and indeed currency are popular reasons to delay rather than act but many people don’t realize the cost of procrastinating when it comes to Australian property is more than they think.

From a taxation perspective, the many incentives on offer to reduce future tax on your Australian salary when you return to Australia require as much time as possible to accrue in order to achieve the best result so you do weaken your future taxation position, albeit not significantly if your delay is short lived.

From an investment perspective, the Australian property market continues to achieve sound and stable growth, so delaying the entry decision can prove more costly than any potential currency cost.

Many people are not aware of the fact that quality lending can act as a natural currency hedge by allowing you to minimize the deposit required and only be exposed to the high currency cost on the funds required to purchase rather than the full purchase value.

When using sensible lending, your cash outlay would be limited to your 20% deposit plus approximately 5% allowance for costs such as stamp duty and legal fees.

Depending on your point of view where the currency might move to, or how much it may be “overvalued” it is important to find the reality of your delay decision.

This is best explained in an example.  Let’s assume you are looking to purchase a property in Australia for A$500,000 of which you would require 25% for deposit and costs to acquire, the balance coming from an Australian dollar loan.

If you feel the Australian dollar is overvalued by say 10% at the moment and would improve that much in the next 12 months, then the “additional cost” of acting now would be 10% of the cash required of A$125,000, being A$12,500.  So if you waited the year for the currency to improve (assuming it does) then you would be better off by A$12,500.

However, if the property you are looking at grows by the average rate of 7%pa over the next year that can be more expensive.  The reason being is that it is calculated on the total purchase price, so a A$500,000 property would be worth A$35,000 more in 12 months if it achieves this average growth.

Hence the net cost of delay is the potential increase in property value, A$35,000, less the assumed currency cost, A$12,500, being a net A$22,500 which is a cost of delay if you wait, or if you were brave enough to act is a extra profit to you.

Many people don’t factor this cost in when assessing the merit of action or delay and find out too late the real cost of delay is far greater than the potential currency loss.

You can then make the additional reductions of the loan later when you feel the Australian dollar has better value.

If you already have an Australian property that has some available equity, this can provide a full hedge on your next purchase as the deposit can also be borrowed against your current property holdings, hence ensuring that you do not need to convert any currency and experience no potential currency cost due to the high Australian dollar.

Under Australian Capital Gains Tax rules, the family home (referred to as the Principal Place of Residence) is free of Capital Gains Tax.

It is a common misconception that if you have a property that was not your residence and had been rented out, that if you move into it for a period it can become tax free under the PPR rules.

This is completely not true, regardless of how long you may actually live in the property in later years.  Instead, the tax free status is allowed on a pro rata basis, so for the period of time it was actually your home that portion is tax free but the rented period remains taxable regardless.

For example if you own a property and rent it out for 4 years then move back in for 1 year prior to selling, only 1/5^th of any gain would be tax free while the remainder would be taxable. Importantly you would still be entitled to the normal half tax free allowance on the taxable portion once I have owned the property for more than 12 months, which in this case had occurred.

There is no minimum time to what constitutes living in the property, however you should genuinely have it as your home and this would be evidenced by such things as electrical accounts, removalists invoices, licence address and electoral roll address.

There may be some further concessions available to this rule is if you had lived in the property prior to moving abroad or renting it out, in which case there are some special rules that treat the property as if it has remained your home for up to six years, even though it was actually rented during this period.

In these situations, you are meant to obtain a valuation when you originally moved out, and that valuation amount becomes your new cost base for tax purposes.  Therefore any capital gains from the original purchase price up to the new valuation will remain tax free.

If the property is sold within the six years then no tax is applicable.

If sold after the six years after moving out, then it will be pro rata from the time of leaving to time of sale.  This may be minor, so you should not sell just to protect against potential tax issues.

Importantly, you must have actually lived in the property while being a resident for Australian tax purposes, so you can’t nominate the property as your home unless you had physically lived in it.

If you move back in to the property then it will increase the pro rata tax free period even further.

Notwithstanding that there may be tax issues that may not be welcomed there are many ways to protect against the Capital Gains Tax through sensible planning while living abroad including further acquisition and debt management.

You should not be afraid of the effect of Capital Gains Tax as rates of tax in Australia have reduced significantly over the recent past so even the full tax cost may be far less than you thought it might be, but obviously if you can legally reduce the potential cost, then this should be investigated and considered.

In July 2009 the Rudd Labour Government changed the way foreign incomes were taxable for Australian Resident taxpayers.

Under the old rules, if an Australian worked abroad for more than 90 days and paid tax in the country of earning, then it was treated as exempt income in Australia and no tax would be charged on this.  Under the new rules, it is fully taxed in Australia and a credit is allowed for any tax paid in the country of earning.

Importantly, these rules only apply to Australian resident taxpayers, which is those living in Australia and just travelling temporarily overseas for work.

Recently, the Australian Taxation Office has increased its Audit activity in this area and is sending letters to many Australians working abroad.

These letters are actually soft Audits to check on the accuracy of the return.  The standard letter that has been sent to many is very confusing and suggests that the ATO has “decided” that a persons residency status has been found to be as a “resident” and hence all offshore income should be included as taxable.

This is an very bad practise, designed to try and ensure that the recipient responds with urgency to the request by making the alternative of inaction very costly.

It is essential to understand that this is not the correct treatment for those living legitimately overseas with a long term intention, so if you receive a letter from the tax office similar to these you must:

Act quickly to make initial contact with the Taxation Office, preferably through your Australian Tax Agent.

Make it clear that you are indeed a Non Resident for tax purposes and therefore your Foreign Income is not taxable in Australia and there is no need to alter past returns lodged.

You will be asked to submit a Residency Questionnaire to confirm this, which should be duly competed and returned.

Once this has been attended to then the matter will be concluded in your favour.

If you do not respond to the Questionnaire, you run the risk of the ATO issuing an amended assessment which will include any income they are aware of (including transfers back to Australia) and a sizeable tax and penalty bill may arise.  This can be disputed, but it will be a long and troublesome issue which could have been avoided by responding originally.

Surprisingly, the ATO is quite easy to deal with on these matters provided you remain attentive, co-operative and polite so ensure you do not feel threatened by the difficult, but required, administrative process.

If you have any doubt about your situation or concerns, make contact with your advisor or contact our office and we will be pleased to assist you gain a full understanding.

Buying a home prior to your migration to Australia is always a good idea and may in fact create some significant tax advantages prior to your arrival.

Under Australian foreign investment laws, the only restriction for foreign investors acquiring property in Australia is that they must buy a newly built property or land provided that construction begins within 24 months.

It is not done as a deterrent, rather it is to keep our property market safe and ensure foreign investment creates jobs and increases the rental pool.

If you have already been granted an Australian Permanent Residency Visa, then this restriction does not apply and you can acquire property whether new or established.

If you are married to an Australian Citizen or permanent resident, you can also acquire established property provided it is acquired as joint tenants with your spouse.  This includes defacto relationships.

Purchasing a property prior to arrival may also be very beneficial in some other important areas:

• It can protect against future Australian income tax on arrival as any holding cost on the property (rent less interest and expenses) is allow to accumulate as a tax deduction indefinitely.  As such you can build up a sensible level of tax losses prior to arrival that can offset any Australian income tax on salary, investment or retirement income once you relocate.

• It may be easier to arrange financing prior to relocation while you are still gainfully employed rather than waiting until you have moved to Australia.  This may make a better home even more accessible with finance readily available for up to 80% of any purchase price for non residents acquiring Australian property.

• You get to acquire the property at todays price rather than tomorrow.  Australian property markets have proved their stability over many decades, so prices of property tend to hold firm and grow at a reasonable pace.  The decision to delay purchase can make the eventual price of your home higher and increase the burden of loan that may be required.  The earlier you acquire, the least cost is most likely.

Depending on your time horizon for relocation, acquiring a property that would suit your living requirements is a very wise decision and even if you may change your mind and chose to live elsewhere, it will stand as a safe and sensible investment decision that can be kept and continued to be let out, or sold to help pay for your new intended residence.

Many people wrongly believe that they will be taxed on any money they send to Australia, but this is not the case.

You can freely send money to and from Australia without any tax consequences in Australia whatsoever.

Once you begin living in Australia you will likely be subject to worldwide tax, however this will not be on the original amount you had in savings or cash, only on any interest that may have been earned on it after the date you have formally relocated yourself and family to Australia.

Even if you send the money down for family members, it will not be taxable to them as long as it is not payment for some service or employment.  Simply gifting them or loaning them money is not a taxable activity.

If you continue to live overseas for some time, then any interest earned in Australia will only be subject to a 10% Withholding Tax.

Once you move to Australia, there is no obligation to close the bank accounts you have in your country of origin, so you can keep them open and leave funds there if you so choose.  You will just be required to declare any interest earnings on the accounts each year.

Many people mistake the need to declare cash taken to Australia with some sort of taxation consequence.  The Cash Transactions Reporting rules require any one leaving or entering Australia with more than A$10,000 equivalent in cash to declare it at the airport.

This is more for anti terrorism, money laundering and anti crime than for tax evasion.

In fact, you can legally bring in much more cash than the declaration amount, as long as you can show a legitimate source for the money, such as closing a bank account or proof of an official withdrawl.

If the amount is electronically transferred to Australia, rather than sent in cash, then there is no restriction on the amount sent, as anti terrorism measures have already been taken by the sending bank or institution to verify your identity in accordance with international convention.

The Australian tax laws are surprisingly favourable for incoming migrants and you should not be fearful of any potential impact on your savings.  This does not mean you can be complacent, and it is advisable to gain a suitable level of understanding of your obligations in order to ensure you legally keep your taxes to a reasonable level.

Australia does have strong international tax rules that require anyone living in Australia to declare and pay tax on their worldwide income and capital gains.

Unlike places like the United Kingdom, where a lot of the tax Domicile rules are centred on where you are a citizen, the Australian tax rules have a more practical approach.

For Australian Tax purposes, we have a Resident and Non Resident Status that centres around the physicality of your person in determining the tax treatment.

A Resident is simply someone that “ordinarily resides” in Australia and requires you to be living on a permanent basis in Australia.

When you are granted a Permanent Residence Visa, this does not trigger off any taxation consequences at all, so the mere task of visiting Australia to complete formalities will not mean that you begin paying Australian taxation provided it is just a temporary stay for that purpose or a short holiday.

Only if you decided to physically move your family and belongings permanently to Australia, would you then start to become a resident taxpayer.  This would be evidenced by packing your belongings and shipping them down, relocating the kids schooling, obtaining a job and moving out of your home in the United Kingdom.

All of these acts are a clear indication that you have moved permanently to Australia to start a new life and would mean that you are now taxable on worldwide income.

There are many concessions to start you off as a resident taxpayer including the fact that all income and assets up to the date of arrival are non taxable in Australia, but you should seek professional assistance to gain a full understanding of your situation.

There are also some special rules for people living in Australia on Temporary Visa’s that can ensure no tax is payable on worldwide income even if they are living in Australia on a full time basis.

If you simply are on a short term visit to satisfy the Visa requirements or a holiday, then you would remain a Non Resident for Australian Tax purposes which would mean that your worldwide income would be completely ignored.  Only Australian property rental and Australian sourced wages would be subject to taxation.

Interest earnings, share dividends and capital gains are not subject to taxation in Australia for Non Residents.

Once you have your approved Permanent Visa stamped you usually have up to five years to relocate to Australia, and it would not be until the actual relocation that tax implications would begin.

This may give you time to plan effectively for your subsequent arrival.

In Australia there is no gift duty so the actual transfer of the value of a property from spouse to spouse does not attract a direct charge.  This is true even when you transfer to your children, relatives or even friends.

What you need to be careful about though, is the taxation and stamp duty issues.

Capital Gains Tax

Under our Federal Laws when an asset is transferred to another person for whatever reason.  Where the transfer is done to a relative for little or no consideration, the law provides that a taxable sale has occurred at the market value of the asset regardless of what is paid.

So if you do transfer property to your wife (or family) then you will be taxed as if it was sold normally.  This could be an expensive and unnecessary cost.

There is an exception if the property is the family home at the time of transfer and is transferred from spouse to spouse.  This effectively eliminates the Capital Gains Tax on the transfer that would otherwise have been payable.

Note this is only if you are living in the house at the time and relates to the transfer of up to one half from the sole holder to their spouse, so the only time it is sensible to transfer a share of the property to your spouse is when you are actually living in it.

Stamp Duty

Each State of Australia levies a transaction charge, referred to as Stamp Duty, on the transfer of property.

This includes real estate transfers and there is usually a fee of 2-6% of the value of the transaction.  Similar to the Federal Capital Gains Tax, this will be levied at the market value for related parties regardless of the amount of the actual transaction.

All states have a similar exemption from duty available when transferring from one spouse to the other, some even allowing a 100% share to be transferred, and they usually require the property to be the main residence at the time however some States do not require this to be a pre requisite.

You will need to have a solicitor or settlement agent handle the transfer and they should be able to confirm if any duty is payable in your situation.

You also need to remember to gain the approval of any lender that may have a mortgage on the property as they will need to give their consent and you will likely need to re apply for a new loan as the names will be changing from the original mortgagee which will incur additional costs and fees as well.

If you are considering transferring a portion of your property you should be sure to take professional advice as each case is different and may have inadvertent implications including the tax and stamp duty implications.  In the great majority of cases the transfer would be unnecessary and should not be undertaken until at least you are living in the property as your home to ensure the exemptions are available.

Under Australian Tax Laws, if you are a non resident for tax purposes (which basically means that you are living permanently out of Australia), then any profits made on publicly traded shares are not taxable at all.

This is great news for any expatriate, as you can use share investment as a means to build up a savings pool while you are overseas, completely free of Australian tax.

You need to be wary if you had owned the shares prior to your departure from Australia.  Under Capital Gains Tax rules, you are deemed to have disposed of your Australian investment assets at the market value on the date of departure.

This means that any profits, or losses, up to the time you left Australia need to be brought to account in the tax return in your year of departure. Once this is done, all future profits become tax free.

It is possible to make a deferral of any tax payable by a written declaration in that return electing to have capital gains tax on the eventual sale instead.  You should be cautious of doing this, as it will include the profit both while in Australia and the duration of time abroad.

In most cases this is not in your best interest, as having the ongoing profits free of tax is usually a preferred option.

However, if a substantial tax bill may arise, deferral can be wise if you are in fact able to build up some tax losses on your Australian property investments, which can then be used to offset the capital gain on the shares when eventually sold.Due analysis is required to establish the best option for you, as whichever option is chosen, it can not be changed later.

Regardless of which option you choose, any dividends you may receive after your date of departure are free of income tax.  If the dividend is “fully franked” then no tax issues occur.  If they are unfranked, then they may be subject to a Withholding Tax.

Franking simply means that the company has paid corporate income tax prior to declaring the dividend.

Saving during your time as an expatriate is essential, and having shares tax free in Australia may well be a further incentive to ensure that you wisely accrue capital whilst abroad.

The good news is the answer is “yes”, you can claim the cost of travelling to Australia against your tax if you collect rental on an Australian Property and make sure that at least part of the trip is spent inspecting the property.

Sadly, if you don’t have a property then you can not claim any of the expenses, similarly even if you do have a property you must actually visit your property in order to justify the claim.

If the primary purpose of the trip was for property related business, such as a tenant changeover, then you will be able to claim airfares in full and expenses for hotels, meals, car hire and associated costs for the number of days of property business activity.

Trips made to find or acquire a property can only offset future capital gains when the acquired property is eventually sold, but when you are already collecting rental then the trips are claimable against your annual income tax.

If the trip has dual purpose such as Christmas home, then you will be able to claim your airfares on a pro rata bases, for example if you do two days of property business on a ten day holiday, then 20% of your airfare and two days of hotel and meal costs will be able to be claimed.

You will only be able to claim expenses for the people who are on the title, so not your children.

In order to ensure you have no trouble with the Tax Office, you should keep a simple diary to confirm your activity, and keep receipts for your airfares and other expenses.

There is no maximum number of trips you can claim, as long as there is a genuine purpose to justify the trip then a claim can be made.

Usually when you are genuinely living out of Australia for an indefinite or extended period, then you are considered Non Resident in Australia for tax purposes, regardless of the fact you may be a citizen. 

When this occurs, the only taxable activity is usually the rental property income and any earnings from services performed in Australia.  As such you do not need to declare your offshore earnings to the Australian Taxation Office.   

If you are only offshore on temporary assignment, you may still be classed as Resident for tax in Australia and then you would need to declare the offshore Income and get a credit for any Foreign Tax paid on it when calculating the Australian tax payable.  This only applies if you have a short term intent on your stay overseas, so you need to be clear on your long term plans. 

You are legally required to lodge a tax return in Australia each year and declare the rental income then deduct all of the expenses relating to the property such as interest, agent fees, maintenance, rates and even travel expenses for inspection.  Usually when all of these are deducted, there is a shortfall that can carry forward into future years to offset rental profits, capital gains on sale or even Australian salary when you eventually return to Australia. 

You may also qualify for special building write offs and depreciation allowances on the property that can further enhance the tax effectiveness. 

This makes Australian property investment very attractive for expats and should not be underestimated as a powerful planning option. 

If you choose to lodge the return yourself, the due date is 31^st October each year, whereas if you have a Registered Tax Agent like myself prepare it, then you will have a time extension usually to the following April. 

Make sure that you do lodge your Australian return each year as the penalty is A$550 per year per person and you may lose out on the tax benefits you are rightfully entitled to.