Owning Overseas Property? Find Out Its Tax Implications
As an asset class, property has done a lot to bring happiness to Australians. Many investors have meaningful portfolios which are well diversified. Some investors look beyond their State and invest in others (NSW investors investing in Queensland, for instance). Then there are those investors who like mixing gearing and positive cash flow by investing in overseas properties.
Tax implications for owning an overseas property
While overseas property investment can be a great strategy, its tax implications deserve a thorough study. You do not want to bleed money in double taxation or you do not want to breach tax compliance and pay harsh penalties. For starters, Australia has a self-assessment tax system which asks its property investors to furnish details of both kinds of purchases; Australian properties and overseas properties. While filing the tax returns, profit made or loss incurred on both such properties need to be included in the assessable income.
It is hard to fool the ATO
If you think you are safe by not furnishing details of overseas purchases, you can be in for a big shock. It is sufficient to say that the Australian Tax Office has pretty cordial relations with the tax offices of other countries and because they all work in sync, there is a great chance you will be found out.
Double Taxation Agreement
How it unfolds in the case of net rental earnings on overseas property
If you own properties in foreign locations, it is ideal to ask your professionals a variety of questions. For instance, what happens if you have a property in Italy and you make a net rental income of 7,000 Euros on it? The worst case scenario could be if you had to pay taxes in Australia as well as Italy.
However, this is clearly not the case because our country has a Double Tax Agreement with most European countries. An investor needs to pay the tax on net rental earnings in Italy. The investor must also file the details of the property in his Australian tax return. Here, he can get a relief under Foreign Income Tax Offset (FITO).
How it unfolds in the case of net rental losses on overseas property
Let’s suppose the opposite scenario when an investor incurs a loss of 3,000 Euros on his Italian property. In the given case, he can apply for a tax deduction to the ATO, thus succeeding in his aim of achieving negative gearing (leverage) for his property.
How it unfolds when you make capital gains on overseas property
You may ask how the scene unfolds in case he sells the property in Italy a decade later and makes a capital gain. Any such gain is to be taxed in Italy according to the Capital Gains Tax applied there. Here, in Australia, he would get a 50% tax rebate because of the CGT discount offered on our soil. Also, he can avail FITO and get a relief for being doubly taxed.
How it unfolds in case of your demise
Australia has disregarded Inheritance Tax in the year 1979 so if the investor in question holds his property till his death, his estate would need to pay Inheritance tax only in Italy.
Professional help can come in handy
While an overseas property purchase is a lucrative deal, it can only bring optimum results if you hire thorough professionals to make the purchasing decision. Such professionals may include, but are not limited to, lawyers, buyer’s agents, and tax accountants. Tax can have serious implications. At times, you may even miss its generous side (many investors are missing out on claiming Plants and equipment deductions, says the ATO). It is always good to have professional help on your side.