Most Australian resident individuals who invest in a rental property located outside Australia are assessed to tax in Australia on the net rental income in a similar way to rental income that is received from an Australian rental property.
Note: Australian resident individuals who hold a temporary residency visa are usually exempt from the charge to tax on rental income from a property that is located outside Australia.
Rental expenses paid on an overseas rental property such as property agent fees, property and landlord insurances, repairs and maintenance costs, council rates, water rates, etc paid overseas are deductible in Australia, as would be the case if the expenses were paid in Australia.
Negative gearing is the term used where the expenses of an income generating asset exceed income, generating a loss.
When this occurs the loss can be deducted from the taxpayer’s other assessable income.
Where this other income has already been taxed (eg PAYG has been withheld from salary) a tax repayment will arise, which is repaid after the taxpayer’s personal income tax return has been lodged with the Australian Taxation Office.
Importantly for residents with property located outside Australia negative gearing is also possible with overseas property.
Taxpayers can claim depreciation on investment property as a tax deduction.
In broad terms, depreciation represents the write off of the cost of an asset over its useful life.
There are two types of depreciation allowed on investment properties: depreciation on plant and equipment, and a building allowance.
Plant and equipment
Depreciation can be claimed on the following items:
Air-Conditioning (Duct excluded)
Rain Water Tanks
Swimming pool cleaning equipment
Hot water systems (excluding piping)
Swimming pool filtration equipment
Note that changes announced in the 2017 Federal Budget mean that taxpayers who acquire a second-hand residential property after the 10th of May, 2017 that contains “previously used” depreciating assets, will no longer be able to claim depreciation on those assets.
Depreciating assets means assets such as those described above.
Importantly, the let property must be income-generating at some point between the 1st of July, 2016 and the 30th of June, 2017 for previously used depreciating assets to be capable of continuing to be depreciated.
We appreciate that this change has been confusing, so we invite you to contact us if you would like to discuss this issue more fully.
Building Allowance or Capital Works Deduction
If the overseas property was constructed after 22nd of August, 1990 a capital works deduction should be available. This is essentially a deduction of the building construction expenditure (which may be substantially different from what you paid to purchase the property).
The rate of deduction is usually 2.5% p.a. of the construction costs, although it may be 4% in some cases.
Tiling, floor wall and roof
The cost of the following can be claimed at 2.5% per annum, when built after 1992:
Tax Depreciation Schedules
If you have a rental property bdh Tax recommends that you consider instructing a firm of Quantity Surveyors to prepare a detailed Depreciation Schedule in respect of your investment property.
This Schedule will detail all items on which a depreciation tax deduction can be claimed, including the cost of the building.
Added to which the cost of a Tax Depreciation Schedule is tax deductible on your Australian tax return.
bdh Tax is pleased to recommend Quantity Surveyors Washington Brown for the purpose of having a report prepared to optimise your tax position in respect of a let property in the UK – Washington Brown has an office in London through which reports for UK based property can be prepared.
Contact your local bdh Tax office for further details, or complete the details here.