An increasingly common circumstance is that of the investment property overseas, which has either arisen by way of an original investment prior to migrating to Australia or by way of a generational change.
Inheriting a property may not result in Australian tax consequences if disposed of within certain timeframes, depending on a number of factors such as the date of acquisition by the deceased. These consequences may interact with the potential application of death taxes in the local jurisdiction.
On arriving in Australia for the first time a new resident (not a temporary resident) generally acquires a tax cost base equal to the market value of the property at the time of becoming a resident. From that point forward the property will be subject to the Australian tax net as well as the income generated from the property.
In addition, if an Australian resident is paying interest to an overseas lender, then interest withholding tax is likely to be applicable. Without registering and withholding the interest paid on any loan is not deductible. By withholding, you may be exposing yourself to increased payments by way of gross up clauses in the lending agreements.
Loans in foreign currencies may also lead to the application of the Taxation of Foreign Arrangements (TOFA) to individuals who would otherwise have been outside this complex set of rules. As such you could be exposed to tax on unrealized gains in your favor from a reduction in your mortgage from foreign currency fluctuations.
On selling the property, not only do you need to deal with the Australian tax consequences but also the foreign tax issues. The availability of Foreign Income Tax Offsets (FITO) may not fully protect you from Australian tax liabilities due to the manner in which any capital gains tax liability is calculated.
For those of you with UK investment properties, forward thinking may be required, as the UK government is considering imposing UK capital gains tax on non residents holding UK residential property from April 2015.
What the above means is that a somewhat simple investment can have a higher than anticipated complexity of compliance affairs as consideration will need to be given to Double Taxation Agreements and FITO. These issues are not insurmountable by any means, however, careful consideration of the rules and how they apply to your circumstances is required.
When factoring in foreign tax regimes with the respective property market and exchange rates, the timing of an investment and or a disposal is a matter of fine judgment. Overlaying this with the resultant tax obligations can result in a significant maze of issues to work your way through.
Should you wish to discuss the above, in more detail please contact your relevant ESV engagement partner on 9283 1666.
Article by David Prichard