Impact of me going overseas on IP calculations

I have one residential property (primary residential) and one investment property in Australia. I am contemplating going overseas for work. Both have mortgage of 300K – IP is currently rented at 340 per week. Can I use the rent on my primary residential property to off set the loss on the investment property? I am assuming a rent of 340 per week on that. Calculation –Interest = 27000 (300K @9%) + 2500 (agent,insurance etc) = 29500   Income =Rent = 17680(IP) + 17680(Residence) = 35360. 
I am not going to make my residential property an IP because I intend to sell lit after 6 years. I will take a loss of approx 25000 per year but I am fine with that Since I think the property price (both )  will rise. 
Once I become a non resident  1)       Do I have to do a tax return
2)       Do you see any problem in the above set-up. 
Regards
Ankit 

Hi Ankit l am new to this forum however l am an Australian expat currently living and working overseas. lf you decide to work overseas make sure you get a statement from the Tax office that you are a "non resident for taxation purposes". Your tax liability depends greatly if you deemed to be a non resident or not.
As a non resident of Australia you have to submit a tax return for every dollar earn't in Australia and it will be taxed at the highest marginal tax rate. l suggest you find a good accountant who deals specifically with Expats.

Regards
Garry

This is very complex. You will be earning an income in Australia from the rent, although you may have deductions to offset this, so you will need to lodge a tax return. You will also need to declare you overeas income. Whether you are tax more will depend on if there is a double tax agreement with the country you are working in.

Whether you are a on resident for tax purposes depends on a number of factors including where you permanent home is, how long you will be overseas etc etc. Non residents don't receive the tax free thresholds and pay 30% tax from $1 in income.

And did you know that you can rent out your main residence for up to 6 years, claim all costs and still sell it CGT free - $25,000 pa x 6 is a big loss of potential income!

Terryw
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I am returning to India – family reasons. But the whole thing rests on me offsetting my rental income from residential property against income from IP.  Current thinking is  -- I pay income tax on what I earn in Australia in Australia. In India I just pay income tax on what I earn in India  from my job their. So my Australian tax return will be income =rent =35360 . Loss will be (1 investment property expenses ) = 29500. Therefore total income  = (35500 – 29500) = 6000 (which @30% tax rate since I will be a non resident) =1800 tax I have to pay in Australia.  Loss of 25000 dollars is for maintaining both properties (IP and investment). 

Also  I had paid off my residential property – I have recently extracted the entire amount to buy property overseas. So it is like paying interest to borrow. Now for the wishful thinking part. …Houses are in Watsonia and Greensborough in Melbourne – council is building a big project @300million their. Both the houses are currently valued at 360 each.  1) I would expect them to be 550-600K in 6 years. 2) if the interest rates reduce a bit and rents go up the 25000 dollar loss will reduce to more like 10-15000 dollar loss. I briefly had a chat with my tax agent but did not get much insight ( he is new as well).. I am very close to making the decision on this…Here is the advice I am after 1)      Does any one see any show stoppers in the strategy2)      What approvals do I need from the tax department3)      Dual tax etc which was mentioed in the earlier post .. seems funny to me which I don’t understand. 
Regards
Ankit     

h

Hello ankitjain

Hope this is of some help.
Elka  

More reading for you. 

http://www.ato.gov.au/taxprofessionals/content.asp?doc=/Content/64045.htm 

Elka, Very informative posts.  I definitely need to get a new tax agent – initially looking through the link -- It seems to show it is not too good for me. I will respond after going through it in detail. Thanks a lot

Elka, This requires proper investigation and may require rethinking the entire strategy. I will take a week to respond to this one fully (weekdays is busy). Initial thoughts….

1. It is likely that my going overseas may trigger a CG event.
2. On the IP I was always going to pay capital gains tax. The real concern is the residential property.
3. I would be extremely reluctant to sell the house – Only if it becomes cost neutral over a couple of years would I sell my house.
4. My calculation prior to this post was

A loss of 25000 per year which would progressively decrease. Appreciation in property value per year  @5%= ( 350000@5%(PPOR) +350000@5%@0.85(IP)) = 32375.  If it increased more than 5 % then it would be where i would win. However now if I have to pay CGT on my PPOR then the whole exercise may become cost neutral.

Question : I am an Australian citizen -- Say I go overseas and come back for one month after 5 years. Do I become a resident again (and use my current residence with tenants moved out as PPOR) or is it only after I live again in Australia for 6 months in a taxation year do I become a Australian resident for tax purposes.
Who does house valuations to determine house value for CG purposes – Can it be a real estate agent or a bank? I would only pay CGT when I sell the house right?

Thanks for your post Elka - appreciate them.

Hello ankitjain
 

You can of cause leave Australia intending to return one day ( 2 – 5 years? ) . If you never come back to live, well... life is full of surprises.

http://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2650/NAT/ATO/00001

One question you will want to ask an accountant is can you be a non resident for tax purposes but still retain a PPOR in Australia if your intention is to return.

If so, would this absolve you of any CGT liability on your home if you sell it within 6 years.

The second paragraph under the heading “Capital gains and going overseas”  on the page of the  ATO site I posted above relates mostly to shares and I think collectibles. If you don’t hold any of these then this is not really of interest to you.

GCT ( if applicable) is only payable on a property after it’s sold.... not when you leave.

A valuation is usually done by a valuer  who you can employ.

Regarding your calculations.

I think one of the difference between your calculations and mine is that you have catered for only $2500 for expenses related to both properties. This is for rates, water, insurance, repairs, vacancies and agents fees. This is much too little.  

The other difference if one of perspective. You view the non tax deductible interest on your home ( $27,000) as a “loss” in Australia whereas I see it as a cost of buying property in India which needs to be justified/compared to the cost of this money in India.

Cheers

Elka

What is the purpose of the property overseas (india I assume) ?  Will you be receiving income on it.  If you become a non resident for tax purposes this Income  will be taxed in India and any deduction for interest will be related to that property not the PPOR in Australia.  If the property in India is for living in I am reasonably sure that you won't be able to use the 6 year rule.  Remember deductibility of interest relates to the purpose of borrowing not the asset it is secured against.

If you become a non resident for tax purposes in Australia the income and costs in Australia on property still require an AUS tax return.  If by chance the expenses are more than the income from rent the loss will be carried forward till you eanr positive income in Australia again.

Property and other investments like shares and managed funds are treated differently when you become a non resident for tax purposes.  If you have any other investments check out the ramifications for these as well.

Cashflow may be more of an issue than tax - check for rules regarding repatriating income from India to Australia if these are needed to cover income shortfalls.

These are a few things picked up from working with other expats.

Good advice is like foundations to your house - be prepared to pay for good advice that the provider can be held accountable for. Getting it wrong could be very costly.

This should not be considered tax advice - seek professional assistance on this one.

Yours in wealth and lifestyle!

Damian Ebzery B.Bus M.Bus AFPA ASA
empire@lips.net.au
www.empirewealthdynamics.blogspot.com
www.lips.net.au

Any comments made of for the purpose of general discussion - these are not to be considered general or personal advice.