Australian Expat Property Tips | Chapter 1 – Paying Down Debt – property makes up a large component of the average Australians wealth building strategies and the same could be said for Australian expats however how you manage your debt on the property as an expat could not be more different.
As an Australian tax resident we all know that when you own a property, especially if its your principal place of residence (e.g. your home), that it makes sense to pay down that debt as fast as you can.
The reason is that the interest cost on your loan is not tax deductible so your home mortgage is essentially a bad debt (as opposed to good debt which is tax deducible like an investment property or margin lending loan).
However when an Australian moves overseas they often follow the same advice as when they were an Australian resident, which whilst it may make you feel good is often not the best use of your disposable income.
The reason is that if you are too aggressive in paying down the debt on your Australian property, and the property is rented out, then your interest cost decreases (because the loan is reducing) which in turn means your deductions reduce resulting in the cashflow on your property becoming positive.
Positive cashflow is a good thing right?
Unlike Australian residents, expats don’t not receive the benefit of the tax free threshold which means that the minute your property starts generating positive cashflow you pay to the ATO 32.5% in tax.
So what’s the answer….
Australian expats have a number of options when it comes to managing the debt on their property:
- Concessional Contributions – They can continue to use excess disposable income to pay down the debt which will create a income tax liability on the property however if they were to use a Concessional Contribution Strategy into their Superannuation account then they may be able to claim a tax deduction which could either remove or reduce that liability.
- Diversify Asset Base – since the changes to the Australian tax rules in 2012 that affected Australian expats owning property more and more expats have been paying the minimum monthly repayment on their property debt and then diverting any excess cashflow towards assets called Non-Taxable Australian Property (NTAP) like shares, managed funds, ETF’s and LIC’s. The reason being that unlike Australian property (which is classified as a Taxable Australian Property (TAP)), non-taxable assets like shares, managed funds and ETF’s do not accrue a capital gains liability with the ATO for the time that you are classified as a non-resident for tax purposes.
- Refinance – consider talking to a specialist Australian expat mortgage broker to look at refinancing and restructuring your loans to generate a more favourable cashflow outcome.
When you become an Australian expat one thing you need to remember is that the tax rules do not provide special dispensation because of your Australian citizenship and that as a non-resident for tax purposes you are treated no differently to that of a British, Russian or Chinese investor so you need to manage your finances accordingly.
And remember, when you return to Australia you can default to your old habits but whilst you are living and working overseas by managing your finances appropriately you can save yourself paying unnecessary tax.
In the next chapter we are going to cover off on the topic why renovating your house as an expat can cost you dearly.