Can An Australian Expat Use Negative Gearing – negative gearing is a commonly used strategy by Australians to generate wealth but how does this work with Australian expats living overseas?
In today’s blog post we run through what negative gearing is and whether an Australian expat can utilise this wealth generation tool.
What is negative gearing?
Negative gearing is a term you won’t find in tax legislation. It is a tax strategy whereby expenses associated with a particular asset are greater than the income derived from that asset.
This strategy is commonly applied in the context of investment properties; however, this can also be applied to other taxable assets such as investment in shares.
Individuals who are negatively geared can deduct their losses against other sourced income such as salary and wages, provided it is consistent with the broader operation of Australia’s personal income tax system.
If negative gearing essentially means making a loss, why do it?
While making a loss on an investment asset might initially appear counterintuitive, some investors are willing to employ this strategy in the expectation that the capital gain when they sell the asset will more than offset that loss.
What does this look like for an Australian expat?
Australian expats who are non-resident for tax purposes can negatively gear their investment property. This means that you can utilise tax losses from the property to offset taxable income from other Australian sourced income, if any.
If you don’t earn any other Australian sourced income, Australia’s tax legislation allows you to carry forward losses indefinitely in your tax return to use at some point in the future at the time when you generate Australian sourced income (i.e. when you return to Australia to work or when you sell the property and make a capital gain).
Can non-residents negatively gear share investments?
Unfortunately, as non-residents for tax purposes, we are not able to negatively geared share investments, even if the funds to invest were borrowed.
This is different compared to Australian tax residents, who are generally able to deduct any interest paid on a loan used to purchase investment shares.
As non-residents, interest expenses are not deductible as there are no other costs associated with shares that the expense can be offset against.
This is mainly because non-residents are not subject to capital gains tax with the ATO for share investments.
Is negative gearing an effective tax strategy for non-expats
Negative gearing your investment property may be an effective tax strategy if you plan on returning to Australia and working as carried forward losses can then be used to offset your taxable income.
However, if you don’t plan on returning to Australia, or when you return to Australia you won’t be earning any income as you maybe retiring, then negative gearing may not be suitable as there is a risk you will not be able to use the accrued tax credits.