Negative Gearing for Australian Expats Living Overseas: A Comprehensive Overview – Australia’s unique taxation structure provides numerous advantages to property investors, particularly through negative gearing.
Negative gearing occurs when the cost of owning a property (interest on the loan, maintenance, property management fees, and other related expenses) exceeds the rental income it generates.
This “loss” can be offset against other income, potentially reducing an individual’s overall tax liability.
But what happens when an Australian decides to live abroad?
Can an expat still utilize negative gearing benefits? Let’s delve into the intricate details.
Australian Tax Residency and Its Implications
To understand the nuances of negative gearing for expats, it’s essential to grasp the concept of tax residency. An individual can be a tax resident of Australia even if they live overseas.
The Australian Taxation Office (ATO) determines tax residency based on various factors, such as the individual’s ties to Australia, the purpose and permanence of their stay abroad, and their residency history.
If deemed a tax resident, an individual is obligated to pay tax in Australia on their worldwide income.
However, if they’re considered a non-resident for tax purposes, they’ll only pay tax on their Australian-sourced income.
Negative Gearing for Expats: The Specifics
- Tax Residents: If an expat remains an Australian tax resident, they can claim the losses from their negatively geared property against their worldwide income, potentially reducing their Australian tax liability. This can be especially advantageous for those earning significant overseas income.
- Non-Residents: For expats who are non-residents for tax purposes, the scenario becomes a bit trickier. They can still negatively gear an Australian property, but they can only offset the losses against Australian-sourced income. Given that many expats might have limited or no other Australian income, the immediate benefit can be minimal. However, the accumulated losses can be carried forward indefinitely and offset against future Australian-sourced income, which might be beneficial when the expat returns home or starts earning Australian income.
Changes to Main Residence Exemption
Expats should also be aware of changes related to the Main Residence Exemption. As of July 2020, the Australian government removed the capital gains tax (CGT) main residence exemption for non-residents.
This means if an expat sells their former Australian home while being a non-resident for tax purposes, they could be liable for CGT on the entire profit, not just the portion after they left Australia.
- Double Taxation Agreements (DTAs): Australia has DTAs with numerous countries to ensure that individuals don’t get taxed twice on the same income. However, the specifics can vary, so it’s essential to understand the DTA with the country in which an expat is residing.
- Local Tax Implications: The country in which the expat resides may also have its own set of tax implications concerning overseas property ownership.
- Financial Institutions: Obtaining finance for property investment might be more challenging for expats, as many Australian banks have stricter lending criteria for those living overseas.
While Australian expats living overseas can still leverage negative gearing, the benefits and implications largely hinge on their tax residency status and the intricacies of international tax laws.
It’s crucial for expats to seek expert advice from both Australian and local tax professionals to navigate these complexities and make informed decisions about their property investments.