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Are you contemplating to file or in the process of filing or have tried to but failed to appropriately file a Foreign Investment Property Tax Return? There might be things that you can miss or did miss out on your Foreign Investment Property Tax Return that could have led you through this struggle. Don’t worry, this simple read aims to give you a hand!
You might be an Australian investor with foreign property investment(s) or you may be a immigrant who has a foreign property, now converted to an investment property or you may have acquired the overseas investment property through inheritance from a family abroad. Regardless of any of the above circumstances, if you are an Australian resident for tax purposes you will be required to declare your worldwide income on your Australian tax return.
These foreign investment properties and the income they produce (which is generally in the form of rental income) need to be disclosed in the Foreign Investment Property Tax Return to be filed with the Australian Tax Office (ATO) in order to avoid unnecessary hassles like going through an audit, or worse, penalties.
Any tax that you may have paid in the overseas country where the income is generated can in most circumstances be offset to reduce or nullify the tax payable in Australia.
WHAT TO INCLUDE IN THE FOREIGN PROPERTY TAX RETURN?
FOREIGN PROPERTY RENTAL INCOME:
The foreign income that needs to be reported in the Foreign Investment Property Tax Return includes the full amount of rent received and any other income received in the course of renting out the property. These payments can also be in the form of commercial leases which should be disclosed in their corresponding Australian monetary values.
FOREIGN PROPERTY RENTAL EXPENSES:
Rental property expenses can be claimed as deductions from the total rental income to come up with the taxable amount on your Foreign Investment Property Tax Return. These expenses should be directly attributable into the renting out activity of the foreign property to be able to claim such as deductions. These include, but not limited to; advertising for tenants, water charges, cleaning, land tax, insurance, repairs and maintenance, interest expenses from related loans and mortgages, and some legal expenses.
It is to be noted also that not all expenses are tax-deductible that might need an expert’s advice due to it’s complexities. For instance, a cost incurred for property improvements or capital works should be capitalized and depreciated for a period of years, then the depreciation expense is deductible in a piecemeal basis and not immediately after incurrence.
IS THERE AN ALLOWABLE TAX OFFSET?
The good news is that by virtue of double taxation agreements, taxpayers can claim a foreign tax credit in their Australian Tax Return as to the foreign income tax they actually (or deemed) to have paid. This is provided that the related foreign income derived from the overseas property has been included in the assessable income for Australian income tax purposes and it must also be supported by adequate documents as proof of earning the related foreign income and the tax paid for such.
WHAT IF A FOREIGN PROPERTY RENTAL LOSS HAS OCCURRED?
In a case where the overseas investment property tax deductions are greater than the overseas rental property income, that would mean a foreign income loss has been incurred. From 1 July 2008, net foreign loss incurred can be offset against any domestic income sourced in Australia and it may be carried forward indefinitely to deduct against any income derived in the future.
IS THERE A CGT ON FOREIGN PROPERTY?
When an Australian taxpayer decides to sell his foreign investment property, it is also subject to Capital Gains Tax (CGT). Like the treatment for rental income, the double taxation rule also applies when the property is sold at a capital gain, otherwise, a capital loss can be carried forward indefinitely into the future to offset any future capital gain. The CGT computation for the foreign investment property is very similar to those that are situated within Australia.
As you can see from the above article, there are a quite a few technical elements involved with the preparation of a foreign investment property tax returns. We have prepared numerous such tax returns in the past and can help with yours too.
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