I have been asked not once but many times how non-resident property investors can benefit from buying investment properties in Australia, particularly when they can’t utilize the ‘losses’ in property to lower their taxable income (work income and rental income from property) and benefit from ‘negative gearing’ like what tax residents do in Australia.
The ‘losses’ from a non-resident’s investment property can be ‘accumulated’ and carried forward indefinitely and these ‘losses’ are termed as ‘tax credits’. They are accrued on a yearly basis and usually split according to the percentages of ownership of the investment property.
Let’s try and understand some fundamental terms.
Expenses – These are usually broken down into 2 categories – Cash Expenses and Non-Cash Expenses.
Cash Expenses(C) – Refers to out of pocket expenses, usually in the form of interest payments, council rates, water rates, insurance, property mangement fees, body corporate fees, etc. The interest payments usually form the biggest portion of cash expenses.
Non-Cash Expenses(D) – Refers to expenses usually not paid out of pocket. The tax office recognizes ‘depreciation of fittings and chattels’ (usually for a period of 5-10 years for brand new properties) and also ‘building allowance’ (usually 2.5% of the construction cost of a new property over a period of 40 years)
Let’s denote Rental Income by (R).
Assuming the maximum loan advanced to an investor is 80%, the result of
R(Rental Income) - C(Cash Expenses) – D(Non-Cash Expenses) = T(Tax Credits)
‘T’ is usually a negative figure. ‘T’ is thus termed as ‘tax credits’.
As non-resident investors, ‘T’ can be accumulated and used to offset capital gains tax when the property is disposed or when the non-resident investor becomes a ‘tax resident’ in Australia (i.e. he migrates to Australia, works there and is now a tax resident).
In the next article, we will examine how we can use multi-currency loan to its full advantage as non-resident property investor residing in Singapore/HK.