Background
As a general rule, Australian resident individuals who invest in a rental property located outside Australia are assessed to tax in Australia on the net rental income in a similar way to rental income that is received from an Australian rental property.
Note: Australian resident individuals who hold a temporary residency visa are usually exempt from the charge to tax on rental income from a property that is located outside Australia.
Rental expenses paid on an overseas rental property such as property agent fees, property and landlord insurances, repairs and maintenance costs, council rates, water rates, etc paid overseas are deductible in Australia, as would be the case if the expenses were paid in Australia.
Negative Gearing
Negative gearing is the term used where the expenses of an income generating asset exceed income. Where this arises during an income tax year the loss can be deducted from other assessable income, and where that income has already been taxed a tax repayment will arise, which is repaid after the personal income tax return has been lodged with the Australian Taxation Office.
Importantly for residents with property located outside Australia negative gearing is possible with overseas property.
Depreciation
Taxpayers can claim depreciation on investment property as a tax deduction. In broad terms, depreciation represents the write off of the cost of an asset over its useful life.
There are two types of depreciation allowed on investment properties: depreciation on plant and equipment, and a building allowance.
Plant and equipment
Depreciation can be claimed on the following items:
Air-Conditioning (Duct excluded)
Lifts
Rain Water Tanks
Beds
Freestanding furniture
Security Systems
Carpet
Garden Sheds
Shower Curtains
CCTV equipment
Gym equipment
Smoke detectors
Clothes dryers
Hose reels
Swimming pool cleaning equipment
Cook tops
Hot water systems (excluding piping)
Swimming pool filtration equipment
Dishwasher
Microwave ovens
Television sets
DVD players
Ovens
Washing machines
Exhaust fans
Pumps
Window blinds
Linoleum
Range Hoods
Window curtains
Building Allowance or Capital Works Deduction
If the overseas property was constructed after 22nd of August, 1990 a capital works deduction should be available. This is essentially a deduction of the building construction expenditure (which may be substantially different from what you paid to purchase the property).
The rate of deduction is usually 2.5% p.a. of the construction costs, although it may be 4% in some cases.
Balustrades
Excavation
Shower screens
Brickwork
Gyprock
Tiling, floor wall and roof
Carpentry
Handrails
Vanities
Concrete
Kitchen
Waterproofing
Doors
Painting
Windows
Excavation
Render
Wardrobes (Built-in)
Structural improvements
The cost of the following can be claimed at 2.5% per annum, when built after 1992:
Driveway
Retaining walls
Paving
Hard Landscaping
Tax Depreciation Schedules
Those who have rental properties are usually best advised to instruct a firm of Quantity Surveyors to prepare a detailed Depreciation Schedule in respect of an investment property. This Schedule details all items on which a depreciation tax deduction can be claimed, including the cost of the building.
Until recently it was not possible to obtain this Schedule in respect of property located outside Australia, but GM Tax is now pleased to confirm that we have identified a firm of Quantity Surveyors that can prepare Tax Depreciation Schedules for property located in the UK.
The cost of a Tax Depreciation Schedule is also tax deductible on your Australian tax return – so obtaining such a report is a win win situation!
Contact your local GM Tax office for further details.