The Australian Taxation Office Hunger Games on real estate investments funded by offshore property loans.
Every dollar of rental income from an Australia real estate investment is taxable at a rate of approx. 37%. With a number of tax deductible allowances, the typical investor with an Australian mortgage rate (5%), usually has nothing to worry about.
By Scott O. Talbot
The purpose of this article is to discuss the importance of ‘depreciation’ and the benefits for overseas investors; the key factors in avoiding the full wrath of the ATO (Australia Taxation Office).
Interest paid on loans is fully tax deductible, combined with other deductible allowances, the typical Australian investor uses an investment property to reduce their personal salary income tax rate. UCHK clients whom have taken advantage of the exclusive offshore loans from 1.75% are cautioned that the tax man will be eating into these initial savings without careful investment planning and tax advice.
Australia real estate investment is a game of beating the tax man, a problem for many to find tax deductible off sets: A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used - property investment depreciation is calculated by division 40 & 43
Australian Real Estate Tax Benefits
The bitter sweet savings in interest paid to the bank and positive rental returns must be offset by tax deductible allowances and by acquiring new investments containing high depreciation advantages.
Comparison between offshore and Australia based loans
$400,000 @ 2.25% (offshore loan) = $9,000
$400,000 @ 5.10% (Australia loan) = $20,400
Interest Savings AU$11,400 (tax deduction loss)
Beating the tax man is a problem for many and finding tax deductible off sets is critical, such as:
- Interest on the loan
- Property Managment fees
- Legal and accounting costs
The purpose of this article is to discuss the importance of ‘depreciation’ and the benefits for overseas investors, the most ‘significant’ and manageable tax deduction.
With off-the-plan, brand new properties everything from the carpets, fitting and finishes known as Division 40 can be claimed under the depreciation tax deduction and, a portion of the construction costs Division 43.
TYPICAL DEPRECIATION EXAMPLE
Year -- Division 40 - Division 43 - Total Allowance
Year 1 --- 2,535 -------- 9,201 -------- 11,736
Year 2 --- 2,240 -------- 9,201 -------- 11,441
Year 3 --- 2,155 -------- 9,201 -------- 11,356
Year 4 --- 2,077 -------- 9,201 -------- 11,278
Year 5 --- 2,027 -------- 9,201 -------- 11,228
Year 6 --- 1,984 -------- 9,201 -------- 11,185
Year 7 --- 1,950 -------- 9,201 -------- 11,151
Year 8 --- 1,940 -------- 9,201 -------- 11,141
Year 9 --- 1,934 -------- 9,201 -------- 11,135
Year 10+ 7,733 -------- 285,220 ----- 292,953
TOTAL - $26,575 ----- $368,029 ---- $394,604
Traditionally for the typical Australian real estate investor, interest on the loan is the significant tax deductible item on the balance sheet.
However, for the offshore loan investor, this is no longer the case and a strategy for acquiring new investment properties with FULL depreciation benefits is now a priority.
In particular, overseas real estate investors whom own multiable Australian properties and the combined income is reaching a significant taxable level, must purchase additional ‘brand new’ investment properties or pay tax.
Rental income is the full amount of rent and associated payments that you receive, or become entitled to, when you rent out your property, whether it is paid to you or your agent.
You must include your share of the full amount of rent you earn in your tax return. The following example shows how property depreciation will increase the cash return on an investment property.
Australia Tax Depreciation Explanation
Depreciation is the key to increasing cash-flow on a residential property. Following are the five principal depreciation tips:
Previous tax returns can be adjusted when a property owner has not been claiming depreciation or maximising tax depreciation deductions. The previous two financial year tax returns can generally be adjusted and amended.
Deductions are available for 40 years. - From the date construction was completed the Australian Taxation Office (ATO) has determined that any building eligible to claim capital works deductions has a maximum effective life of 40 years. Therefore, investors can generally claim up to 40 years of property depreciation on a brand new building, whereas the balance of the 40 year period from the construction completion date is claimable on an older property.
There are two main areas to a property depreciation schedule: the plant and equipment and the capital works deductions.
Plant and equipment items (Division 40) are usually mechanical fixtures or those which can be ‘easily’ removed from the property as opposed to items that are permanently fixed to the structure of the building. Items which are mechanically or electronically operated are considered plant items, even though they can be fixed to the structure of the building.
Plant & equipment items include but are not limited to:
- Hot water systems
- Range hoods
- Garage Door Motors
- Door Closers
- Freestanding Furniture
- Air-conditioning Systems
The capital works deductions (also known as Division 43 or building write off) is a deduction for the structural element of a building including items that are fixed to the structure.
It is based on the historical construction costs of the building and includes materials such as bricks, mortar, plaster walls, flooring, wiring and items such as doors, tiles, windows, toilets and guttering.
Property expenses that can be immediately deducted from the annual rental income:
- Interest charged on that loan
- advertising for tenants
- bank charges
- body corporate fees and charges
- council rates
- electricity and gas
- gardening and lawn mowing
- in-house audio and video service charges
- interest on loans
- land tax
- lease document expenses – preparation – registration
- legal expenses
- mortgage discharge expenses
- pest control
- property agents fees and commissions
- quantity surveyor’s fees
- repairs and maintenance
- secretarial and bookkeeping fees
- security patrol fees
- servicing costs, water heater, postage
- telephone calls and rental
- tax-related expenses
- travel and car expenses – rent collection
- water charges