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 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.
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)
Rain Water Tanks
Swimming pool cleaning equipment
Hot water systems (excluding piping)
Swimming pool filtration equipment
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.
Tiling, floor wall and roof
The cost of the following can be claimed at 2.5% per annum, when built after 1992:
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.