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Provided that a foreign national is permitted to purchase an investment property, the tax rules apply independently from that imposed by other regulatory regimes (eg, FIRB regulations, immigration law, etc). Eddie Chung, Partner, Tax & Advisory, Property & Construction with BDO (QLD) Pty Ltd lists the following issues that every foreign investor needs to know when buying Australian real estate:
1. Tax Residency Status
The determination of tax residency status in Australia is far from straightforward because the rules are not ‘black and white’ and are dependent on the specific facts on a case-by-case basis. If the investor is an Australian tax resident, it is a general rule that their worldwide income is assessable in Australia. In contrast, if the investor is a non-resident, only income sourced in Australia is taxable. Further, these rules must be applied in conjunction with the Double Tax Agreement (DTA), if any, between Australia and the country of residence of the investor, which may modify the tax treatment of the income derived and expenses incurred by the tax payer. These rules are highly complex and professional advice should be obtained.
2. Tax Rates
While Australian tax residents are required to return their worldwide income for Australian tax purposes, they are also entitled to the tax-free threshold and a lower marginal tax rate up to a certain taxable income amount (currently $37,000). Conversely, no tax-free threshold applies to non-residents, which means that they are subject to Australian tax for every dollar they earn that is sourced in Australia. However, any taxable income in excess of the $37,000 will be taxed under the same marginal tax rates applicable to residents. Notwithstanding the above, nonresidents are generally not subject to the Medicare Levy (currently 1.5% of taxable income) while residents are subject to the Medicare Levy by default, unless an exemption applies (eg, if the resident investor derives a war veteran pension).
3. Capital Gain
Irrespective of the tax residency status of the investor, all capital gains derived on Australian properties are taxable in Australia. If the property is held by an individual or a trust for at least 12 months, a 50% capital gains tax (CGT) discount may apply for Australian investors only. Special rules apply to an investor’s CGT assets if there is a change in their residency status. If a non-resident becomes a resident, the CGT assets are taken to be acquired at their original purchase date and a capital gain will only be derived when they are disposed of. If a resident becomes a non-resident, the assets will also be taken to be purchased at their original purchase date but depending on the type of CGT asset involved, the investor may be deemed to have disposed of the asset for its market value at the point of residency change. However, as rental properties are ‘taxable Australian property’, the deemed disposal rules will not apply, which means that any capital gain on the property will only be derived at the point of disposal.
4. Tax Losses
The tax loss rules generally operate in the same fashion regardless of the tax residency status of the investor. If a foreign investor incurs a revenue loss on an Australian property, the tax loss may be carried forward indefinitely for recoupment against future Australian assessable income and/or capital gain, if any; any capital loss incurred may be carried forward indefinitely but can only be used to offset future capital gains. In the past, tax losses sourced outside of Australia were quarantined. However, from 1 July 2008, foreign losses are no longer quarantined and may be used to offset Australian income. Further, provided that the foreign income is assessable in Australia, debt deductions (eg, interest, borrowing costs, etc) incurred in the course of deriving such income are generally taxdeductible against Australian income, subject to the potential application of the thin capitalisation and transfer pricing rules. Cross-border transactions are generally complex by default. Accordingly, a tax advisor who is either well versed in the tax rules of both jurisdictions or has access to such resources should be consulted.
