As an offshore investor, the way in which your investment is treated from a taxation perspective may vary depending on a) the location of the property and b) the country you are a resident of.
Here we take a look at investment property in Australia and the way expenses are treated and the impact this will have on your overall income tax position.
Before we go on, please note we are not tax advisors or accountants. We are property experts and this information is intended as general information only. You should not rely on this information as tax guidance and you must seek advice from professional accountants or tax advisors if you are considering investing in Australia.
How do expenses affect your income tax position?
To establish your next return after-tax, you need to prepare an income statement. Your income statement has the following components:
- Cash Expenses
- Non-cash expenses
- Profit (or loss)
- Net profit after tax
A typical property income statement will be set out as below:
Less Cash Expenses:
Operating and Management Expenses
Less Non-Cash Expenses
Depreciation – Fixtures, Fittings & Equipment
Depreciation – Capital Improvement
Profit (or Loss) Before Tax (Gross income less expenses)
Income Tax (based on your profit or loss)
Net Profit After Tax (Profit less income tax)
Gross income is the income that is generated in each period from renting the property to a tenant. Gross rental also includes the rent associated payments that are received, or you become entitled to when renting out the property.
People can get confused regarding expenses because property agents use different terminologies. It does not matter where your property is located, it will have the same three groups of expenses from an income statement perspective. Where differences exist between countries, is in how these expenses are treated from an accounting perspective. These are:
- Operating and management expenses
- Interest costs on finance
- Non-cash expenses
Operating and Management Expenses (cash expense)
Operating and management expenses are the cash expenses that are incurred in renting and maintaining the property. In most situations, the operating and management expenses are fully deductible from a tax perspective and are therefore included in the income statement.
In Australia, operating and management expenses are referred to as ‘Immediate Deduction Expenses’ by the Australian Taxation Office (ATO). Immediate deduction expenses which can be claimed for immediate deduction (in the year they occur) are detailed in our Investor’s Guide to Australia.
Interest Costs on Finance (cash expense)
One of the reasons that real estate is such a popular investment is that you can recover the cost of interest incurred on your mortgage in many countries. It is important to note that only the interest portion of the mortgage payment can be included as an expense, the other part of the payment is reducing the amount of the capital you have paid (in a principal and interest mortgage).
In Australia, landlords can claim the full amount of interest charged on their mortgage. However, in order to do so the property must be rented out, or genuinely available for rental, in the income year for which the deduction is claimed.
While the property is rented (or genuinely available for rent) a landlord can also claim interest on loans taken out:
- To purchase depreciating assets
- For repairs
- For renovations
A non-cash expense is an accounting expense that does not involve the payment of cash. From a real estate investment perspective, non-cash expenses are allowances that investors can offset again their income to allow for the depreciation of the assets.
Except for the land your property sits on, your property consists of what is called wastings assets. Over time as they are used, their value diminishes; a sofa is a good example.
Non-cash expenses in Australia are defined as “deductions for the declining value of depreciating assets”. In Australia, if you purchase a rental property, you are generally treated for tax purposes as having bought a building, plus various items of ‘plant’. Items of the plant are depreciating assets such as air-conditioners, stoves, and other similar items.
Therefore, the purchase price of the property needs to be allocated between the building (capital improvements) and other depreciable items. Investors can then deduct an amount equal to the declining value of each asset from the income generated in the year which the asset was held, for each year of the useful life of that particular asset.
These will typically be classified as:
- Capital improvements (the building)
- Plant; and
- Various other depreciating assets.
It is worth noting here the expenses which are non-recoverable in Australia. Investors cannot claim deductions on any of the following expenses:
- Acquisition and disposal costs of the property
- Exmpenses not incurred by the investor (such as an item which is paid by the tenant which would otherwise be deductible
- Travel expenses to inspect the property
Calculating income tax
Once you have your income and expenses, the profit or loss which is generated will be used to calculate the income tax liability.
Australian Income Tax Rates
In Australia tax rates are different for resident and non-resident investors and are set out below.
Income tax rates (Residents)
Taxable Income Tax on this income
|Income Threshold||Tax Rate|
|$0 – $18,200||0%|
|$18,201 – $45,000||19% of each $1 over $18,201|
|$45,001 – $120,000||$5,092 plus 32.5% of each $1 over $45,000|
|$12,001 – $180,000||$29,467 plus 37.0% of each $1 over $120,000|
|$180,001 and over||$51,667 plus 45.0% of each $1 over £180,000|
Income Tax Rates (Foreign Residents)
Taxable income tax on this income
|Income Threshold||Tax Rate|
|$0 – $120,000||32.5% if each $1|
|$120,001 – $180,000||$39,000 plus 37% of each $1 over $120,000|
|$180,001 +||$61,200 plus 45% of each $1 over $180,000|
The calculations for determining the tax impact of purchasing an investment property for Australian residents and international buyers are different because the Australian resident will have a domestic income that needs to be added to the property income to determine their tax costs.
For domestic purchasers investing in property in Australia, there will be scenarios where owning an investment property means they pay less income tax than they would otherwise pay if they had not owned an investment property. This is because building depreciation, interest costs, and other allowable expenses all create income tax deductions for investors. These income tax deductions can have the effect of reducing their overall tax liability.
In fact, it is not unusual for some investors to be owed money from the tax authorities this is because the allowable expenses exceed the income – i.e. a theoretical loss has occurred, in this situation, a tax credit is created. Because governments do not like giving money back to investors these tax credits are accumulated to future years where they can offset years with positive income and therefore reduce tax liability in that year.
For foreign investors, because there will be no domestic (Australian) income to consider, the tax liability is calculated on the net income generated by the property.
We will shortly be launching our new platform where investors can use our calculators and analysis tools to forecast how much tax they will pay, specific to their own circumstances. You’ll be able to do this for any property in Australia, New Zealand or the UK.
This tool will be invaluable for investors, allowing you to analyse investment opportunities in detail, before you purchase.
Important notice: Proptech Pioneer and its associated companies seek to provide investors with guides, information and tools, but we cannot guarantee this information to be accurate or perfect. You use the information at your own risk and accept no liability if you rely on this information. Proptech Pioneer is not a tax advisor, accountant conveyancer, lawyer, financial advisor or mortgage advisor. You should seek independent advice from independent professionals before making any investment decision