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Do I have to pay Australian tax on an overseas rental income?

By Jarrod Rogers CPA

As with all public information on this website, the following article is for information only. If you want advice specific to your circumstances you need to be a client of Beyond Accountancy. We are currently taking on new clients.

“Do I have to pay tax on overseas rental income?”

It’s a complicated question, but seeing as I was the one who asked it, I may as well try to answer it. The answer to the question depends on your residency status is in the Australian tax system.

Residency for Australian tax purposes

There are three categories of residency for Australian tax purposes:

  1. Non-residents
  2. Residents
  3. Temporary residents

Many people have not heard of the third category. In fact, on the tax form, there are only two options: resident and non-resident.

Technically, a temporary resident is a sub-category of residents to whom special rules apply.

A non-resident is required to pay Australian tax on Australian income but not on overseas income. So, if you are a non-resident for tax purposes (this usually means you are living on a permanent or indefinite basis outside Australia) then your foreign/overseas rental income is irrelevant for tax.

If you are a permanent resident of Australia then you must pay tax on all Australian AND overseas income, but you pay tax using the lower resident tax rates.

When it comes to temporary residents, you get the best of both worlds:

  • You are taxed at the lower (resident) tax rates, and;
  • You do not have to pay tax on foreign investment income.

Definition of a temporary resident

So, who counts as a temporary resident for tax purposes?

Basically, somebody who would otherwise be treated as a resident of Australia for tax purposes but who holds a temporary visa e.g. a working holiday visa or an employer-sponsored (457) visa.

You are not a temporary resident if you are a resident of Australia for social security purposes or your spouse is.

Simply put, if you are holding a temporary resident visa, then you can ignore your foreign rent.

New Zealand ex-pats with rental properties

Apparently, there are 600,000 New Zealanders in Australia. If you are one of them and you are renting out your NZ home while working in Australia, you may have to pay tax on the rent and capital gains tax (CGT) may apply.

While the process for a New Zealander working in Australia is simpler than for other countries, all New Zealanders technically hold a visa in Australia. Some New Zealanders will count as temporary residents and others will not.

It depends on when you arrived and the usual factors in determining residency.

The complexity makes it too hard to go into detail in a medium such as a website article.

This section of the ATO website explains it in more detail.

Is there capital gains tax on a foreign property?

The same principles apply to CGT as to tax on rent.

  • Resident: capital gains tax applies
  • Non-resident: capital gains tax does not apply to foreign assets.
  • Temporary residents: capital gains tax does not apply to foreign assets.

New Zealand citizens who become a resident of Australia for tax purposes are subject to capital gains tax on their NZ properties even though there is no CGT in the New Zealand tax system.

What are the tax implications of becoming an Australian resident?

In broad terms, a capital gain is calculated as the difference between:

  • Capital proceeds (sale price of your asset) and;
  • Cost base of the asset (usually the purchase price)

However, if you become a (permanent) resident of Australia for tax purposes when you already own a property, then the rules are adjusted.

Instead of using the purchase price of the property as your cost base, you can take the market value of the property on the date you became an Australian resident.

See the ATO website for a good example of this. Look for the example of Fred.

Main residence exemption on foreign properties

Just to add a final layer of complication, the main residence (e.g. the family home) is exempt from capital gains tax. The main residence exemption can apply to foreign property and the ATO had provided guidance on the interaction between the rules about main residences, and the rules amount a person who changes residency.

Suffice to say, this is an area where you need to get good tax advice, and you should make an appointment with us to discuss this.

Tax advantages for temporary residents

As well as the exemption from tax on foreign income and from the capital gains tax, there are a number of other issues for temporary residents to consider.

Depending on your country of origin, you may be exempt from paying the Medicare levy which is a 1.5% tax on your entire Australian income. We can assist with your exemption application.

Once you depart Australia, you are able to cash in your superannuation balance (provided you never became a permanent resident during your time in Australia. We can assist with applications for the Departing Australia Superannuation Payment.

And finally, there are additional sections of the tax return that you must complete in the year you become a temporary resident, and the year you cease being a temporary resident. We can make sure you meet all your lodgment obligations, and ensure you get the tax refund you are entitled to.

Making an appointment with Beyond Accountancy

If you wish to make an appointment to complete your Australian tax return or to discuss how these rules apply to your unique situation, please contact reception on 1300 823 011 or use our online booking calendar to book now.

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