Foreigner Tax Obligations: Rent Income Tax in Australian Residential Property

Foreigner Tax Obligations: Rent Income Tax in Australian Residential Property

You have finally completed your purchase of your real estate property and want to start earning from it. But you have to understand that if you will be earning from your property in Australia, you would need to understand your responsibilities and pay the taxes you are due.

Taxation in any country is a complicated matter. If you are a foreigner, it’s even more complex. However, it’s important to understand that whenever you are generating income from something, you are always required to pay taxes for it.

Here are the steps to follow when paying for Rent Income tax in Australia.

Learn about your Tax Residency Status
Obtain a Tax File Number
Lodge your Tax Return
How to Compute Your Rental Income
Tax Deductions
Capital Gains Tax
Recent Changes to Taxation Rules on Rental Property
Find a Registered Tax Agent

Learn about your Tax Residency Status

There is a difference between your actual residency status and your tax residency status in Australia. Your tax residency status is not as simple as knowing what visa you are holding. It is a complex process so it would be best to hire an accountant that specializes on Chinese real estate investors before applying for a Tax File Number.

In general, foreigners who obtain residential real estate in Australia are considered “temporary residents” or “foreign residents” for tax purposes. Temporary tax residents are those that:

  • Have a temporary visa;
  • Are not considered an Australian resident based on the Social Security Act of 1991;
  • If with spouse, spouse is not considered an Australian resident based on the Social Security Act of 1991.

Obtain a Tax File Number

Once you know what your tax residency status is, you can proceed with obtaining a tax file number or TFN. You can apply for your TFN online, through the Individual Auto-Registration page of the Australian Taxation Office.

However, to be allowed to apply online, you must hold a valid visa of any of the following:

  • Permanent migrant visa
  • Visa with work rights
  • Overseas student visa
  • Any visa that allows indefinite stay in Australia

Keep in mind that even if there are changes in your name, visa or circumstances, it is not necessary for you to reapply for a TFN. Your TFN will stay the same. You just need to update your details at the ATO.

When applying for TFN, you would need to send certified copies of your documents by mail if you are in Australia. Do not send the original ones as there is a chance that these may not get returned. Any alterations in the certified true copy can render the document unacceptable, so be careful.

If your documents are in foreign language, you must hire an authorized translator recognized by the National Accreditation Authority for Translators and Interpreters Ltd (NAATI).

Foreigner Tax Obligations: Rent Income Tax in Australian Residential Property

Lodge your Tax Return

Australia financial year starts on the first of July and ends on the 30th of June of the following year. The due date for filing rent income tax is 31st of October of the same year. You can lodge your tax return online via myTax. If you are getting confused about all your tax responsibilities, it would be best to hire a registered tax agent so that you will not miss the deadline and incur penalties.

Using myTax

MyTax is a secure online tax return lodging system prepared by ATO itself. Since your tax return will include sensitive information, the system was made to be as secure as online banking systems. If you are internet savvy, lodging your return online will be easy for you.

The following are the advantages of using myTax:

  • Your bank and the government agencies concerned will have pre-filled your information from their own records;
  • You can lodge your tax return at any time of the day;
  • If you are entitled to refunds, you will get it in as little as two weeks;
  • You can print out and look over your tax return first before submitting;
  • You will be able to see the details of your estimated debt or refund.

Hiring a Registered Tax Agent

Although filing your own tax return has been made easier with myTax, you can still opt to hire a registered tax agent to do the work for you. Many Chinese investors go this route because they hardly have the time to assess their rental income.

You can even have your tax agent and your property manager discuss matters directly to make sure everything about your rent income tax is accurate. Registered tax agents are also given special extensions by the government, if necessary, so you would not need pay for penalties. You must, however, hire a tax agent before the due date.

How to Compute Your Rental Income

Foreign tax rate in Australia is 32.5% of your net income obtained in the country. If your income exceeds AUD$87,000 per year, your tax rate can increase for up to 37%. Although this tax rate is pretty high, you also need to take note that this is only for your net income, minus allowed deductibles.

Tax Deductions

Your rental income is not the entire rent amount that you receive. There are still some deductions that you can use to adjust the taxable income. Taxable income is net income by computing the gross income minus related expenses.

The following are some of the items you are allowed to deduct:

• Advertising costs
• Property manager service costs
• Gardening or landscaping costs
• Maintenance costs
• Insurance costs (for property and related assets)
• Loan interest for the real estate property
• Lease preparation cost
• Council rates
• Land tax
• Depreciation
• New construction costs
• Legal expenses (depends on the type of legal action, such as evicting a non-paying tenant)

Keep in mind that for these claims to be allowed, you would need to submit documents to support your claim. You must have copies of these expenses for up to five years from the date of tax return submission.

If in case your expenses exceed that of your earnings, the amount can be forwarded and deducted in the next tax season.
If you are renting out your property only a part of the year and using it as vacation home or personal use the other half, you cannot claim expense during that part of the year.

Capital Gains Tax

Capital Gains Tax is what you have to pay when you sell the property. The tax is computed against the net profit gained from the sale. This is basically computed from the sale price of the property minus the price of the property when you purchased it. Any expenses made towards the improvement and sale of the property can also be deducted from the net profit.

If the sale resulted in a loss, the owner (or former owner) will not be taxed. Instead, the capital gains tax loss can be carried over to offset any capital gains in the future.

Capital Gains Tax is a withholding tax, which means the buyer will immediately withhold the amount upon purchase of the property. It shall be the buyer’s duty to send the withholding tax to the ATO. If in any case the tax withheld upon sale is bigger than that of the actual tax (for instance, you have additional expenses towards the sale), the seller is eligible for a tax refund.

Foreigner Tax Obligations: Rent Income Tax in Australian Residential Property

Recent Changes to Taxation Rules on Rental Property for Foreign Owners

There have been several updates in taxation regulations when it comes to foreign-owned residential properties in Australia. These are:

Travel expenses no longer deductible

This regulation started in July first in 2017. Before, the cost of traveling from your country to Australia to check on your residential rental property can be deducted from your tax. This is no longer the case. This also pertains to you or your property manager’s travel cost when it comes to inspections, repairs, maintenance, and collections activities.

Charge for Under-utilised properties

This term refers to residential properties that have not been made available for lease for more than six months per year. Any foreign investor who lodged an application with the FIRB on or after May 9, 2017 and whose property is deemed under-utilised will have to pay this fee. The charge is equivalent to the FIRB-imposed fee at the time of application.

Increase in Capital Gains Tax

Non-residents were previously charged 10% capital gains withholding tax. This has been increased to 12.5% for sales starting July 1 2017.

Minimum Threshold Adjustment

Still with regard to Capital Gains Tax, the former minimum amount for a property sale to be taxable is AUD$2M. This has been lowered down to AUD$700,000.

Find a Registered Tax Agent

Filing rent income tax, understanding which deductibles apply to you and computing for your tax return is a complicated process. It is made even more complex if you are not staying in Australia and would need to come here during the tax season.

In such cases, it would be best to hire a registered tax agent who will take all the hassles of lodging your income tax return so much easier. If you are looking for a qualified tax agent to assist you, just send us a message and we will link you up with one who is not only an expert, but is also someone willing to discuss with your property manager to understand the actual costs that running the residential rental property has incurred. This way, although you will still be involved in the process, there will be no communication issues when filing your income tax.