Taxation Advice & Planning

Lodging your Australian tax return from overseas

Lodging Your Australian Tax Return From Overseas

Australian tax return and “worldwide” income

Most people’s “to-do” list when they are planning a trip overseas will likely include items such as travel insurance, phone chargers or taking photos of their passport — but probably the last thing on anyone’s minds will be their likely tax situation before, during or after that trip-of-a-lifetime.

However, a few simple considerations, taken in the context of your personal circumstances, may end up making quite a difference to your final fiscal outcome.

Generally, you will remain an Australian resident for tax purposes if you’re overseas temporarily and you don’t set up a permanent home in another country. There’s usually nothing stopping you from working overseas, but you must lodge an Australian tax return and declare your “worldwide” income, even if tax was taken out in the country where you earned the income (there will most likely be a tax offset to take care of any doubled-up tax).

You can lodge your Australian tax return online from overseas. Note however that it is advisable to log in to your myGov account and turn off the myGov security code feature before you lose access to your Australian mobile number. If you have access to your number overseas, you can keep this feature turned on.

CGT considerations

If you leave your home in Australia temporarily and rent it out, you can continue to treat it as your main residence for up to six years for capital gains tax (CGT) purposes. If you don’t rent out your vacated home, you can treat it as your main residence for an unlimited period.

If you cease to be an Australian resident and decide to sell your home in Australia you may be liable to CGT.

If you cease to be an Australian resident while overseas, the ATO may deem some of your assets (generally those not considered “taxable Australian property”) to have been disposed of for CGT purposes, which may mean you become liable to pay CGT.

You can choose not to have this deemed disposal apply. But if you subsequently dispose of the asset sometime later, the ATO may take into account the whole period of ownership – including any period when you’re not an Australian resident – when it calculates a gain or loss for CGT purposes.

Your superannuation remains the same

If you are an Australian citizen or permanent resident heading overseas, your super remains subject to the same rules, even if you are leaving Australia permanently. This means you cannot access your super until you reach preservation age and retire, or satisfy another condition of release.

If you have a small amount saved for retirement that you want to keep with your super fund, contact your super fund and tell them. This will prevent it from being transferred to the ATO as “unclaimed” super.

If you are a trustee of a self-managed super fund (SMSF) and you intend to travel overseas for an extended period, check before you leave that your fund will continue to meet the definition of an Australian super fund. Generally, there are certain residency conditions for an SMSF, which include that:

  • It was established here and at least one asset of the fund is located in Australia
  • Central management and control is ordinarily in Australia
  • Its active members hold at least 50% of the fund’s assets.

If your SMSF fails the residency test, it could be advisable to roll over your funds to a resident regulated super fund and wind up the SMSF — as otherwise, the SMSF will become non-complying. Professional advice in these situations is recommended.

Health insurance

The Medicare levy surcharge applies to Australian residents who have incomes above the surcharge thresholds and do not have an appropriate level of private patient hospital cover. So if you cancel your private health insurance while travelling overseas, you may be liable for the Medicare levy surcharge if your income exceeds the relevant threshold.

A good idea may be to contact your health fund to work out the amount of premium you expect to save by cancelling or suspending your cover, and then compare it to the surcharge you may have to pay.

You and all your family dependants must have private patient hospital cover to avoid paying the surcharge. Cancelling or suspending cover for yourself will mean you and your spouse may each still be liable for the surcharge if your combined income for the purposes of the surcharge exceeds the family surcharge threshold.

Remember, travel insurance is not private patient hospital cover for the purposes of the Medicare levy surcharge. Private patient hospital cover does not include cover provided by an overseas fund.

(Also note that although any foreign employment income may be exempt from Australian tax, the ATO will still take it into account when it determines your taxable income for the purposes of the Medicare levy surcharge.)

Student loans

If you have moved overseas and have a Higher Education Loan Programme (HELP), VET Student Loan (VSL) or Trade Support Loan (TSL) debt, you will have the same repayment obligations as those who live in Australia. This applies even if you already live or intend to move overseas for a total of more than six months in any 12-month period.

You will need to update your contact details using the ATO’s online services via myGov. You will also need to advise the ATO of your worldwide income, and make compulsory repayments or pay an overseas levy towards your debt if you earn over the minimum repayment threshold.

If you have a Student Financial Supplement Scheme (SFSS), Student Start-up Loan (SSL) or ABSTUDY Student Start-up Loan (ABSTUDY SSL) debt and go overseas, the ATO will continue to maintain your loan account. Your debt will not be waived and the amount outstanding will continue to be indexed each year until you have paid off your debt. You can still make voluntary repayments when you are overseas.

If you have any questions about tax complications while living overseas please contact our tax accountants at W Wen & Co.

Property development and tax obligations

Property Development And Tax Obligations

The ATO keeps an eye on property developers

Property development and tax obligations

The ATO seems to be always looking over the shoulder of property developers to make sure they are complying with their tax obligations.

The considerations facing the ATO are many and varied, but can include topics such as whether an agreement to develop and sell land is a “mere realisation” or a disposal either in the course of a business or as part of a profit making undertaking or plan.

What is ‘mere realisation’

A “mere realisation” is a sale on capital account to which the capital gains tax (CGT) rules will generally apply. Landholders will usually seek this treatment if they can access CGT concessions (for example, applying the appropriate CGT discount or the small business CGT concessions) or the property is a pre-CGT asset.

A sale that is more than a mere realisation will be on revenue account and the proceeds will generally be assessable as ordinary income. The two most common scenarios where the proceeds are income are:

  1. where the land is sold in the course of a business or as an incident of business operations, or
  2. where the land has been acquired and sold as part of a profit making undertaking or scheme.

Whether a sale is a mere realisation or something more is determined by examining and weighing the facts and circumstances taken as a whole.

The ATO must consider income and deductions, PDAs and land banking activities

Outside of the capital/revenue discussion (more below), the ATO must also consider timing issues relating to the recognition of income and deductions, property development agreements (PDAs), and land banking activity.

A relevant discussion can be found in the Taxpayer Alert Trusts mischaracterising property development receipts as capital gains. This alert focuses on the recognition of profits from property developer activities as a mere realisation of capital rather than an allocation of ordinary income to trust beneficiaries.

Also note for completeness that Taxation Ruling Income tax: whether profits on isolated transactions are income and Miscellaneous Taxation Ruling The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number provide public advice relevant to this issue.

Ask us for links to the above should you want to read more.

Capital vs revenue characterisation

The ATO has stated that it is important to weigh all the facts and indicia together, and not in isolation. The test it applies is whether, on the balance of probabilities, it is more likely than not that the relevant tax provisions apply to the facts of the particular case.

The ATO says it is not simply a matter of tallying how many indicia point in each direction (for example, that a taxpayer acquired land with the requisite profit-making intention or purpose). Some factors will be more influential than others, and some will, because of the particular circumstances, point more strongly to a particular conclusion.

The ATO has provided the following list of indicia, but says this is not exhaustive and may change over time:

  • Whether the landowner has held the land for a considerable period prior to the development and sale
  • Whether the landowner has conducted farming, or other non-development business activities, on the land prior to beginning the process of developing and selling the land
  • Whether the landowner originally acquired the property as a private residence or for recreational purposes
  • Whether the landowner originally acquired the property as an investment, such as for long term capital appreciation or to derive rental income
  • Whether the land has been acquired near the urban fringe of a major city or town
  • Where the property has recently been rezoned, whether the landowner actively sought rezoning
  • A potential buyer of the property made an offer to the landowner before the landowner entered into a development arrangement
  • The landowner was unable to find a buyer for the land without subdivision
  • The landowner applies for rezoning and planning approvals around the time or sometime after acquisition of the property, but before undertaking further steps that might lead to a profitable sale or entering into development arrangements
  • The landowner has registered for GST on the basis that they are carrying on an enterprise in relation to developing the land
  • The landowner has registered a related entity for GST that will participate in (or undertake) the development of the land
  • The landowner has a history of buying and profitably selling developed land or land for development
  • The operations are planned, organised and carried on in a businesslike manner
  • The landowner has changed its use of the land from one activity to another (such as from farming to property development)
  • The scope, scale, duration and degree of complexity of any development
  • Who initiated the proposal to develop the land for resale
  • The sophistication of any development or other pre-sale arrangements
  • The level of active involvement of the landowner in any development activities
  • The level of legal and financial control maintained by the landowner in a development arrangement
  • The level of financial risk borne by the landowner in acquiring, holding and/or developing the land
  • The value of the development or other preparatory costs relative to the value of the land.

If you have any questions about tax obligations on property development, please contact our tax accountants at W Wen & Co.

10 helpful tips to avoid common tax mistakes for rental property owners

TOP 10 Tips To Avoid Common Tax Mistakes For Rental Property Owners

Best tips to avoid tax stumbles

10 helpful tips to avoid common tax mistakes for rental property owners

The ATO is reminding rental property owners that each year it sees some fairly common mistakes being made with tax claims for investment properties. It has therefore released a list of the top 10 stumbles and how best to avoid them.

1. Apportioning expenses and income and for co-owned properties

If you own a rental property with someone else, you must declare rental income and claim expenses according to your legal ownership of the property. As joint tenants, your legal interest will be an equal split, and as tenants-in-common, you may have different ownership interests.

2. Make sure your property is genuinely available for rent

Your property must be genuinely available for rent to claim a tax deduction. This means:

  • You must be able to show a clear intention to rent the property
  • Advertising the property so that someone is likely to rent it and set the rental amount in line with similar properties in the area
  • Avoiding unreasonable rental conditions

3. Getting initial repairs and capital improvements right

Ongoing repairs that relate directly to wear and tear or other damage that happened as a result of you renting out the property can be claimed in full in the same year you incurred the expense. For example, repairing the hot water system or part of a damaged roof can be deducted immediately.

Cost for initial repair, renovation and improvement

Initial repairs for damage that existed when the property was purchased, such as replacing broken light fittings and repairing damaged floorboards, are not immediately deductible. Instead, these costs are used to work out your capital gain or capital loss when you sell the property.

Replacing an entire structure like a roof when only part of it is damaged or renovating a bathroom is classified as an improvement and not immediately deductible. These are building costs that you can claim at 2.5% each year for 40 years from the date of completion.

If you completely replace a damaged item that is detachable from the house and it costs more than $300 (for example, replacing the entire hot water system) the cost must be depreciated over a number of years.

4. Rental property borrowing expenses

If your borrowing expenses are over $100, the deduction is spread over five years. If they are $100 or less, you can claim the full amount in the same income year you incurred the expense. Borrowing expenses include loan establishment fees, title search fees and costs of preparing and filing mortgage documents.

5. Rental property purchase costs

You can’t claim any deductions for the costs of buying your property. These include conveyancing fees and stamp duty (for properties outside the ACT). If you sell your property, these costs are then used when working out whether you need to pay capital gains tax.

6. Claiming interest on your rental property loan

You can claim interest as a deduction if you take out a loan for your rental property. If you use some of the loan money for personal use such as buying a boat or going on a holiday, you can’t claim the interest on that part of the loan. You can only claim the part of the interest that relates to the rental property.

7. Getting rental property construction costs right

You can claim certain building costs, including extensions, alterations and structural improvements as capital works deductions. As a general rule, you can claim a capital works deduction at 2.5% of the construction cost for 40 years from the date the construction was completed.

Where your property was owned by someone else previously, and they claimed capital works deductions, ask them to provide you with the details so you can correctly calculate the deduction you’re entitled to claim. If you can’t obtain those details from the previous owner, you can use the services of a qualified professional who can estimate previous construction costs.

8. Claiming the right portion of your rental property expenses

If your rental property is rented out to family or friends below market rate, you can only claim a deduction for that period up to the amount of rent you received. You can’t claim deductions when your family or friends stay free of charge, or for periods of personal use.

9. Keeping the right records

You must have evidence of your income and expenses so you can claim everything you are entitled to. Capital gains tax may apply when you sell your rental property. So keep records over the period you own the property and for five years from the date you sell the property.

10. Getting your capital gains right when selling your rental property

When you sell your rental property, you may make either a capital gain or a capital loss. Generally, this is the difference between what it cost you to buy and improve the property, and what you receive when you sell it. Your costs must not include amounts already claimed as a deduction against rental income earned from the property, including depreciation and capital works.

If you make a capital gain, you will need to include the gain in your tax return for that income year. If you make a capital loss, you can carry the loss forward and deduct it from capital gains in later years.

If you have any questions about the tax implications of your rental properties, please contact the accountants at our Sydney office

An overview on residential rental property and travel expenses

Residential Rental Property And Travel Expenses

Claiming travel expenses related to residential rental property – new rules! The ATO recently highlighted significant non-compliance with the rules prohibiting taxpayers claiming travel expenses related to residential rental properties. Late last calendar year, the ATO revealed it had identified 26,000 taxpayers who had incorrectly claimed deductions for travel to rental properties during tax time …

Residential Rental Property And Travel Expenses Read More »

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