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If you have an IP in another country, how does Tax/Gearing work?

Discussion in 'Accounting, Tax & Legal' started by Sk3tChY, 22nd Aug, 2007.

  1. Sk3tChY

    Sk3tChY Well-Known Member

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    Hypothetical Scenario;

    I'd have an IP in AUS, rented out at $250pw and be paying approx $1,500 a month in interest repayments, along with some shares, of which I recieve 100% franked dividends, which are all re-invested via DRP, i'd prob also have a margin loan, paying interest as well.

    I now plan to move to the UK for approximately 2 years, to work full-time. Whilst over in the UK, I may consider buying a property for the 2 years, and then sell it when I come back to AUS.

    Questions;

    1. How does income tax work on my AUS assets?
    2. How does negative gearing benefits work on my AUS assets?
    3. If I did buy a property in the UK, how would CGT work when I sold?
     
    Last edited by a moderator: 22nd Aug, 2007
  2. Rob G.

    Rob G. Well-Known Member

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    Intending to remain an Australian Resident for tax purposes ?

    This has nothing to do with immigration residence status. An Aussie overseas will remain a resident for tax purposes unless they can demonstrate a permanent place of abode overseas.

    Your (tax) residence has a very big impact on geared investments.

    Rob
     
  3. Sk3tChY

    Sk3tChY Well-Known Member

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    I'd be living over in the UK, but im not 100% sure on whether i'd be a permanent resident or not. If possible could you give me both scenarios?

    I'd probably want the most cost effective thing, so yeah... Would I be able to move to the UK for a couple of years, and not become a perm resident, whilst working there?
     
  4. Rob G.

    Rob G. Well-Known Member

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    Don't really know where to start - so I'll just give a few broad (& maybe not appropriate to you) facts:

    1. An Australian Resident is taxed on their world-wide income - with a credit for any tax paid overseas. So consider any UK salary & investment income along with foreign tax credits.

    2. A non-resident is only taxed on Australian sourced income. Consider dividends, interest and rental income from Australian investments.

    3. There will be CGT issues the moment you change residency.

    4. A non-resident will be subject to a flat rate witholding tax on (unfranked)dividends & interest for which deductions cannot be claimed and no franking credits are allowed. Beware of gearing !!

    5. A non-resident will pay a minimum of 29% tax on rental income derived from Australian property and deductions are limited to the income - i.e. losses are carried forward so watch negative gearing, and no $6000 tax-free threshold.

    6. An Australian resident may well be a resident of the UK based on duration of stay and living arrangements. The particular UK double tax agreement will override Australian Taxation Law and specify tax sharing.

    7. Your choice of residency status should be based on location of assets, location of income and your actual and intended living arrangements including length of stay, location of family, any possible changes of status, etc...

    This is a very specialised area and you really need an Accountant or Solicitor who has experience in this role, preferably with contacts in the UK.

    Better go get the whole scenario from them rather than have bits of info dribble out in this forum.

    Cheers,

    Rob
     
  5. Sk3tChY

    Sk3tChY Well-Known Member

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    Thanks Rob, yeah, well this plan wouldnt be going into action for at least another year or two, so for now i'm just trying to get a basic understanding...

    I've given a more detailed scenario in my first post, which may give a better understanding of my situation.
     
  6. Rob G.

    Rob G. Well-Known Member

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    Well 2 years is the minimum the ATO considers substantial enough to be regarded as "permanent" but the courts have ruled on less time. You don't need to actually buy a place in the UK, but you must have a permanent living arrangement - e.g. lease.

    If you choose to be a non (tax) resident then you may have CGT issues with investments other than the IP. You may be able to elect to defer payment of CGT. Also, no tax deductions on borrowings to buy shares, but no tax on franked dividends. Negative gearing the rental property is generally bad as excess deductions cannot be claimed against other investment income and must be carried forward.

    If you remain an Australian resident, then you will be taxed on any income from the UK but you will get relief to the extent it has been taxed there.

    In both cases your length of stay will make you a (tax) resident of the UK.

    If you remain an Australian resident then the relevant double tax agreement will share the taxing rights - usually based on the source of income. So the UK would have priority over UK sourced salary, etc. BUT this could depend on where you have the closest ties - family, assets etc...

    Cheers,

    Rob
     
  7. Sk3tChY

    Sk3tChY Well-Known Member

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    Ok sorry rob, a little confused.

    If im working in the UK, I would be under the assumption I'd be paying their tax brackets on the income I make over there.

    I was also hoping that if I remained an AUS citizen, that I would be taxed according to AUS tax brackets, likewise with the negative gearing benefits.

    Is this understanding wrong? Heres an example to better explain.

    I'm not 100% on how UK tax works, but from what i've manged to find the brackets are as follows;

    Starting rate 10% 0 - 2,230
    Basic rate 22% 2,231 - 34,600
    Higher rate 40% Over 34,600

    With this in mind my assumption would be;

    (edited: It was to confusing, i've split everything up in my post below to make things easier, hopefully.)

    ps: Rob I sent you a pm.
     
    Last edited by a moderator: 23rd Aug, 2007
  8. Sk3tChY

    Sk3tChY Well-Known Member

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    1. If was living and working in the UK for 2 years, earning £30,000pa, i'd have to pay £6332.40 in tax, according to the UK tax brackets.

    If I was an AUS citizen, would I pay the UK tax brackets on this income?

    2. I would at the same time have an IP in AUS, and be earning approx $13,000pa in rental income. I'd also have some AUS shares, with a margin loan, so I'd be paying some interest on that as well.

    What type of tax would I pay on this income? Would it be UK or AUS brackets? And how could I claim negative gearing benefits from interest repayments on the property and my shares?
     
  9. Rob G.

    Rob G. Well-Known Member

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    I'm trying to evade specifics, and I have not read the details of the UK double tax treat, but ....

    For a dual resident ...

    1. Tax in UK on salary income over there will be based on being a UK resident, as you will be spending more than six months there - unless (possibly) you hold a special visiting worker class of visa.

    2. Tax in Australia on UK salary income - but with a credit for tax witheld in the UK up to a limit of the amount otherwise taxable here (in other words you are not double taxed).

    3. Tax in Australia on your Oz income at resident rates and allowed a tax-free threshold, credits and deductions including negative gearing.

    4. Tax in UK on Oz source income - DEPENDS ON THE DOUBLE TAX AGREEMENT, but you will be deemed to be a UK (tax) resident and the agreement will decide, usually allowed a credit for tax paid in Oz so you are not double taxed.

    International tax is extremely complex as you have domestic, overseas and international jurisdictions. A competent Accountant in this area, preferably with a few UK based clients, is strongly recommended.

    Cheers,

    Rob
     
  10. Sk3tChY

    Sk3tChY Well-Known Member

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    Ahh ok, I guess it isnt going to be as simple as I had hoped. Thanks heaps for the advice rob.

    If anyone else has anything to add, please don't hesitate to do so, I'd like as much info as possible, so I can understand the sort of things I need to be aware of.
     
  11. Rob G.

    Rob G. Well-Known Member

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    No probs, just trying to convince you that it is so complex nobody will want to stick their neck out with free advice !!

    Each country will count both salary and net rental income for their applicable tax rate, regardless of borders.

    The double tax agreement will work out which jurisdiction will get taxing rights - you will be taxed only once, but it might be shared.

    However, I am uncertain whether the UK will allow full rental deductions in its calculation as negative gearing is an Australian phenomenon, also franking credits are treated differently I think.

    Too many unknowns, some people only specialise in ex-pat taxation and are held on retainer by Accounting & Law firms.

    Cheers,

    Rob