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Tax on IP interest if NON resident

Discussion in 'Accounting, Tax & Legal' started by Boatboy, 5th Aug, 2007.

  1. Boatboy

    Boatboy Well-Known Member

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    Just wanting to know and can't find ATO link, but if I am an Australian citizen, but spending time out of country, is the interest on IP loans in OZ, tax deductable.

    Thank's

    Dave
     
  2. Rob G.

    Rob G. Well-Known Member

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    Melbourne, VIC
    Generally yes.

    But get advice as you could still be regarded as a non-resident for tax purposes on extended stays overseas if you set up a home in one place (usually at your election). If your tax residency status changes then you have all sorts of CGT issues.

    ALSO you could be deemed a resident of an overseas country for tax purposes which means a tax grab by that country as well !

    ALSO if you are posted overseas as an employee for more than 91 days consecutive then your salary might be exempt from tax here. The downside is that you cannot usually use this income to offset negative geared property here.

    If you are a Trustee or Director then it is important to understand your residency status for both immigration and tax purposes which are quite different.

    Residency & tax is a complex area so ALWAYS get advice for your particular circumstances from an Accountant.

    Rob
     
  3. Boatboy

    Boatboy Well-Known Member

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  4. Rob G.

    Rob G. Well-Known Member

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    Hi Dave,

    Took a quick look at that thread - too much info and a lot conflicting. At the end you were extolling the virtues of being a non-resident.

    Do you really want to be a non-resident for tax ? This is usually only good for people with significant offshore assets or income. Looks like all your assets & income have an Australian source, although for CGT it may be that only your properties are a worry.

    As a non-resident you lose the $6000 tax-free threshold (FOR EACH OF YOU), franking credits, low income tax offset and deductible super contributions (Not to mention possibly any tax-free super in the future).

    If you want to be a non-resident you will need to convince the Commissioner that you have a permanent place of abode in another country. This means a permanent fixed living arrangement - not transitory.

    I don't see any calculations of costs for a local to administer your investments/assets, or any liquid reserves & insurance (including health/trauma etc) - but I couldn't wade through all those posts !

    Just make sure your Accountant is aware of all your plans & objectives to be sure you get the best advice.

    Cheers,

    Rob
     
  5. pjb89

    pjb89 Active Member

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    Hiya Boatboy

    I don't want to burst your bubble, but the answer to your question as to whether or not the interest on your investment loans is tax deductible is yes...and no.

    I obviously can't speak for your specific circumstances, however, in my case I am a non resident for tax purposes and do not pay income tax. Because of this everyone would be thinking that I have all of this additional income which I do I suppose ....BUT I do not benefit from the negative gearing legislation that allows me to offset my investment costs against my income TODAY. I am able to quarantine my losses until I return to Oz, which can be of benefit later (see below). Also I am liable for the income tax payable in the country that I work, so it can get a little complicated sometimes.....

    An example - IP worth $300K, IO loan 7.5%, rent $300/wk, taxable income say $60K, deposit say 20% so no MI - this IP would cost this person a little over $60/week to hold AFTER the tax variation paperwork was complete and in use. If this same person was now to earn tax free income and the income remained the same (I realise this is not going to be the case, but bear with me) this same IP would COST this lucky punter nearly $160/week out of their tax free income. So in this simplistic example this lucky person would need to increase his salary by 160/60 = 266% to have the same effect as if he was paying income tax and being eligble for the negative gearing deductions. If you use the PIA software, this sort of scenario is real easy to model, just put your numbers in as usual, but put a ZERO income in the taxable income box and see the change in YOUR costs.

    The above is simplistic of course but it is only shown to provide you with something that might be of benefit in your considerations.

    Having said all of that, I will get a tax benefit, but it will be only when I return to Oz and am classified as a resident for tax purposes. So to extend my story, say in 10 years I return home to live/retire, my quarantined losses (which in this simple example is going to be my costs of holding the above IP) will be used to offset my income tax that will be due. So in 2017 I am now living in Oz and am classified a resident for tax purposes. My income from all sources is say $100K/yr, the tax due on this is say $30K, so instead of me paying the ATO this out of my income, I am able to pay the ATO (on paper) the money out of my quarantined losses, meaning I recieve the full $100K in the hand. When my quarantined losses run out as they inevitably will, I will be required to cough up the income taxes just like every one else. Note that the tax rates are not accurate as the purpose of this reply is descriptive only.

    There's a whole lot more to this tax free lifestyle story than suggested above, and you would really need to speak to a savvy accountant that has a number of clients already o/seas....good luck in your endeavours!

    Pedro
     
  6. Rob G.

    Rob G. Well-Known Member

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    Correct Pedro ...

    Dividends (except fully franked) and interest are subject to witholding tax here - and that is the end of the story for it.

    SO interest on borrowings to derive interest and dividend income will not be able to be deducted to reduce your net income here, neither can a franking offset be used to reduce tax payable.

    Rent is different, tax is on net rent. BUT a non-resident's total deductions to derive rental income is limited to the amount of Australian source income (other than dividends & interest). So in this case it is limited to to rental income and the excess rental deductions are carried forward (I believe).

    ** Generally non-residents (for tax purposes) should not negative gear **

    That is why I asked if you REALLY want to be a non-resident in this case. It is usually only useful if you have significant overseas assets or income - Australian source income is caught whatever your residency (unless a business in some cases).

    Cheers,

    Rob