Getting taxed on UK income

[catatemyfish]

Hi all,

 

Last year I made a small profit on my UK rental and was subsequently taxed my the Australian tax man. The T&Cs of my mortgage allow me to pay a lump sum of up to £1000 off my mortgage per year - my question is if I use the rental profit towards this payment can I avoid paying tax here?

 

Many thanks in advance,

[Bungo]

Hi all,

 

Last year I made a small profit on my UK rental and was subsequently taxed my the Australian tax man. The T&Cs of my mortgage allow me to pay a lump sum of up to £1000 off my mortgage per year - my question is if I use the rental profit towards this payment can I avoid paying tax here?

 

Many thanks in advance,

 

No. None of your mortgage payments are tax deductable, not even your regular monthly payments.

 

Only mortgage interest added onto your mortgage by the bank is tax deductable.

[Guest]

Hi all,

 

Last year I made a small profit on my UK rental and was subsequently taxed my the Australian tax man. The T&Cs of my mortgage allow me to pay a lump sum of up to £1000 off my mortgage per year - my question is if I use the rental profit towards this payment can I avoid paying tax here?

 

Many thanks in advance,

 

Are you sure you made full use of depreciation? If you have a mortgage on the property it's hard to imagine you could make a profit in the ATO's eyes, the depreciation of everything in the property, carpets, curtains, white goods, heating system, hot water system etc. can have deductions from income for depreciation.

 

https://www.ato.gov.au/individuals/income-and-deductions/in-detail/investments,-including-rental-properties/rental-property-expenses/?page=3

 

If you don't use accountant I suggest you do - one well-versed in both UK and Australian taxation and if you do, get a better one

 

If the profit is around £1000 then perhaps use that to improve the property - back when we were renting out a property in the UK we always invested the small profit back in - new carpets, double glazing, etc. That way you are maintaining and improving the property and usually maintaining/improving your investment returns.

[Bungo]

Are you sure you made full use of depreciation? If you have a mortgage on the property it's hard to imagine you could make a profit in the ATO's eyes, the depreciation of everything in the property, carpets, curtains, white goods, heating system, hot water system etc. can have deductions from income for depreciation.

 

https://www.ato.gov.au/individuals/income-and-deductions/in-detail/investments,-including-rental-properties/rental-property-expenses/?page=3

 

If you don't use accountant I suggest you do - one well-versed in both UK and Australian taxation and if you do, get a better one

 

If the profit is around £1000 then perhaps use that to improve the property - back when we were renting out a property in the UK we always invested the small profit back in - new carpets, double glazing, etc. That way you are maintaining and improving the property and usually maintaining/improving your investment returns.

 

 

It it is very hard to get a depreciation report on a UK property, I have never heard on anyone getting such a thing. In any case I would not expect the depreciation on the odd washing machine or whatever to offset £1,000 of profit every year. (Possibly more if OP has inadvertently been deducting mortgage payments).

 

It is perfectly normal especially in today's low interest environment, to pay tax on overseas property income.

 

And money spent on double glazing or other property improvements would not be tax deductible either (not until such time as CGT needs to be calculated anyway) as it represents a capital improvement, not a maintenance expense.

Edited July 26, 2016 by Bungo

[catatemyfish]

Hi,

 

Thanks for your replies. Given that you cannot claim tax back on new carpet etc, what other expenses other than necessary repairs to the heating system and electrics etc can you spend any profit on that you can then claim back on your tax return? I'm not talking big amounts, maybe £750.

[Bungo]

Hi,

 

Thanks for your replies. Given that you cannot claim tax back on new carpet etc, what other expenses other than necessary repairs to the heating system and electrics etc can you spend any profit on that you can then claim back on your tax return? I'm not talking big amounts, maybe £750.

 

The logic of looking to incur expenses just so that you don't pay tax is somewhat illogical. If you haven't had expenses then don't look to incur some now! To try to illustrate the point, spending $100 on something you really don't need to do in order to get $100 x your tax rate = say $30 off yur tax bill does not make sense.

 

Profit is a GOOD thing to have.

[Ken]

The logic of looking to incur expenses just so that you don't pay tax is somewhat illogical. If you haven't had expenses then don't look to incur some now! To try to illustrate the point, spending $100 on something you really don't need to do in order to get $100 x your tax rate = say $30 off yur tax bill does not make sense.

 

Profit is a GOOD thing to have.

 

Well put Bungo. The obsession that many people have with reducing their tax bill no matter the cost never ceases to amaze me. Since my fees are tax deductible I always offer to put my price up if people want to save tax that much!

[Parley]

I'm not sure so much these years but it used to be well worth while to ensure your taxable income was below a certain amount.

This would mean you would qualify for family allowance benefits as they were called back then.

 

There could well still be definite benefit in ensuring your taxable income falls below the threshold where the private health surcharge kicks in.

There may be others also so I wouldn't totally say there is no point.

[Guest]

It it is very hard to get a depreciation report on a UK property, I have never heard on anyone getting such a thing. In any case I would not expect the depreciation on the odd washing machine or whatever to offset £1,000 of profit every year. (Possibly more if OP has inadvertently been deducting mortgage payments).

 

It is perfectly normal especially in today's low interest environment, to pay tax on overseas property income.

 

And money spent on double glazing or other property improvements would not be tax deductible either (not until such time as CGT needs to be calculated anyway) as it represents a capital improvement, not a maintenance expense.

 

We were never required to provide a depreciation report, we used the workbook provided by ATO and there is an awful lot more than white goods included.

 

And yes Double Glazing is a capital improvement but this is still deductible albeit not in the same way - from the ATO guide for Rental Properties

 

Capital works deductions

You can deduct certain kinds of construction expenditure.In the case of residential rental properties, the deductionswould generally be spread over a period of 25 or 40 years.These are referred to as capital works deductions.Your total capital works deductions cannot exceed theconstruction expenditure. No deduction is available untilthe construction is complete.Deductions based on construction expenditure apply tocapital works such as:n a building or an extension, for example, adding a room,garage, patio or pergolan alterations, such as removing or adding an internalwall, orn structural improvements to the property, for example,adding a gazebo, carport, sealed driveway, retaining wallor fence.

 

And with regards to interest on the mortgage it was my understanding that is deductible in Australia, again from the same booklet

 

Interest on loans

If you take out a loan to purchase a rental property, you canclaim the interest charged on that loan

 

Certainly when our accountant did our tax returns it was included - and they are a regular poster on here and something of an expert in UK/Aus tax.

 

I believe this is your field too so not going to argue the point with you - my intent was purely to help the OP and my suggestion that they use a UK/Aus accountant rather than one that is only expert in one domain is still my advice to them.

[littlegreenman]

We were never required to provide a depreciation report, we used the workbook provided by ATO and there is an awful lot more than white goods included.

 

And yes Double Glazing is a capital improvement but this is still deductible albeit not in the same way - from the ATO guide for Rental Properties

 

Capital works deductions

You can deduct certain kinds of construction expenditure.In the case of residential rental properties, the deductionswould generally be spread over a period of 25 or 40 years.These are referred to as capital works deductions.Your total capital works deductions cannot exceed theconstruction expenditure. No deduction is available untilthe construction is complete.Deductions based on construction expenditure apply tocapital works such as:n a building or an extension, for example, adding a room,garage, patio or pergolan alterations, such as removing or adding an internalwall, orn structural improvements to the property, for example,adding a gazebo, carport, sealed driveway, retaining wallor fence.

 

And with regards to interest on the mortgage it was my understanding that is deductible in Australia, again from the same booklet

 

Interest on loans

If you take out a loan to purchase a rental property, you canclaim the interest charged on that loan

 

Certainly when our accountant did our tax returns it was included - and they are a regular poster on here and something of an expert in UK/Aus tax.

 

I believe this is your field too so not going to argue the point with you - my intent was purely to help the OP and my suggestion that they use a UK/Aus accountant rather than one that is only expert in one domain is still my advice to them.

 

Another registered tax agent here and I can confirm that any expense that is incurred in gaining assessable income is deductible under s8-1 of ITAA97. This clearly includes mortgage interest, regardless of whether it is in relation to foreign source incomee or not.

Edited July 26, 2016 by littlegreenman
Typo

[Ruth7862]

I started a new post today but it seems this post answers most of my questions. I agree profit is good and wouldn't recommend spending money to pay less tax. I was more interested in how to make sure all allowable deductions were made regarding depreciation etc. I guess paying for an accountant is probably sensible even though my son, whose rental in the UK it is, is an intelligent person and generally capable of filling in forms. What is the best way to go about finding a good accountant if you don't know anyone that can recommend someone?

[Alan Collett]

I started a new post today but it seems this post answers most of my questions. I agree profit is good and wouldn't recommend spending money to pay less tax. I was more interested in how to make sure all allowable deductions were made regarding depreciation etc. I guess paying for an accountant is probably sensible even though my son, whose rental in the UK it is, is an intelligent person and generally capable of filling in forms. What is the best way to go about finding a good accountant if you don't know anyone that can recommend someone?

 

 

Hi Ruth.

 

There are at least 3 of us on this thread who are registered tax agents!

 

Best regards.

[Alan Collett]

It it is very hard to get a depreciation report on a UK property, I have never heard on anyone getting such a thing. In any case I would not expect the depreciation on the odd washing machine or whatever to offset £1,000 of profit every year. (Possibly more if OP has inadvertently been deducting mortgage payments).

 

It is perfectly normal especially in today's low interest environment, to pay tax on overseas property income.

 

And money spent on double glazing or other property improvements would not be tax deductible either (not until such time as CGT needs to be calculated anyway) as it represents a capital improvement, not a maintenance expense.

 

 

Hi Bungo.

 

Many of our clients who are taxpayers in Australia with UK let property have tax depreciation reports through the firm of Quantity Surveyors with which we work - they have a UK office.

 

You would be surprised at how much the tax deductions add up to over the years - and what is capable of being depreciated.

 

Note also that in the UK replacement double glazing has been held to be a revenue deduction:

One example of this is double glazing. At one time, replacing single glazed windows with double glazing was an improvement. Over time, double glazing became the industry norm. This meant that replacing single glazing with double glazing ceased to be an improvement, and capital expenditure, and became allowable expenditure for tax purposes as it was simply replacing like with currently available like.

 

(https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim46925)

Best regards.

[Guest]

I came back to this thread now I'm on my PC to recommend @Alan Collett but I see he has already recommended himself

[Marisawright]

 

@Bungo, I'm surprised you would think having a depreciation report would make so little difference, you being an accountant. Admittedly I bought both my rental properties new, so my depreciation figures were higher than usual - but mainly thanks to the depreciation I paid no tax at all for years.

[SaffanZimbo]

More than a little worried..... We rented out our UK house and our UK accountant sent us a lovely email in May advising that as OH and my tax profit was GBP5470 was less than the threshold we do not have any UK tax liability..... However, we now need to disclose this on our Australian Tax returns and have no idea where we will get the money to pay the tax on the UK income in Australia. Our mortgage payments, insurances etc cover our UK mortgage with just under GBP100 left in the bank so we don't have any "profit" from the UK to transfer here to pay the Australian Tax. We don't have much in saving here either as I'm in a very low paid job and we transfer $'s to NZ to support my mum who is on a pension....

Can we arrange a payment plan with the ATO to pay the monies due over the year?

[Marisawright]

We rented out our UK house and our UK accountant sent us a lovely email in May advising that as OH and my tax profit was GBP5470 was less than the threshold we do not have any UK tax liability..... However, we now need to disclose this on our Australian Tax returns and have no idea where we will get the money to pay the tax on the UK income in Australia. Our mortgage payments, insurances etc cover our UK mortgage with just under GBP100 left in the bank so we don't have any "profit" from the UK to transfer here to pay the Australian Tax. We don't have much in saving here either as I'm in a very low paid job and we transfer $'s to NZ to support my mum who is on a pension....

Can we arrange a payment plan with the ATO to pay the monies due over the year?

 

You do know you are allowed to claim your expenses? Has that been taken into account? Does your UK accountant know what expenses you can claim under the Australian tax regime or do you have an Aussie tax agent who can do that for you?

 

Something that might help - if you do your tax return yourself, you can delay submitting the return until late October, so you're not likely to have to pay any money till November. If you get a tax agent to do your return for you, it's even better - in that case, you can delay until (I think) March the following year. So that would give you more time to save up.

 

You should have had a depreciation report done before you rented out the property, it would be worth getting that done now so you can reduce your tax for future years (see Alan Collett's post).

[baggo]

Hi all

New to this but I don't understand. I thought there was a double taxation agreement so that you couldn't be taxed again in Oz on income you'd already been taxed on in the UK?

 

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[Guest]

Hi all

New to this but I don't understand. I thought there was a double taxation agreement so that you couldn't be taxed again in Oz on income you'd already been taxed on in the UK?

 

Sent from my SM-G930F using Tapatalk

 

That is correct but you are taxed in the country of residence.

[Marisawright]

Hi all

New to this but I don't understand. I thought there was a double taxation agreement so that you couldn't be taxed again in Oz on income you'd already been taxed on in the UK?

 

 

 

There is a double taxation agreement, but you still have to submit tax returns in both countries if you're earning income in both. What the tax agreement means is that the tax office in one country will assess the tax you're due to pay under their rules, then take into account how much tax you've already paid in the other country. If it's an equal amount, you won't have to pay them anything. If it's less, then you'll have to pay the balance.

[Alan Collett]

There is a double taxation agreement, but you still have to submit tax returns in both countries if you're earning income in both. What the tax agreement means is that the tax office in one country will assess the tax you're due to pay under their rules, then take into account how much tax you've already paid in the other country. If it's an equal amount, you won't have to pay them anything. If it's less, then you'll have to pay the balance.

 

 

Not technically correct. UK source pension income payable to a permanent visa holder or Australia citizen who is a resident of Australia is only taxable in Australia under the Treaty provisions.

 

UK source rental income from a property owned by an Australian tax resident individual, by contrast, is subject to income tax in both countries - so long as the individual is not a temporary tax resident of Australia (as defined - generally, the holder of a temporary residency visa).

 

In short, the Tax Treaty between the UK and Australia contains provisions that are more involved than described, and overlays the domestic legislation of each country.

 

Best regards.

[Alan Collett]

That is correct but you are taxed in the country of residence.

 

No, the assumption is actually incorrect.

 

Best regards.