Buying Australian property whilst in UK

[Malcolminthemiddle]

Hi everyone,

We are considering a move back to Sydney following 3 years in the UK, we are dual nationals.

Ahead of our move we are looking to buy a property as our family home, but would let it out until ready to move.
Having searched Google extensivley there is scant information around this specific situation.

I was wondering if anyone here has any insight on the following questions:

If we let out a Sydney property whilst in the UK which tax deduction rules would apply in which order?
Mortgage interest relief is now limited in the UK but do the Australian rules apply first when we are UK resident?

When we move back to Sydney, would there be any tax issues with moving into a property that we had previusly let out?

Is it relatively easy to convert an investor mortgage to a normal residential mortgage in Australia?

As always appreciate your comments and feedback - thanks in advance!

M

 

 

 

 

[Ken]

Australian rules apply to Australian tax, UK rules apply to UK tax. Since the property is Australian property you would taxed on it in Australia according to Australian rules. Since you are resident in the UK you would also be taxed on it in the UK according to UK rules but would be allowed the tax you paid on it in Australia as a tax offset (the fact that the Australian tax paid was calculated according to Australian rules is irrelevant). The Double Taxation Agreement gives Australia the first bite when the property is in Australia, the UK only gets a bite if the UK tax exceeds the Australian tax.

The only tax issues with moving into a property you had previously let out is the CGT when you sell it as you wouldn't get the private resident exemption for the period you let it out before living in it (although you can get it for up to 6 years of letting it out after you've lived in it).

I should also point out that Australian tax is less favourable to non-residents. You will get no tax free allowance on the rental income and if you have to sell the property before returning to Australia you'll be hit by CGT on the entire gain with no CGT discounts available to you (such as the 50% discount for holding an asset for more than one year).

[Malcolminthemiddle]

Thanks Ken, appreciate the reply.

So if I understand correctly I would follow the Australian rules first and potentially make deductions including mortgage interest first and any tax differential between Australia and the UK  I would pay to HRMC. I was concerned that I may have to apply UK deduction rules after Australian rules meaning much reduced mortgage interest relief.

Good news on the CGT too - thanks again, we will take the hit on any gain before moving in.

M

[Ken]

7 hours ago, Malcolminthemiddle said:

Thanks Ken, appreciate the reply.

So if I understand correctly I would follow the Australian rules first and potentially make deductions including mortgage interest first and any tax differential between Australia and the UK  I would pay to HRMC. I was concerned that I may have to apply UK deduction rules after Australian rules meaning much reduced mortgage interest relief.

Good news on the CGT too - thanks again, we will take the hit on any gain before moving in.

M

No you haven't grasped it. You have to follow the Australian rules first and make deductions including mortgage interest to calculate the Australian tax payable. You then reverse all of those deductions and make the UK deductions to calculate the UK tax payable and there is a much reduced mortgage interest relief if you are a higher rate tax payer, but you don't have to pay all of that tax because you deduct the Australian tax paid from that figure.

That is of course putting it in simple terms. Because the tax years end on different dates you'll never really be working with the same numbers for income or deductions in the two countries tax returns even where the rules are the same.

Also CGT is payable when you sell the property not when you move in but you can get a valuation at the point you move in so as to have the amount for the future.

Edited March 8, 2021 by Ken

[Chocci]

@Malcolminthemiddle 3 years ago, we actually did what you are proposing to do: we bought a home in Melbourne and will be moving back in Nov.  At the time I was worried about rapid capital gains on properties and worrying we'd never be able to afford a place if we kept waiting.  

I'm still wondering if it was the right decision because even though I grew up in Melbourne and was really familiar with the areas, as we approach the time to move back I wonder if we do want to be based in that neighbourhood. 

Secondly, as Ken mentioned there are CGT implications: once you let out a property before living in it as the principle place of residence, you lose the right to the 6 year letting out period (i.e. if you lived in it first, you could let it out for 6 years and still get a CGT exemption when you sell). 

In terms of taxes, we file Australian taxes every year and all the relevant deductions under Australian tax laws and any net income is taxed at 32.5% which is hefty.  We are taxed in the UK as well but get a tax credit for a large proportion of the Australian taxes. 

[Marisawright]

On 07/03/2021 at 21:29, Malcolminthemiddle said:

If we let out a Sydney property whilst in the UK which tax deduction rules would apply in which order?

It's not a case of applying them in order.  Australian tax deductions apply in Australia and UK tax deductions apply in the UK.  You then get a credit for the tax you paid in Australia.

As a foreign investor in Australia, you will submit an Australian tax return for the rental property.  You're allowed all the usual Australian deductions (mortgage interest, depreciation, non-capital expenses) but you will be taxed on the net income at a flat rate of 32.5% with no tax-free threshold (ouch)

As a UK resident, you must submit a tax return in the UK for all your worldwide income.  So you declare the full amount of the rent and claim all your usual UK deductions.  Then there will be a place where you declare how much Australian tax you've already paid, and they'll deduct that from the tax you're liable to pay in the UK.   Sadly, if the Australian tax is more than the UK tax, you don't get a refund!

If you go down that route, I would advise getting a tax agent versed in both UK and Australian tax (like Ken, or you could contact @Alan Collett).   Even if you can handle juggling the yearly tax returns, the real fun starts when you want to sell the property, and have to work out your CGT liability for a property that's been rented out for part of its life.  There's a complicated process of crediting back depreciation and pro rata-ing that would make your head spin, unless you've got an agent who's been keeping track every year and can just press a button.

[Malcolminthemiddle]

Thanks everyone that replied. I had no idea that the deductions would need to be reversed for the UK tax to be calculated so this is an eye opener for me. Thats not to mention the CGT calculations.

I am reconsdering what our move should be - given all the variables I may just wait and buy a property just prior to moving.

And good luck Chocci with your move back!

Thanks

M

[Marisawright]

2 hours ago, Malcolminthemiddle said:

Thanks everyone that replied. I had no idea that the deductions would need to be reversed for the UK tax to be calculated so this is an eye opener for me. Thats not to mention the CGT calculations.

I am reconsdering what our move should be - given all the variables I may just wait and buy a property just prior to moving.

And good luck Chocci with your move back!

Thanks

M

Do you have someone to view properties on your behalf?

[Malcolminthemiddle]

I do -  a couple of mates that live the neighbourhood we are looking to buy in.

All things considered much as I am frustrated watching prices go ever higher I think we will sit tight and maybe buy 2 months ahead of the move.

I thought it might be smart if you can take advantage of the more generous Aus deductions but if we rental income will subject to both as well as non-resident tax I don't think its worth it for us. Plus the exchange rate may improve by 10% in the same period - who knows.

 

 

[newjez]

4 hours ago, Malcolminthemiddle said:

I do -  a couple of mates that live the neighbourhood we are looking to buy in.

All things considered much as I am frustrated watching prices go ever higher I think we will sit tight and maybe buy 2 months ahead of the move.

I thought it might be smart if you can take advantage of the more generous Aus deductions but if we rental income will subject to both as well as non-resident tax I don't think its worth it for us. Plus the exchange rate may improve by 10% in the same period - who knows.

 

 

Another option may be to invest in a residential property fund. That should give you the advantages of being invested in Australian residential real estate and keep up with the rising prices without the hassle.

[Riki]

Hey fellas is it possible to get a house loan from the bank if you not PR but waiting to be approved? Coz if my gf apply she can get on her name but it's not enough so we can't to apply together.

[rammygirl]

Yes but you will need FIRB approval for your part of the deal. That costs. 

[Riki]

16 hours ago, rammygirl said:

Yes but you will need FIRB approval for your part of the deal. That costs. 

I never heard about that what is it and how much it cost ?

[Marisawright]

1 hour ago, Riki said:

I never heard about that what is it and how much it cost ?

https://firb.gov.au/apply-now

You have to pay an application fee. If you are approved, then you will also have to pay a surcharge on the purchase of the property. On a $500,000 property, the surcharge is around $45,000.  It varies from state to state.

[Ken]

On 11/03/2021 at 18:31, rammygirl said:

Yes but you will need FIRB approval for your part of the deal. That costs. 

You don’t need FIRB approval if you’re buying the property with an Australian citizen as joint tenants and you’re in a spousal relationship - not sure what the OPs relationship with his GF is like but if she's a citizen it's an option worth exploring!

[rammygirl]

1 hour ago, Ken said:

You don’t need FIRB approval if you’re buying the property with an Australian citizen as joint tenants and you’re in a spousal relationship - not sure what the OPs relationship with his GF is like but if she's a citizen it's an option worth exploring!

Good to know. Is that the same if your partner is PR?

[Riki]

2 hours ago, Ken said:

You don’t need FIRB approval if you’re buying the property with an Australian citizen as joint tenants and you’re in a spousal relationship - not sure what the OPs relationship with his GF is like but if she's a citizen it's an option worth exploring!

We do live together but I didn’t want to apply for partner visa coz I already applied for my 186 visa I didn’t expect to take 17 months and still not approved yet. We spoke with couple of brokers and they said I have to be PR to get a loan. My gf she can get the loan on her own but it’s not enough for the property we want that’s why I asked coz I’m not sure how long I need to wait for my visa to be approved.