Tax Deductions on Overseas Investment Properties

Tuan Duong

Australia’s real estate market has long been an attractive option for domestic buyers. However, with soaring prices in recent years, an increasing number of Australians are turning their eyes to foreign countries for investment opportunities. 

This shift has not come without its share of complexities, particularly around tax implications.

As an Australian investor in overseas property, understanding the tax implications is key to avoiding any potential pitfalls and making the most of your investment. 

So, this guide aims to provide an overview of the Australian taxation system’s impact on overseas property investment.

The Tax Implications of Owning an Overseas Property

Australian’s who own investment property must declare any rental income or capital gain as part of their assessable income on their tax return each year. This also applies to those who have migrated to Australia and choose to retain their property abroad as a diversification strategy for their property portfolio.

Does that Mean You’ll Get Double-Taxed?

A common concern for Australians investing in overseas property is the possibility of being taxed twice: once in the foreign country where the property is located and again in Australia. Fortunately, Australia has double taxation agreements (DTAs) with many countries. These agreements are designed to prevent the same income from being taxed in two jurisdictions.

How Double Taxation Agreements Work

Double Taxation Agreements (DTAs) are treaties between two countries that determine which country has the right to tax specific types of income. For example, if an Australian resident earns rental income from a property located in a country with which Australia has a DTA, the agreement may stipulate that only the foreign country can tax that income. 

Alternatively, it might allow both countries to tax the income but provide a mechanism for the Australian resident to claim a foreign income tax offset in Australia, effectively giving them a credit for the tax paid overseas.

Claiming a Foreign Income Tax Offset

If you’ve paid tax on your overseas rental income in the country where the property is located, you may be entitled to claim a foreign income tax offset in Australia. 

As a result, you may be able to reduce the Australian tax payable on the same income, ensuring you’re not taxed twice on the same earnings. However, there are limits to the amount you can claim, and it’s essential to keep detailed records of all foreign tax payments.

Can You Claim Tax Deductions For Your Overseas Investment?

Yes, you can claim tax deductions for your overseas rental property expenses. However, these deductions apply only to non-capital expenses. 

Non-capital expenses are the regular and recurring costs associated with the day-to-day operation and maintenance of an asset, such as a rental property. These expenses are not related to the improvement or enhancement of the property’s value but are necessary for its upkeep and to generate rental income.

Examples of non-capital expenses for a rental property include the following:

  • Property Management Fees: Fees paid to property managers or agencies for managing the rental property, collecting rent, and dealing with tenants
  • Repairs and Maintenance: Costs associated with fixing any damages or wear and tear. This could include fixing a leaky faucet, repainting walls, or replacing broken tiles.
  • Utilities: If the landlord pays for utilities like water, electricity, or gas, these can be considered non-capital expenses.
  • Insurance: Premiums paid for insuring the property against damages or loss.
  • Interest: Interest on a mortgage or loan taken out to purchase the rental property
  • Property Taxes: Taxes paid on the property, which might vary depending on the country or region.
  • Advertising: Costs associated with advertising the property for rent
  • Legal and Professional Fees: Fees paid to professionals like lawyers or accountants for services related to the rental property
  • Travel Expenses: Costs incurred travelling to and from the property for management purposes, especially relevant for overseas properties.

So, any expenses you incur for improving or replacing something on or within the overseas property are not eligible for tax deductions as they are considered capital in nature. 

However, you can claim depreciation or a building allowance over the lifetime of the asset. 

What is Depreciation?

Depreciation is the reduction in the value of an asset over time due to wear and tear, age, or obsolescence. In the context of property investment, tax depreciation refers to the deduction that property investors can claim for the diminishing value of their property’s building structure and its fixtures and fittings.

There are two main types of depreciation that property investors can claim:

  1. Division 43: Capital Works Deduction: This relates to the structural elements of a building, such as bricks, walls, roofs, and windows. Typically, residential properties have a depreciation lifespan of 40 years, meaning investors can claim a deduction of 2.5% of the construction cost each year for 40 years.
  2. Division 40: Plant and Equipment: This covers the fixtures and fittings within a property, such as carpets, blinds, ovens, and air conditioners. The depreciation rates for these items vary based on their effective life, as determined by the Australian Taxation Office (ATO).

To maximise your depreciation claims, you should obtain a depreciation schedule from a qualified quantity surveyor. This schedule outlines the claimable amount for each depreciable asset over its effective life, ensuring you take full advantage of the available tax benefits.

Key Takeaways

  • Australians are increasingly investing in overseas properties due to rising domestic prices.
  • Overseas property income must be declared on Australian tax returns.
  • Australia’s Double Taxation Agreements (DTAs) prevent investors from being taxed both abroad and domestically.
  • Tax deductions for overseas properties are limited to daily operational costs, known as non-capital expenses.
  • While expenses enhancing a property’s value aren’t immediately deductible, their depreciation can be claimed over time.
  • Investors should consult tax professionals and obtain a depreciation schedule to maximise their benefits.

Ready to maximise your overseas property investment returns? Trust the experts. Reach out to Duo Tax Quantity Surveyors today and ensure you’re making the most of every tax benefit available to you.

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Disclaimer: Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek a second professional opinion for any legal or tax issues raised in your investing affairs.

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Tuan Duong

Tuan is an award winning Quantity Surveyor and leads Duo Tax Quantity Surveyors – Australia’s fastest growing provider of Tax Depreciation.

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