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Tax tips & traps: Investing overseas

Mar 22, 2018
Tax tips & traps: Investing overseas

Owning a rental property overseas can be a great idea for a business family.  It gives you diversification, tax perks and potentially better market returns.  However offshore property investment also bring about tax risk and estate planning risk as well.

The tax system and residency

As an Australian tax resident you pay tax on your worldwide income.  So you are taxed on rental income from rental stock in Australia and you are also taxed on rental income from property invested outside of Australia.

John is an Australia tax resident.  He owns a property in Margaret River and a property in London.  Each property generates AUD $20,000.

John also earns $200,000 from his family business in Australia.

John will have a taxable income of $240,000.

The flip side of course is that if you are not an Australian tax resident you only pay tax on your Australian sourced income.

John is an English tax resident.  He owns a property in Margaret River and a property in London.  Each property generates AUD $20,000 each.

John also earns $200,000 from his family business in London.

John will have an Australian taxable income of $20,000.

Paying tax overseas

If you are generating taxable income in another country the likelihood is that you are paying tax in that country as well.  In effect the income is sourced in that country and most countries will want to tax income that has been generated from that country.

Of course each country is different.  And Australia has Double Tax Agreements with different countries with different and unique wording.  So a business family should have a tax advisor who has contacts with local knowledge in the area.  This is critical in getting a good outcome.

As a rule if a business family pays tax in the other country they will get a tax credit in Australia.  There are exceptions of course (like if the tax is a bribe) but we are only talking high level here.

John is an Australia tax resident.  He owns a property in Margaret River and a property in London.  Each property generates AUD $20,000 each.

John also earns $200,000 from his family business in Australia.

John will have a taxable income of $240,000.

John pays AUD $5,000 in UK tax.  His Australian tax liability is now educed by AUD $5,000.

If the overseas tax paid is less than what the Australian tax is payable: then a full credit is given to the end tax bill.  However if the overseas tax payable is more than the Australian liability – no Australian tax refund is given.  Rather the excess foreign tax is “carried forward” against future foreign income.

The management of a potential carried forward credit is crucial in developing a tax strategy document.  If the income from a property is volatile and the tax from overseas is incurred at different points in time you could pay Australian tax and then pay foreign tax on the same income.

Foreign exchange risk

Property is almost always a very large investment.  And when you purchase property overseas you are not only exposed to the market cycles of the property market: you are also liable to foreign exchange risk.

 John buys a home in Paris.  The home costs AUD $500,000.

The home in Paris falls in value by 5% however the Aussie dollar also falls in value by 20%.

The value of the home is now worth AUD $593,750 – simply because of the gain generated via the foreign exchange movement.

While the above example shows a benefit from a weakening Australian dollar the opposite can also be expected.  If the Australian dollar is strengthening then the value of property investments offshore is getting worse.

In these instances you can choose to protect the changing foreign exchange position by the use of hedges and FX derivatives.  However the cost associated with that protection must be taken into account in the financial modelling for the investment.

Sovereign risk

The Australian tax system is robust and clear.  However this is not necessarily the case with revenue authorities from other countries.

In other jurisdictions the tax regime can be heavily geared against foreigners or it can be quite subjective – you may find that individuals working for revenue authorities have a lot of discretion in how they interpret the law.

For example Spain has a “whole of asset” penalty for tax avoidance.  If you are considered to be avoiding tax you effectively lose the entire asset.  This compares to Australia where you just pay a high penalty.

Australia, as an example, charges higher stamp duty costs on the purchase of a home by a non-resident.  And while this is not a “sovereign risk” is still indicates a matter that should be considered by a purchaser.

Bank lending

Banks are reluctant to lend to non-residents.  This is true for Australian banks lending to non-residents and also applies to banks in other countries as well.

Sadly the reluctance of banks to lend to non-residents extends to Australian banks operating overseas.  Even if an Australian bank is operating in New Zealand, and you can offer both Australian property and New Zealand property as security you are going to struggle to get finance.

In this instance it is very much a case of understanding the market and how it operates.  And local knowledge of the laws is imperative for a business family to make an impact.

Death taxes

Australians have not had a death tax for nearly two generations now.  So it comes as a surprise to many that almost every other country has a death tax.

In the UK the death tax can be upto 40% of the value of the UK estate!  So if you are going to purchase overseas: an understanding the death taxes in that country, plus a clear understanding of how the Australian tax system recognises those taxes, is critical to a successful outcome.

Estate planning

Australia gives its residents a lot of choice on how the estate will be dealt with.  However the estate planning documents in Australia are most likely not effective in another country.

It is always prudent to obtain local legal advice, coupled with the Australian position, about the estate planning aspects of the foreign country.  Typically you will need a will in that country.

Overseas property assets are often “ear marked” for overseas children.  It is common, for example, for a home in say, Rome, to be bequeathed to a child who lives in Rome.  However this needs consideration at a holistic level and at a local level.

Further, some countries restrict the ability of a person to choose their inheritors.  Some countries have prescribed allocation percentages that must go to certain people.

Understanding the asset

Almost every country has a different legal system for buying land.  Some countries do not have “certificated land holdings” and simply require all of the locals to acknowledge land in a “spot” has been transferred.  Other countries only permit foreigners to lease the land.

In some countries a home owner is required to contribute an ongoing sum of money to the local church or local police station.

In Australia a foreigner can only buy newly built homes.

Research is needed and customs explained when buying international property.

Key take-away

No matter what you are doing you need to undertake good research.  And the local advisor should never be recommended to you by the local property promotor.  You should engage the services of an accountant or lawyer who have connections in the local jurisdiction who can walk you through the complex process.  Engaging a group collectively will give you complete advice on the impact both in Australia and overseas.

At Westcourt we understand that business families are increasingly looking overseas to generate revenue.  So we are part of Geneva Group International.  This gives our clients a competitive edge in looking at business and property investment opportunities worldwide so the family can understand the tax, legal and succession planning impact of buying property overseas.

As a start we offer clients a two to three hour review opportunity with our practice, plus a 30 minute phone call with a tax advisor overseas, and a report for $1,500 plus GST (which is tax deductible).  We make our costs low simply so family businesses, and business families, can access and use our services.



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