Rental Properties - Advanced (2024) PDF

Rental Properties - Advanced (2024) Overview N EGATIVE AN D POSITIVE GEAR IN G Negative Gearing Case Study: Negatively Geared Property Positive Gearing Case Study: Positively Geared Property OWN ER SH IP Ownership Joint Tennants  Tenna...

Rental Properties - Advanced (2024) Overview N EGATIVE AN D POSITIVE GEAR IN G Negative Gearing Case Study: Negatively Geared Property Positive Gearing Case Study: Positively Geared Property OWN ER SH IP Ownership Joint Tennants  Tennants in Common Joint Tennants and Tennants in Common Ownership and Capital Gains Tax Partnership for taxation law R EN TAL IN COME Rent received Payment by way of goods or services Leases - Surrender OVER SEAS R EN TAL PR OPER TIES Property value and the tax return Foreign rental property income Foreign rental property deductions - Interest Foreign rental property deductions - Interest Case Study Foreign rental property deductions - Non-capital expenses Foreign rental property deductions - Capital expenses Capital Gains Tax Foreign Income Tax Offset 6-Y EAR R ULE Overview Eligibility Former home used to earn income Former home not used to earn income What happens if the 6 year limit is exceeded? Former home used for income before the taxpayer moved out Lesson 1 of 28 Overview Investing in a rental property has taxation implications for the taxpayer. Rental income and any capital gain on disposal will generally be classified as assessable income to the taxpayer. Financing costs such as interest expenses and ongoing maintenance costs are generally deductible. A capital tax loss from a rental property may be offset against a taxpayer's other capital gains. Where the rental property yelded a loss, this loss may be offset against the taxpayer's other taxable income such as salary and wages, and including capital gains. This concept is commonly referred to as negative gearing. Residential rent is input taxed for GST purposes whilst commercial rental income is subject to GST where the owner is required to be registered for GST. In 2019, the ATO audited over 300 taxpayers in relation to their rental properties and found that 9 out of 10 rental schedules were incorrect. The most common errors included: Interest claims: Taxpayers not apportioning their intersest wher the loan had been refinanced and a portion of the loan was now used for private purposes. Apportioning expenses: Not apportioning deductions for holiday homes where they are genuinely available for rent. Capital works: Incorrect classification of capital works as repairs and maintenance. With these kinds of numbers, it is little wonder that rental properties continue to be on the ATO hit list each year. It is our job to ensure that we are apply the tax laws properly when completing a rental property schedule. Did you know... The ATO underakes data matching in relation to property transactions. Lesson 2 of 28 Negative Gearing When a property is negatively geared, it means the cost of owning it is more than the income it generates. Because this strategy returns a loss, it can seem risky – but there are other benefits that can add up in the taxpayer's favour overall. For example, they can deduct some of their costs from their taxable income and potentially benefit from capital appreciation. Benefits of negative gearing While the taxpayer is making a loss, the property’s capital value may be growing. Negatively geared investors are banking on their overall loss being offset by their property's potential capital appreciation. Keep in mind, there may be tax implications (like capital gains tax) that the taxpayer will need to factor in if or when they sell. Disadvantages of negative gearing The taxpayer will need to have enough cash flow to cover their losses until tax time comes around each year. Running negatively geared investment properties can also make it harder to build their property portfolio, since their extra cash will be tied up. If the taxpayer is more highly geared (more deeply in debt) they will be vulnerable to rate rises too. Remember: we can't provide financial advice to a taxpayer. We can only advise on the potential tax implications. Lesson 3 of 28 Case Study: Negatively Geared Property Jackson is an IT administrator who works full time as well as runs his own IT servicing business. He has decided that he would like to purchase an investment property (as a lot of his friends are doing!) He has sought advice from a financial specialist and has advised him that negative gearing is the way to go in his situation. Jackson was able to save enough money to be able to put down a 15% deposit. Here are the facts: Annual rental income received $20,000 from tenant Annual interest bill on $25,000 investment property mortgage Annual expenes (including rates, insurance, body $4,000 corporate fees, management fees etc) $20,000 - $25,000 - Rental Loss $9,000 $4,000 As the expenses are higher than the income received, Jackson is deemed to be negatively gearing his property. From a tax perspective this means that he will be able to use the $9,000 Loss to reduce his taxable income when he prepares his tax return for that financial year. As Jackson has private health insurance, he will only need to pay the Medicare Levy. Let's see what the difference is in the amount of tax payable is (note we are using 2024 tax rates). Not Negative Negative Details Geared Geared Income from salary and wages $87,000 $87,000 Plus Net income from business $64,000 $64,000 Less Allowable deductions (D1 to $2,150 $2,150 D10) Equals $148,850 $148,850 Less Rental Loss - $9,000 Equals Taxable Income $148,850 $139,850 Tax on taxable income (taxable $40,141.50 $36,811.50 income x.37 - $14,933) Plus Medicare Levy (assessable $2,977.00 $2,797.00 income x 2%)  Tax payable $43,118.50 $39,608.50 Due to negative gearing, Jackson total tax saving for that year was $3,510. Lesson 4 of 28 Positive Gearing When a property is positively geared, it means that the income received from the tenants is greater than the amount the taxpaye is spending on it. Benefits of positive gearing Positively gearing the proeprty means the taxpayer is likely to be making a profit. With a higher income, the taxpayer has options when it comes to the extra cash flow being generated by the property. They could use it to pay off other loans, purchase other investments, or they might choose to use the extra cash to pay down the principal on their mortgage. Disadvantages of positive gearing When a taxpayer has a positively geared property, the income generated by the property is taxable, meaning they will not be able to claim tax benefits that come with negative gearing. This can be a disadvantage for some investors, especially those who rely on tax benefits to make their investments profitable. This where early discussions with their accountant can be quite beneficial so they can avoid a tax debt when they complete their tax return at the end of the year. Remember: we can't provide financial advice to a taxpayer. We can only advise on the potential tax implications. Lesson 5 of 28 Case Study: Positively Geared Property Jamilla is a teacher who works full time. She has decided that she would like to purchase an investment property. She received an inheritance which allowed her to put down a 40% deposit on an investment property. Here are the facts: Annual rental income received $33,410 from tenant Annual interest bill on $12,911 investment property mortgage Annual expenes (including rates, insurance, body $5,680 corporate fees, management fees etc) $23,410 - $12,911 - Rental Profit $14,819 $5,680 As the expenses are lower than the income received, Jamilla is deemed to be positively gearing her property. From a tax perspective this means that she will need to pay tax at her marginal rate on the $14,819 profit when she prepares her tax return for that financial year. As Jamilla has private health insurance, she will only need to pay the Medicare Levy. Let's see what the difference is in the amount of tax payable is (note we are using 2024 tax rates).  Not Positive Postive Details Geared Geared Income from salary and wages $92,000 $92,000 Less Allowable deductions (D1 to $1,437 $1,437 D10) Equals $93,437 $93,437 Plus Rental Profit - $14,819 Equals Taxable Income $93,437 $108,256 Tax on taxable income (taxable $20,834.03 $25,650.20 income x.325 - $9,533) Plus Medicare Levy (assessable $1,868.74 $2,165.12 income x 2%) Tax payable $22,702.77 $27,815.32 Due to positively gearing her property, Jamila will be required to pay $5,112.55 in additional tax. Now there are couple of things Jamilla can do. Do some math! Work out roughly how much she will be liable for and ensure that she has put aside enough money to cover her potential payable amount at tax time. Enter into the PAYG instalment system. Jamilla will make regular payments to the ATO and when she lodges her tax return at the end of the year, the instalments that she has made throughout the year will be offset against the tax that is payable. If Jamilla waits until her tax return is lodged to pay the additional tax, she may be automatically entered into the PAYG instalments system. This will occur where all of the following apply: has instalment income from its latest tax return of $4,000 or more tax payable on the taxpayer's latest notice of assessment is $1,000 or more estimated (notional) tax of $500 or more Lesson 6 of 28 Ownership Although co-ownership of rental property is a partnership for income tax purposes, it is not a partnership at general law unless the ownership amounts to the carrying on of a business. 👉 Taxation Ruling IT 2423 is relevant in determining whether the letting of property amounts to carrying on a business. In general, if rent is derived from a number of properties (not just one or two), or from a block of apartments, that may indicate the existence of a business. The income or loss from rental property must be shared according to the legal interests of the co- owners, whether they are joint owners or tenants in common, except where there is sufficient evidence to establish that the equitable interests are different from the legal interests. Where income from a rental property is derived from co-ownership and there is no partnership under general law, any agreement to vary the sharing of profits or losses will have no effect for income tax purposes. 👉 TR 93/32 Rental Property: division of net income or loss between co-owners explains the basis upon which the ATO will accept for tax purposes, the division of the net income and loss from a rental property between co-owners of that property. Lesson 7 of 28 Joint Tennants Joint Tennants means that all owners have equal shares in the property. This means that: If one owner dies, their share automatically passes to the surviving owners. This is known as the right of survivorship. From a tax perspective, all income and most deductions will need to be split evenly amongst the owners. Interest on money borrowed by only one of the co-owners which is exclusively used to acquire that person's interest in the rental property does not need to be divided between all of the co- owners. Example: Death of one of the listed owners Sarah and Michael buy a rental property together under a joint tenancy arrangement. They each own 50% of the property. If Sarah passes away, Michael automatically inherits Sarah’s share, meaning he will then own 100% of the property. Example: Tax perspective - joint loans Sarah and Michael buy a rental property together under a joint tenancy arrangement.  They each own 50% of the property. The property earned $20,000 in income and had allowable deductions of $3,280. Michael and Sarah took out a joint loan to purchase the property. The interest paid during the year totalled $12,980. The amounts to be entered into the tax return would be calculated as follows: Detail Michael Sara Rental Income (50/50 split) $10,000 $10,000 Less allowable deductions $1,640 $1,640 (50/50 split) Less interest on mortgage (50/50 $6,490 $6,490 split) Rental profit represented in tax $1,870 $1,870 return Example: Tax perspective - separate loans Sarah and Michael buy a rental property together under a joint tenancy arrangement. They each own 50% of the property. The property earned $20,000 in income and had allowable deductions of $3,280. Michael and Sarah each took out their own loans to purchase the property. Michael's interest for the year totalled $10,980 while Sarah's interest for the year totalled $12,980. The amounts to be entered into the tax return would be calculated as follows: Detail Michael Sara Rental Income (50/50 split) $10,000 $10,000 Allowable deductions (50/50 $1,640 $1,640 split) Less interest on mortgage $10,980 $12,980 Rental profit represented in tax $2,620 $4,620 return Lesson 8 of 28 Tennants in Common Tenancy in Common allows owners to hold different shares in the property. Each owner can transfer or sell their share independently, and their share of the property does not automatically go to the other owners upon their death. Instead, it becomes part of their estate and is distributed according to their will. From a tax perspective, this means that all income of the rental property is split based on their ownership listed on the title, and most expenses will be split along the same ownership lines. Interest on money borrowed by only one of the co-owners which is exclusively used to acquire that person's interest in the rental property does not need to be divided between all of the co-owners. Example: Death of one of the listed owners Emily and James buy a rental property with Emily owning 60% and James owning 40%. If Emily dies, her 60% share does not automatically go to James. Instead, it is distributed according to Emily’s will or estate plan. James could end up sharing the property with Emily’s heirs or be required to buy out their share. Example: Tax perspective - joint loans Emily and James buy a rental property together under a joint tenancy arrangement. Emily owns 60% of the property. James owns 40% of the property. The property earned $20,000 in income and had allowable deductions of $3,280. Emily and James took out a joint loan to purchase the property. The interest paid during the year totalled $12,980. The amounts to be entered into the tax return would be calculated as follows: Detail James Emily Rental Income (40/60 split) $8,000 $12,000 Less allowable deductions $1,312 $1,968 (40/60 split) Less interest on mortgage (40/60 $5,192 $7,788 split) Rental profit represented in tax $1,496 $2,244 return Example: Tax perspective - separate loans Emily and James buy a rental property together under a joint tenancy arrangement. Emily owns 60% of the property.  James owns 40% of the property. The property earned $20,000 in income and had allowable deductions of $3,280. James and Emily each took out their own loans to purchase the property. Emily's interest for the year totalled $10,980 while James' interest for the year totalled $12,980. The amounts to be entered into the tax return would be calculated as follows: Detail James Emily Rental Income (40/60 split) $8,000 $12,000 Allowable deductions (40/60 $1,312 $1,968 split) Less interest on mortgage $10,980 $12,980 Rental loss represented in tax $4,292 $2,948 return Lesson 9 of 28 Joint Tennants and Tennants in Common Just to make it a little more interesting, it is possible that the title could show the owners being both joint tenants and tenants in common. In the example above: The overall ownershop of the property is as tenants in common and the property has been broken into two equal shares. One share belongs to a sole owner (Sandra) One share belongs Lee and Kane as joint tenants This means that: Sandra owns 50% of the property  Lee and Kane jointly own 50% of the property Worked example Using Sandra, Lee, and Kane from the above example, let's see how this would look from a tax perspective. Loan interest The parties took out a shared loan where the interest totalled $25,200 Rental income received during the year totalled $21,200 Allowable deductions received during the year totalled $4,800 The amounts to be entered into the tax return would be calculated as follows: Sandra Lee Kane Detail 50% 25% 25% Rental Income $10,600 $5,300 $5,300 Less allowable deductions $2,400 $1,200 $1,200 Less interest on mortgage $12,600 $6,300 $6,300 Rental loss represented in $4,400 $,2200 $2,200 tax return Lesson 10 of 28 Ownership and Capital Gains Tax The division of capital gains tax also aligns with the taxpayer's ownership share as representated on the title. When it comes to a property held as tenants in common, the ownership shown on the title determines how the gain, or loss is split. Joint tenants are deemed to own equal shares in the property, so the capital gain or loss would be split evenly between the owners listed on the tile. Example: Joint tenants Albert, Margaret, Crystal and Peter own a property as joint tenants. They sell the property which results in a capital gain of $170,000. Based on their ownership of the property, the would split the capital gain as follows: Albert $170,000 x 25% = $42,500 Margaret $170,000 x 25% = $42,500 Crystal $170,000 x 25% = $42,500 Peter $170,000 x 25% = $42,500 Example: Tenants in common Louis and Carla own a rental property as tenants in common. The title shows Louis owing 2 shares of 10 while Carla owns 8 shares of 10 (so a 20/80 split). Louis and Carla sell the property which results in a capital gain of $170,000. Based on their ownership of the property, the would split the capital gain as follows: Louis $170,000 x 20% = $34,000 Carla $170,000 x 80% = $136,000 Lesson 11 of 28 Partnership for taxation law The definition of partnership is wider for income tax purposes than it is at general law. Subsection 6(1) of the Income Tax Assessment Act 1936 (the Act) defines partnership as an association of persons carrying on business as partners or in receipt of income jointly but does not include a company. Under the extended income tax definition of partnership, it is not necessary that persons carry on a business for their association to be treated as a partnership for income tax purposes. They need only to be in receipt of income jointly. Therefore, co-owners of rental property could fall within the definition of partnership for income tax purposes, not because they are necessarily partners at general law, but because they are in receipt of income jointly. However, most rental activities are considered to be a form of investment and don't amount to carrying on a business. However, where the taxpayers are deemeed to be carrying on a business of letting rental properties under a partnership, the net rental income or loss would be distributed in accordance with the partnership agreement and not in line with the legal interests of the owners. Where the taxpayers don't have a partnership agreement, rental profit or loss amounts should be distributed between the partners equally. E X A M PL E S Example: Not a partnership Scenario Andrew and Sue are married. They both legally and beneficially own two apartments and a house as joint tenants. Both apartments and the house were rented out. A record of discussion between the two of them stated that net profits would be distributed: 25% to Andrew, and 75% to Sue. If a loss was to arise, then it would be distributed 100% to Andrew as the sole income producer in their family. Andrew performs most of the maintenance on the properties himself once the tenants advise him of any issues. Sue cleans the propertie when the tenants move out. Outcome They are only co-owners of several rental properties. Therefore, as joint tenants, they must each include half of the total income and expenses in their tax returns, that is, in line with their legal interest in the properties. The 'arrangement' they came up with on thier own would be ignored when completing their tax returns. Example: Partnership Scenario Chris and Naomi own a number of rental properties, both as tenants in common and as joint tenants. They own 8 hourses and 3 apartment blocks (each block consisting of 6 apartments). They each spend approximately 25 hours per week managing the property. They interview prospective tenants, they jointly decide on any financial issues and future planning for the properties. They carry out inspections, perform maintenance duties etc. Chris and Naomi have no other income. They have a written partnership agreement whereby they: have agreed to operate a business of letting rental properties Naomi is entitled to 75% of the partnership profits or losses Chris is entitled to 25% of the partnership profits or losses Outcome Chris and Naomi would be deemed to be carrying on a business of letting rental properties. The profit or loss generated by the partnership would be distributed to them based on their partnership agreement even where this would differ from their ownership proportions based on the titles HI NT You should always undertake additional research if you believe the taxpayer is carrying on a business of letting rental properties. This could include talking to co- workers, the ATO, and researching rulings such as but not limited to: 👉 Taxation Ruling TR 93/32 Income tax: rental property – division of net income or loss between co-owners. 👉 Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? Paragraph 13 of Taxation Ruling TR 97/11 lists 8 indicators to determine whether a business is being carried on. Although this ruling refers to the business of primary production, these indicators apply equally to activities of a non-primary production nature. 👉 Taxation Ruling TR 94/8 Income tax: whether a business is carried on in partnership (including ‘husband and wife’ partnerships) 👉 Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business – permanent establishment – deduction for interest Lesson 12 of 28 Rent received Rental income is generally assessable as ordinary income (ITAA 97 s6- 5). Where the taxpayer is not carrying on a business of letting properties, the rental income is generally assessed on a cash basis. That is, at the time of receipt. Where the property is being managed by a real estate agent, the amount received is declared in the year that the tenant pays rent and not when the rental income is transferred to the taxpayer. Rental income can include: bond money the taxpayer retains in place of rent or keep because of damage to the property letting and booking fees the taxpayer retains when renters or holiday makers cancel a booking insurance payouts, such as damage from a natural disaster (such as a bushfire, flood or cyclone) damage from an unexpected event (such as a burst sewage pipe) for the loss of rent  money you receive from a relief fund in a disaster payments for deductible expenses, such as payments from a tenant to cover the cost of repairing property damage government rebates for buying a depreciating asset (for example, a solar hot water system) lump sum payments of rental income any assessable amounts relating to limited recourse debt arrangements involving your rental property 👉 IT 2167 Income tax: rental properties – non-economic rental, holiday home, share of residence, etc. cases, family trust cases. E X A M PL E Example Steve and Brad own a rental property as joint tenants (Steve - 45% and Brad - 55%). They have rented the property out for the full year. Their tenant gave notice that they will be mving out and directs the property manager to use their bond to pay their last months' rent. The bond of $2,000 is released to the property manager on 30 June 20XY, but this amount was not transferred to Steve and Brad until 4 July 20XY. When Steve and Brad are completing the rental schedule to their tax return, they would: report the gross rent they have earned, before it is reduced by any management fees or expenses paid by the property manager on their behalf include the final month's rent. Although not received by Steve and Brad until 4 July 20XY, the amount was received by the property manager in that financial year report their income and expenses on a 45:55 based on their legal ownership in the property Lesson 13 of 28 Payment by way of goods or services Rental income does not need to be provided to the landlord in the form of cash. It could also be provided in the form of goods and services. Where a tenant pays the taxpayer rent in the form of goods and services, there wll need to be a monetary value applied to the items. Example Jon rents out his property to Jordan. Jordan is a mechanic and Jon operates a car hire business. Jon and Jordan come to an agreement where Jordan will service Jon's car fleet (15 vehicles) four times per year instead of paying Jon cash for rent. The market value of renting out the property is currently $15,000 per year. Jordan calculated that he would charge $250 for servcing each vehicle. Any additional amounts for parts or repairs outside of servicing would be paid for by Jordan. Jon would declare $15,000 in income in his rental schedule. Lesson 14 of 28 Leases - Surrender A surrender of a lease occurs where the tenant of the rental property and the landlord agree to end the lease before the date it was due to finish and a lease surrender payment will be required. If a landlord owns the property as an investor, any lease surrender payments given to them from the tenant, is likely to be a capital gain, which may qualify for the 50% discount if longer than 12 months. If a landlord owns the property in the course of running a business, then the lease surrender payment would be assessable income. If a lease surrender payment is made by the landlord to the tenant, as a property investor, the payment made is not tax deductible, but would be added to the cost base of the property when sold. If a payment is made by a landlord who owns the property in the course of running a business, then the amount can be claimed, under the blackhole expenditure rules, at 20% per year over 5 years. 👉 TR 2005/06 - Income tax: lease surrender receipts and payments Summary Not tax deductible. Added to the cost Property owned as base of the an investor property for future Lease surrender capital gains tax payment made by purposes. landlord to tenant Property owned in Claimed at 20% per the course of year over five years. running a business Likely to be a capital gain, which Property owned as may potentially an investor qualify for the 50% Lease surrender capital gains payment made by discount tenant to landlord Property owned in the course of Assessable income running a business Lesson 15 of 28 Property value and the tax return Where a taxpayer owns a foreign rental property valued at AUD$50,000 or more, they will be required to enter Y at Item 20P on the tax return Lesson 16 of 28 Foreign rental property income Foreign income and tax If the taxpayer is an Australian resident for tax purposes, they will need to declare the income received for their investment property from overseas in their tax return. They may also need to declare this income in the country where the property is located. 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. 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. If the taxpayer has paid tax on their overseas rental income in the country where the property is located, they may be entitled to claim a foreign income tax offset in Australia. As a result, the taxpayer may be able to reduce the Australian tax payable on the same income, ensuring they are not taxed twice on the same earnings. However, there are limits to the amount they can claim, and it’s essential to keep detailed records of all foreign tax payments. Lesson 17 of 28 Foreign rental property deductions - Interest Special rules apply to the deductibility of mortgage interest expenses against foreign rental income when a property is located overseas. If mortgage interest for a foreign rental property is paid to a foreign lender, there are withholding obligations that may need to be addressed. Generally, for the mortgage interest expense to be allowed as a tax deduction, the taxpayer must register as a PAYG withholding remitter and remit to the ATO, 10% of the interest paid to the foreign resident lender. Due to the double tax agreements, there are some exceptions to this withholding requirement. If the interest is paid to a foreign lending institution that is a resident of: Finland, France, Germany, Israel, Japan, New Zealand, Norway, South Africa, Switzerland,  United Kingdom, or the United States, there is generally no withholding tax obligation. Any deductible foreign interest and any associated fees are claimed at Item D15 (not Item 20). Other rental expenses, including capital works and capital allowance deductions, are calculated in the same way as for Australian rental properties, and will reduce the net rental income included at Item 20 Label R. Example: Not required to register for PAYG Withholding Bradley is an an Australian resident for tax purposes. He owns an investment property in the United States of America. The loan for the investment property was taken out with an American bank. During the 2024 financial year, Bradley paid a total of AUD$12,180 in interest on the loan. Bradley is not required to register for PAYG Withholding as the United States is specifically excepted from withholding due to the double tax agreement in place between Australia and the USA. Bradley will enter $12,180 at Item D15 on his tax return. Example: Required to register for PAYG Withholding Mick is an an Australian resident for tax purposes. He owns an investment property in Argentina. The loan for the investment property was taken out with an Argentinian bank. During the 2024 financial year, Mick paid a total of AUD$15,000 in interest on the loan. Mick is required to register for PAYG Withholding as Argentina is not specifically excepted from withholding obligations. To calculate the amount to withhold: = interest amount paid in AUD x 10 / 9 x 10% = $15,000 x 10 / 9 x 10% = AUD$1,666 Mick will be required to remit $1,666 to the ATO, and will be able to claim a deduction at Item D15 on his tax return of the grossed up interest amount of AUD$16,666 Lesson 18 of 28 Foreign rental property deductions - Interest Case Study Ramish Gupta is an an Australian resident for tax purposes. He does not operate a business. He has just purchased an investment property in Canada. The loan for the investment property was taken out with a bank based in Canada (Canada Banking Solutions) that does not have an office in Australia. The property settled on 1 July 2023 and his first loan repayment will commence on 20 July 2023. His loan repayment schedule for 2024 is below: Date Repayment Amount Interest Component 20 July 2023 $2,120 $1,730.58 20 August 2023 $2,120 $1,729.35 20 September 2023 $2,120 $1,614.56 20 October 2023 $2,120 $1,777.01 20 November 2023 $2,120 $1,694.03  20 December 2023 $2,120 $1,670.13 20 January 2024 $2,120 $1,897.58 20 February 2024 $2,120 $1,670.03 20 March 2024 $2,120 $1,608.55 20 April 2024 $2,120 $1,876.17 20 May 2024 $2,120 $1,758.74 20 June 2024 $2,120 $1,587.38 $20,614.11 What does Ramish need to do? L E T ' S FI ND O U T Step 1 - Register for PAYG Withholding Ramish can register for PAYG withholding by either: phoning the ATO business line and speaking with a customer service representative, or  by completing the Application to register a PAYG withholding account (NAT 3377) As Ramish does not have an ABN, he will be issued a Withholding Payer Number. An example of the completed form can be viewed below.  Complete the content above before moving on. Step 2 - Remit required amounts to the ATO As Ramish estimates that the annual holding amount is less than $25,000, he will be required to remit the amounts to the ATO on a quarterly basis. Repayment Interest Date Amount to remit to ATO Amount Component 20 July $2,120 $1,730.58 2023 20 August $2,120 $1,729.35 2023 = interest x 10 / 9 x 10% 20 = (1,730.58 + 1,729.35 + September $2,120 $1,614.56 1,614.56) x 10 / 9 x 10% 2023 = 5,074.49 x 10 / 9 x 10% = $563 20 October $2,120 $1,777.01 2023  20 November $2,120 $1,694.03 2023 = interest x 10 / 9 x 10% 20 = (1,777.01 + 1,694.03 + December $2,120 $1,670.13 1,670.13) x 10 / 9 x 10% 2023 = 5,141,17 x 10 / 9 x 10% = $571 20 January $2,120 $1,897.58 2024 20 February $2,120 $1,670.03 2024 = interest x 10 / 9 x 10% = (1,897.58 + 1,670.03 + 20 March $2,120 $1,608.55 1,608.55) x 10 / 9 x 10% 2024 = 5,176.16 x 10 / 9 x 10% = $575 20 April $2,120 $1,876.17 2024 20 May $2,120 $1,758.74 2024 20 June $2,120 $1,587.38 = interest x 10 / 9 x 10% 2024 = (1,876.17 + 1,758.74 +  1,587.38) x 10 / 9 x 10% = 5,222.29 x 10 / 9 x 10% = $580 = $563 + $571 + 575 + 580 TOTAL $20,614.11 = $2,289 When completing the Activity Statement, you would enter the amount of withheld at Item W3 and then enter a total at W5. In this case for the September quarter, Ramish would enter $563 at W3 and then $563 again at W5. The Activity Statement would be lodged with the ATO and the relevant amount paid. If Ramish had a business that was registered for GST, the PAYG tax withheld would form part of his quarterly BAS. This process would be repeated for the December, March and June quarters. NE X T Step 4 - Complete Annual Report At the end of the financial year (and by 31 October 2024), Ramish will be required to complete ATO form PAYG withholding from interest, dividend and royalty payments paid to non-residents (NAT 7187) Ramish will need to contact the ATO and order this form (at the time of writing you could not download and use a copy of this form). He can either call the ATO on 1300 720 092 or can go online and use the ATO's ordering service. Ramish will need to enter the grossed up amount of $22,903 which is the total of the interest paid to the lender being $20,614 plus the tax withheld amount of $2,289.  Complete the content above before moving on. Step 5 - Enter the deduction in the tax return Ramish will be able to claim the grossed up amount of $22,903 in his 2024 tax return at Item D15. Lesson 19 of 28 Foreign rental property deductions - Non-capital expenses Non-capital expenses Non-capital expenses are the regular and recurring costs associated with the day-to-day operation and maintenance of the 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. Lesson 20 of 28 Foreign rental property deductions - Capital expenses Much like rental properties in Australia, taxpayers are able to claim for the expenses incurred for improving or replacing items on or within the overseas property. 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 taxpayers can claim a deduction of 2.5% of the construction cost each year for 40 years. 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). Lesson 21 of 28 Capital Gains Tax While most Australians are aware that their Australian based investment property may be subject to CGT on sale, many are not aware that the sale of their foreign investment property may also be subject to CGT. Calculating a resident taxpayer's CGT gain or loss is generally the same as when you are calculating the gain or loss on an Australian investment property. All foreign income must be converted into Australian dollars when performing your CGT calculations. When a CGT event occurs, the foreign currency conversion rates are used at the time of the acquisition and disposal. Example: Conversion Carol sold her rental property in the United States. She signed the purchase contract for $250,000 USD on 18 September 2020 and the sale contract for $350,000 USD was signed on 10 March 2023. The daily foreign exchange rates can be found on the Reserve Bank of Australia website. The applicable exchange rate on 18 September 2020 was 0.7320 USD and on 10 March 2023 was 0.6599 USD. The formula to be used is: = amount / conversion rate The acquisition conversion amount is $341,530 AUD and the disposal conversion amount is $530,383 AUD. Lesson 22 of 28 Foreign Income Tax Offset A taxpayer can claim a full credit or offset for foreign income tax paid if 100% of the income (including capital gains) is included in their Australian assessable income. However, if less than 100% of the income or capital gains are assessable in Australia (for example, if it is a 50% discounted capital gain), a credit for only the same proportion of foreign tax paid (that is 50%) will be allowed against the Australian tax payable. Example Jordy is an Australian resident who owned an investment property overseas. He purchased the property on 4 August 2015 for $190,000 AUD. He sold the property on 2 February 2024 for $290,000 AUD. When he sold the investment property, he paid foreign tax on the capital gain at a discounted rate of 20% (normal tax rate is 40%). As he is an Australian resident, he is also required to calculate the capital gain/loss in his Australian tax return. In Australia, he is entitled to a discount of 50% as he had held the asset for longer than 12 months. His tax rate in Australia is 45% (not including the Medicare levy). Foreign $100,000 country capital gain Foreign tax $100,000 x $20,000 paid 20% Australian $100,000 capital gain Australian $100,000 x discounted $50,000 50% capital gain Australian $50,000 x $22,500 gross tax 45% Less Foreign Note: FITO reduced by 50% as the gain Income Tax has been discounted $10,000 Offset $20,000 x 50% Australian net $22,500 - $10,000 $12,500 tax Lesson 23 of 28 Overview A taxpayer's main residence (their home) is generally exempt from Capital Gains Tax (CGT). Usually, a property stops being their main residence when they stop living in it. However, for CGT purposes the taxpayer can continue treating a property as their main residence: for up to 6 years if they used it to produce income, such as rent (sometimes called the '6-year rule') indefinitely if they didn't use it to produce income. During the time that the taxpayer treated the property as their main residence after they stopped living in it: It continues to be exempt from CGT (the same as if they were still living in it, even if they start renting it out after they leave). The taxpayer can't treat any other property as their main residence (except for up to 6 months if you are moving house). Lesson 24 of 28 Eligibility In order to use the 6 year rule, the property must have: been the taxpayer's main residence first – the taxpayer can't apply the main residence exemption to a period before a property first became their main residence (for example, if they rented out their home before they lived in it, the main residence exemption doesn't apply to the period they rented out your home) stopped being the taxpayer's main residence – that is, the taxpayer stopped living in it. If the property was continuously used as the taxpayer's main residence, the usual rules for the main residence exemption apply. This means if the taxpayer used it to produce income, such as rent, they will be entitled to only a partial main residence exemption from CGT. If the taxpayer is a foreign resident when a CGT event happens to their residential property in Australia (for example, they sell it), generally they aren't entitled to claim the main residence exemption. Lesson 25 of 28 Former home used to earn income If the taxpayer uses their former home to produce income (for example, they rent it out or make it available for rent), they can choose to treat it as their main residence for up to 6 years after they stop living in it. This is sometimes called the 6 year rule. The taxpayer can choose when to stop the period covered by their choice. For example, if they rented the property out for 5 years, they can choose to treat the property as their main residence for 3 years. If the taxpayer is absent more than once when owning the property, the 6 year period applies to each period of absence. A period of absence stops when they either stop renting their home and: move back in leave it vacant. Example: ending the period covered by the choice early Brock: signed a contract to buy a house in Tasmania on 15 September 2012 and moved in as soon as the contract settled. moved to Sydney on 10 October 2014 and rented out his Tasmanian house signed a contract to buy a new house in Sydney on 3 October 2019 and moved in as soon as the contract settled signed a contract to sell the house in Tasmania on 1 March 2024. When Brock completed his 2023/2024 tax return, he decided to treat the Tasmanian house as his main residence for the period after he moved out in October 2014 until he purchased his new main residence in Sydney in October 2019. This is a period of less than 6 years. This means Brock is entitled to claim a partial main residence exemption under the 6 year rule. As Brock decided not to treat the Tasmanian house as his main residence after he bought the Sydney house, he is subject to CGT for that period. This means James must include a capital gain or loss in the period not covered by the main residence exemption in his 2024 tax return (from October 2019 until March 2024). Example: Dwelling used to produce income for up to 6 years Barbara-Jean: signed a contract to buy a house in 2002 and moved in as soon as the contract settled stopped living in the house in 2013 signed a contract to sell the house in 2023. While she lived in the house, she didn't use it to produce income. During the 10-year period after she moved out, Barbara-Jean: rented the house out for 3 years left it vacant for 2 years rented it out again for 3 years left it vacant again for 2 years. The total period Barbara-Jean used the house to produce income was 6 years, which meets the 6 year limit for treating it as her main residence. It doesn't matter if the 6 years is broken. While the house is vacant, the period is unlimited because the house is not being used to produce income. Barbara-Jean can choose to treat the house as her main residence for the entire 10 year period after she stopped living in it and disregard her capital gain or loss on the sale of the house. Barbara-Jean must include the CGT event in her tax return in the year of the contract sale date, even if she chooses to treat the house as her main residence for the period she stopped living in it. Barbara-Jean can claim the Main residence exemption in her tax return. Example: Dwelling used to produce income during multiple absences Cheyenne signed a contract to purchase a house in 2004 and moved in as soon as the contract settled. Cheyenne: Stopped living in the house in 2013 because she had to move for work, so she rented it out for the next 5 years. Moved back into the house in 2018 and treated it as her main residence for 2 years. Moved out again in 2020 and rented the house out, this time for 3 years. Entered into a contract to sell the house in 2023. While Cheyenne lived in the house, she did not use it to produce income. The 6 year limit applies separately to each period of absence immediately following a period Cheyenne lived in the property. This means Cheyenne can choose to treat the house as her main residence for both rental periods and disregard her capital gain or loss on the sale of the house. Cheyenne must include the CGT event in her tax return in the year of the contract sale date and claim the Main residence exemption in her tax return. Lesson 26 of 28 Former home not used to earn income If the taxpayer does not use their former home to produce income (for example, they leave it vacant or use it as their holiday house) they can treat it as their main residence for an unlimited period after they stop living in it. This only applies if the taxpayer is not treating another property at the same time as their main residence. Example Van brought a house and lived in it for 2 years. He then moved out to live with a friend while his daughter Elizabeth occupied the house rent free. Van did not treat any other property as his main residence. Twelve years later, he sold the house and claimed the main residence exemption from CGT. Lesson 27 of 28 What happens if the 6 year limit is exceeded? If the taxpayer uses their former home to produce income for more than 6 years in one absence, it is subject to CGT for the period after the 6 year limit. To work out the taxpayer's CGT when they dispose of their home: the taxpayer needs to work out their cost base, which is the market value of their home at the time they first used it to produce income, plus any allowable costs since then (this is the home first used to produce income rule) the capital gain or loss is based on the portion of time after first using their home to produce income; that is, over the 6 year limit. Example: Former home used to produce income for more than 6 years Kyra bought an apartment for $180,000. She immediately started living in the apartment as her main residence:  On 29 September 1997, Kyra moved interstate and rented out the apartment and at that time the market value of the apartment was $220,000. During her time interstate she didn't acquire another property. In July 2022, she returned to her home state and continued to rent out the apartment. She sold the apartment for $555,000 under a contract that settled on 29 September 2022. She incurred $15,000 in agent’s and solicitor’s fees when she sold. She had no other capital gains or losses. As Kyra rented out the apartment, she can treat it as her main residence during her absence for a maximum of 6 years. This is the period 29 September 1997 to 29 September 2003. Kyra must treat the apartment as though she acquired it: on the date she first used it produce income (29 September 1997) at the market value at that time ($220,000). Kyra works out her CGT as follows: capital gain = capital proceeds − cost base  = $555,000 − ($220,000 + $15,000) = $320,000 Non-main residence days (days over 6-year limit) 30 September 2003 to 29 September 2022 = 6,940 days Ownership period days (from deemed acquisition date) 29 September 1997 to 29 September 2022 = 9,132 days Assessable capital gain = $320,000 × (6,940 days ÷ 9,132 days) = $243,188 She is eligible to use the 50% CGT discount to reduce her capital gain: = $243,188 × 50% = $121,594 Kyra is not entitled to a full main residence exemption. She must also report a net capital gain of $121,594 on her 2023 tax return for the period the main residence exemption wasn't applied. Lesson 28 of 28 Former home used for income before the taxpayer moved out If the taxpayer used any part of their home to produce income before they stop living in it, they can't apply the continuing main residence exemption to that part. This means they can't get the main residence exemption for that part of their home either before or after they stop living in it. Example: Home used for income before ceasing to live in it Reba signed a contract to buy a house in 2006 and moved in as soon as possible after settlement. Reba: used 75% of the house as her main residence and the remaining 25% as an accountant's practice moved out and rented out the house in 2018 signed a contract to sell the house in 2024, making a capital gain of $400,000. Reba chooses to treat the house as her main residence for the 6 years it was rented out. As 25% of the house was used to produce income during the period before Reba stopped living in it, the same proportion of the capital gain is assessable: = $400,000 × 25% = $100,000