Foreign investment is an important part of the Australian economy and helps it reach its full economic potential.
For example, foreign investment in Australian increases tax revenues of the federal and state governments that can be used to fund parts of the community like hospitals, school and other essential services. Beyond the economic factors, foreign investment enriches the Australian climate with diversification, increased competition and performance.
If you’re a foreign resident to Australia, and thinking about investing in residential property here, this is what you need to know and how you can claim tax deductions like depreciation.
In this article, we will cover:
What is it and how does it work?
If you’re a foreign person to Australia (including temporary resident or foreign non-resident), you can directly invest in Australian property.
However, there are several rules and regulations that apply to you and the type of property you can invest in. Here is a short overview of some of the key rules that apply.
Before deciding whether to invest in Australian property, it’s important to read through the Foreign Investment Review Board (FIRB) guidance notes. These outline what is required, processes, what you can and cannot invest in and any additional fees you may be subjected to.
The types of Australian properties that you can invest in include:
- New dwellings
- Established dwellings to live in (i.e. as a main residence, not investment)
- Properties for redevelopment
- Off-the-plan properties
- Vacant residential land
This means you will generally be prohibited from purchasing established property, like a second-hand house, as an investment.
But you can apply for what is called an ‘exemption certificate’. If you’re successful in your application, the exemption certificate will allow you to purchase one unspecified residential property (i.e. one excluded from the list above) in a particular state/territory without having to apply for approval.
Once you own an Australian property, you will be subjected to Australian taxation requirements. This means you will need to get a tax file number and report all rental income and expenses by lodging an Australian tax return.
Through this tax lodgement process, you may be required to pay a vacancy fee. This fee was introduced in 2017 and is an annual fee that must be paid if the property isn’t residentially occupied or leased for more than six months (183 days) in a year.
As a foreign investor, can you claim tax deductions and depreciation?
Claiming tax deductions comes hand-in-hand with reporting taxable income in Australia.
This means you can claim deductions when lodging their Australian tax return. Just some of the deductions you can claim are expenses for are interest repayments, insurances, property management fees and much more.
A tax depreciation schedule prepared by a specialist quantity surveyor will also allow you to claim depreciation on the property.
Depreciation is the natural wear and tear of the property and its assets over time. You don’t need to spend any money to claim depreciation and it has the potential to boost cash returns by thousands.
Case study – claiming depreciation in practice
Nina is a permanent resident of Beijing, China. She purchased two Australian investment properties at the start of the 2020-21 FY.
The table below provides information on each of her new residential investment properties and the first-year depreciation deductions she could claim from each.
When combined, Nina’s annual taxable income from the properties is $67,600 and total first-year depreciation deductions come to $32,622. The table below demonstrates how depreciation alone affects the amount of tax she needs to pay.
By claiming depreciation alone, Nina has a tax liability of $10,602 when lodging her Australian tax return. Without depreciation, she would’ve been faced with a tax liability of $21,970 (assuming a 32.5 per cent tax rate) – therefore making an annual saving of $11,368, or approximately $219 per week.
BMT Tax Depreciation specialise in comprehensive tax depreciation schedules for both Australian and non-Australian residents.
To learn more about claiming depreciation, contact BMT Tax Depreciation on 1300 728 726 or Request a Quote.