How your investment loan can reduce your tax
As an expatriate, you benefit from not declaring your overseas income in Australia. But, on the flip side, if you earn Australian sourced income, you have to pay tax from the very first dollar earned, without the advantage of the tax-free threshold.
If you’re an expatriate who owns an Australian rental property, Australian taxes can become a considerable cost that may not be considered in your initial plan. However, a properly structured investment loan can help you minimise those taxes.
Interest Costs & Taxation
Generally, the best way you can reduce tax on your Australian rental property is by ensuring the interest costs on your investment loan are tax-deductible.
In Australia, any property loan used to derive rental income, the associated interest payments on that loan should be tax-deductible.
In achieving the maximum tax deductions available, and thereby minimising your tax, there are many principles for expatriates to be aware of when managing their investment loan:
Only the portion of your loan repayments related to interest costs is deductible. Principle Loan Repayments are not tax-deductible. This point is relevant when considering interest-only loans and principal and interest repayment terms and their different interest rates.
Deductibility of interest is dependent only on the purpose for which the loan principal is used, and it is irrelevant as to what assets or income-flows the loan is actually secured against. This means that if you finance an investment property by mortgaging your private holiday home, the deductibility of that new loan will not be adversely affected.
Suppose multiple redraws from a single loan account are required for different purposes. In that case, only the portion of the interest costs relating to drawings to finance your rental property will be tax-deductible. Redraws will work to your advantage when redraws are for investment purposes but will work to your disadvantage if redraws are for personal expenses.
Suppose you also own your overseas home and have a loan against that property too, and you’re seeking to reduce your overall debt levels. In that case, it is usually a tax benefit for you to eliminate the loans on your home before reducing any loans on your rental property.
In the instance where an interest deduction is not available, your interest costs may be added to your property’s cost base to reduce any future capital gains tax on its eventual sale. This can be very favourable if an investment property becomes your principal residence for any period before it is sold.
Although, as an expatriate, you will pay tax from your very first dollar of Australian income, taxation can be minimised by considering the above considerations.
If you’d like some assistance with your taxation, reach out to Dean Crossingham,
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