Reducing your Australian income tax

Usually, the three key questions a foreign resident property investor asks are:

1)      What is taxable?

2)      How do I reduce my tax payable?

3)      How much income tax do I have to pay?

Reducing your Australian income tax as an individual foreign resident

1) What is taxable?

This is easy to determine as all rental income earned is taxable (i.e. rental income, insurance payout etc.). It is earned when you receive the money (directly or indirectly through an agent) or become entitled to it.

2) How do I reduce my tax payable?

The most effective way to reduce your tax payable is by claiming your tax deductions correctly. Tax deductions for rental expenses are more complicated compared to rental income. For some expenses you can claim them immediately against your taxable income when incurred while some you can only claim them in the future.

There are three main categories of rental expenses:

a)      Expenses that you can claim immediately

  • interest on loans
  • secretarial and bookkeeping fees
  • tax-related expenses (i.e. tax advice and lodgement of income tax returns)
  • travel expenses (i.e. air tickets, accommodations etc. to Australia for inspection of the property etc.)
  • property agent’s fees and commission
  • advertising for tenants
  • bank charges
  • body corporate fees and charges
  • insurance
  • land tax etc.

 

 

b)      Expenses that you can claim over a time period

  • borrowing expenses
  • assets used in the rental property (i.e. dishwasher, oven etc.) to be  claimed as deductions through depreciation
  • structural improvements (i.e. building new carport, sealed driveway etc.) to be claimed as deductions through capital works deductions

c)       Expenses that you cannot claim  

  • acquisition and disposal costs of the property (falls under the Capital Gains Tax (CGT) legislation and is addressed by our ‘Reducing your Australian CGT’ publication)
  • expenses incurred when the property is for private use

3) How much income tax do I have to pay?

Mark owns one property in Melbourne which he earns a return of 6% per annum on his $500,000 investment. His assessable income for the year ended 30 June 2013 is $30,000 and total tax deductions are $20,000. His tax deductions are made up of the following components:

Expenses Category of expenses Amount ($)
Lodgement of income tax return Expenses you can claim immediately 550
Air tickets to Melbourne Expenses you can claim immediately 1,000
Interest on loan Expenses you can claim immediately 14,800
Property agent fees Expenses you can claim immediately 1,650
Depreciation for furniture and fittings Expenses you can claim over a time period 2,000
  Total $20,000

 

Therefore, his taxable income is $10,000. Assuming that he is foreign resident for tax purpose, he needs to pay $3,250 in tax. The effective tax rate is only 10.8%.

Results

Legitimate tax deductions can significantly reduce your taxable income. Hence, you want to make sure that you are correctly claiming these deductions and not missing out on your entitlements.

We would like to speak to you and assist if you have any questions or concerns. Contact us now for your complimentary and no obligation first meeting to see how we can assist in reducing your Australian income tax.

 

1 Jul 2013 © AscendPoint 2013

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Disclaimer

This publication is intended as a general commentary only and does not purport to be comprehensive. It should not be regarded as tax advice and you should not act solely on the information contained herein. Please contact us to further discuss about your circumstances or concerns.

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