Australian Expats hit hard from new property taxes

Brenda Williamson and Family

Whilst living in Singapore as a part time working mother of two beautiful children and a wife of a very busy husband I have chosen to take full responsibility for organizing my family’s Financial Life and I have to be honest, it hasn’t been easy. Like my parents, grandparents and most Australians, I am a very property minded investor and it is because of these reasons that it has been extremely hard for myself and 1,000s of other Australian expatriates to accept that investing in Australian Property may no longer be the answer that it once was.

In order to gain more clarity on my finances I spoke with Singapore’s leading Australian Specialist Sean Abreu from IPP Financial Advisers.

Sean, why have Australian expatriates turned away from Australian property investments?

The answer is quite clear; the numbers simply don’t add up. Investors generally purchase properties for capital growth, or a decent rental income yield. Unfortunately, once you become a non-resident for tax purposes, these outcomes are drastically effected.

In my opinion, the Australian Government is discouraging expatriate property investment, through:

1. The removal of the CGT 50% discount for non-residents
2. The increase in certain state land taxes for non-residents
3. The proposed ending of the 6 year CGT main residence exemption for non-residents 
4. The withholding taxes on property sales for non-residents
5. The general reluctance by Australian banks to lend to non-residents

What are two of the main taxes that affect Australian expats in regards to investment properties?

1. Non-residents aren’t eligible for the 50% capital gains tax discount, unlike our friends and family back home. This means expats must pay twice as much tax on the sale of an investment property. Even if you manage to receive a healthy growth rate of 6% p.a over the next 10 years, you only walk away with approximately 3.5% growth after tax. Keep in mind, that doesn’t factor in stamp duty, agent fees, land tax, up keep, inflation, renovations and other costs.

2. Not only are Australian expats dealing with low rental yields, they are also dealing with additional running costs. NSW, VIC and Queensland (with other States to follow) have now introduced additional land taxes for absentee owners and foreign investors. This has been a major setback for investors who seek income from their property portfolio.  

Can Australian expats reduce tax by moving in to an investment property before selling?

Unfortunately, no. Moving in to the property won’t cancel out your time as a non-resident. The tax is calculated on a pro rata basis, so you will be assessed as a foreign investor for the entire time you were living offshore.

What are the reasons for Australian expats to purchase or retain Australian property?

There are three key non-financial reasons why Australian expats should consider purchasing Australian Property:

1. Lifestyle: I personally own a property in my home town of Perth, Western Australia. Does the property generate a good rental yield? No. Will the property generate a decent investment growth rate? Factoring in high taxes and a down market, it’s unlikely. However, I spend at least one week a month back home, and the property allows me a stable base to visit family and friends, as well as proximity to the coastal lifestyle I enjoy. This makes the property a worthwhile investment for me.

2. Emotional return: When it comes to investing, not everyone is out to seek financial return. Some investors seek emotional security, while others have a sentimental or personal connection to the property they own. Investing can mean so much more to people than just financial return.

3. Dream home: What’s the point of working your entire life if you can’t buy that home you’ve always wanted? Again, not every decision for a property purchase needs to provide a financial return. If you have your eye on a dream property, why not go for it?

Should Australian expats pay off their investment home loans?

That depends on the reason for the purchase. There are two points to consider here;

1. Did you purchase the property for an income yield? If so, then it’s obvious you should pay off your mortgage. Keep in mind, average rental yields in Australia are currently at approximately 3%, while a decent Australian dollar term deposit in Australia will generate around 2.5% p.a.

2. Did you purchase the property for capital growth? If so, it may not be the best idea to pay off your mortgage. Given the high capital gains tax for foreign investors, it’s best to maintain a neutral stance when it comes to your mortgage. Paying it off will only decrease the leverage you need when it comes to capital growth.

What’s your opinion on Australian property?

From a capital growth and income perspective, Australian property doesn’t seem to be an attractive investment at present. I predict another 5% to 15% coming off the housing market, depending on where you’re looking at buying. 

Also of importance for those living and earning abroad, is the rather precarious political and economic situation back home. I can’t see the AUD strengthening in the short term. In fact, I see further weakening and the potential for another rate cut before things start looking up again. Plus, for expats, yields are too low and the taxes on any gain are so substantial that it almost makes Australian property investment pointless. There is also likely an opportunity risk as there are other far more tax efficient ways for expats to save and invest.

As an investor, it is crucial for you to define your goals before purchasing any asset. Once those goals are defined, you can assess the asset against those objectives. If you are after capital gain or income, there are many options available to expat investors. That said, at some point in the next twelve months or so, (excluding taxation considerations) Australian property will likely become an attractive opportunity.  Attractive enough to override the aggressive taxation expats will face?  We’ll have to reassess that in the future.  But for now, my hard-earned money is going elsewhere.

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Sean Abreu, your trusted adviser at IPP, dedicated to financially helping fellow Australian expats living in Singapore

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