Australian Expats turn away from Australian Property
2 March, 2023
Like most Australian Expats in Singapore I am a very property minded investor. Australian Property once provided me with a sense of financial security and it is for this reason that it has been extremely hard for myself and thousands of other Australian Expatriates to accept the fact that investing in Australian property whilst living abroad may no longer be a logical investment.
The Australian Government has made it perfectly clear that they do not want Foreign Investors / Australian Expats buying property in Australia and have introduced very unattractive tax legislation to prove it:
- The removal of the CGT 50% discount for non-residents
- The ending of the 6 year CGT Main Residence Exemption for non-residents
- The applied withholding taxes on property sales for non-residents
- The increase in State Land Taxes for non-residents
- The general reluctance by Australian banks to lend to non-residents
It is important to note that the Australian Government has introduced harsh taxes on foreign investors for good reason, they are concerned that every day working Australians will not be able to live a comfortable life if they do not prevent international foreign money from rapidly rising the price of Australian property.
These harsh taxes have now forced 1,000s of Australian expats around the world to ask one simple question…..
Is it worth it?
If you own or are currently seeking to purchase property in Australia as a foreign investor, then it is crucial that you define the reason behind the purchase before you do so.
There are three main reasons as to why most people would choose to own an investment property whilst being a Non-Resident Australian for tax purposes:
- Capital Gain
- Rental Yield / Income
Reason for ownership – Capital Gain
The most common reason as to why Australian Expats would own property in Australia is to generate a capital gain once they eventually sell the property in future.
Why Australian property may not make sense from a capital gain perspective?
Non-residents aren’t eligible for the 50% capital gains tax discount, unlike our friends and family back home. This means expats usually pay twice as much tax on the capital gain of an investment property. Even if an investor managed to receive a healthy annual growth rate of 6% p.a over the next 10 years, it is likely that they will lose almost half of that growth to capital gains tax. Keep in mind, that doesn’t factor in the costs of a 7% stamp duty, 2% agent fee, 1% land tax, 3% interest rate, up keep, inflation, renovations, and other costs. Given the drastic tax implications of owning property whilst living offshore one must question the reason behind buying property for capital gain purposes. Is it worth it?
What if I move back into the home before I sell it?
Unfortunately, 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. You will not be able to erase your time as a non resident by moving into the property before selling it.
What if I never sell the property?
If you do not ever intend on selling your property then the motivation behind the ownership or purchase of the property is not for capital gain purposes. The intention behind the ownership of your property may then be lifestyle or income.
Reason for ownership – Rental Yield / Income
Some investors seek an annual income from their investment. If you have managed to pay off your investment property mortgage in Australia then it is likely that you will be receiving a gross income of 3% p.a on your property. This means that if the market value of your property is worth $1,000,000 AUD then you should expect approximately $30,000 AUD rental income per year from your property.
Why Australian property may not make sense from an income perspective?
Not only are Australian expats dealing with low rental yields of approximately 3% per annum, 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.
- The minimum income tax rate is 32.5% for non residents on rental income in Australia. This means that your tax bill on a $30,000 rental income surplus would be $9,750.
- Strata Fees in some cases (Apartment Buildings) can cost up to 1.5% of the properties value.
- Other factors such us upkeep, agent fees, time lost etc need to be considered
Factoring in the high running costs of Australian property can make owning property for income purposes pointless.
Reason for ownership = Lifestyle
I personally own a property in my home town of Perth, Western Australia. Does the property generate a good rental yield via airbnb whilst im not in Australia? Factoring high running costs and high interest rates, No. Will the property generate a decent capital gain? Factoring in high taxes, it’s unlikely. However, I spend at least one week a month back home (Pre-covid), 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. Unfortunately I will eventually need to reassess the purpose of my investment due to the proposed 45 day rule that may come into affect within the next few years. If I cant spend more than 45 days in Australia without losing my offshore tax residency would there be any point/reason in keeping my property for lifestyle purposes? Absolutely not. From a personal perspective, Id rather sell my property, invest my proceeds into an offshore stock portfolio (Capital Gains Tax Free), and stay at a hotel when I visit my friends and family back home.
Define the purpose of your property before the purchase. Is it for Capital Gain, Income or Lifestyle? Once you know the reason for the purchase then do what most people don’t, take the time to calculate the financial projections of the property. What will be my return on investment after stamp duty, agent fees, land tax, strata fees, insurance, interest payments and Capital Gains Tax if we assume a growth rate of 6% p.a over the next 10 years? Then ask yourself a simple question: Is it worth it?
Things are not as as simple as they once were and Australian property may not be the answer it once was.
Book a complimentary video or face to face consultation with Award Winning Expat Financial Advisor Sean Abreu at IPP Financial Advisers for further information.