Ask Ban Tacs Question
Background:
I am an Australian citizen and my wife currently holds Hong Kong passport. She obtained the partner PR and is now getting annual Australian Resident Return visa (subclass 155). I moved to Hong Kong in 2008 and has been a non-tax resident since then. In 2015, I purchased a house in Sydney for AUD 2.6m as an investment property under my sole name (the mortgage is in joint name). The house has been rented out for almost 10 years now and we never stayed here since the purchase.
Questions:
- I have accumulated losses carried forward from earlier years due to rental income less than the expenses such as interests, land tax, repairs, etc. This loss (now over AUD130k) is classified as Non-primary production losses under item L1 in my tax report. From Apr this year, I plan to offset 100% of the outstanding mortgage with cash which will result in mortgage interest being close to 0 and I will start to have positive taxable income. Can I use the accumulated losses so that I don’t need to pay tax as a non-tax resident?
- How else can I use these accumulated losses? I plan to return to Australia permanently in a few years but not sure if I will be employed by then. I am in my 40’s now.
- My wife and kids plan to move back permanently in 2028 and stay in the house as main residence. I might go with them at the same time or work in HK for 2 more years and then join them. Assuming I decide to sell the house in 2035 for AUD5m, How do we work out and calculate the CGT? Will it be lower if we live in the house for a longer time?
- Is the house also considered as main residence if I let my parents live there (i.e. while my family is still in Asia now)? They own a house but my brother lives with them together now.
- Do I need to get a market valuation the moment I stop renting and let my wife or my parents stay in the house as main residence? What do I need to be aware of before we decide to return to Australia?
- I was told that it is better from a tax perspective to buy another property as main residence when we move back and keeps renting out the investment property I purchased in 2015. Is there any truth in this? How does it work in our circumstances?
- Is it possible to reduce land tax? We noticed that the amount is rapidly increasing each year.
- On a separate note, do we need to pay tax if my wife or I invest in Australia gov treasury bond in HK?
Answer
Questions:
1. I have accumulated losses carried forward from earlier years due to rental income less than the expenses such as interests, land tax, repairs, etc. This loss (now over AUD130k) is classified as Non-primary production losses under item L1 in my tax report. From Apr this year, I plan to offset 100% of the outstanding mortgage with cash which will result in mortgage interest being close to 0 and I will start to have positive taxable income. Can I use the accumulated losses so that I don’t need to pay tax as a non-tax resident?
Yes
2. How else can I use these accumulated losses? I plan to return to Australia permanently in a few years but not sure if I will be employed by then. I am in my 40’s now.
There is no restriction on the use of these losses as they are on revenue account. The only catch is you can’t delay using them. This means that you might have a year when you are a tax resident again and entitled to the tax free threshold so with maybe only $20,000 in taxable income you would not be paying tax on that $20,000 anyway but your carried forward losses will be reduced by that amount.
3. My wife and kids plan to move back permanently in 2028 and stay in the house as main residence. I might go with them at the same time or work in HK for 2 more years and then join them. Assuming I decide to sell the house in 2035 for AUD5m, How do we work out and calculate the CGT? Will it be lower if we live in the house for a longer time?
I attach a spreadsheet that will help you keep the records you will need to keep. It is all a proportional calculation. The eventual calculation for the whole period of ownership is apportioned pro rata between days covered by your main residence exemption and days not. So living there is going to increase the percentage of the gain that is not taxable but during that time the gain will also increase. Crystal ball stuff. The bonus is when calculating the capital gain you can decrease it by all the costs associated with holding the property that were not claimed as a tax deduction ie rates while you are living there (more detail in the spreadsheet). The way the formula works these expenses relating to when it was not producing income actually proportionally decrease the capital gain for the period it was producing income. If you have a look at the left hand side of the spreadsheet you can see how the calculation works. This spreadsheet may help you do some what if analysis for your crystal ball.
Also consider buying and selling costs such as stamp duty and CGT and real estate agent’s fees mean you will have a lot less to buy your next house with. If it is suitable it is a bargain. Plan B could be to live there for the rest of your life. If it is your home when you die your heirs inherit it at market value at the date of your death so all the CGT is forgiven and forgotten (section 128-15 ITAA 1997).
4. Is the house also considered as main residence if I let my parents live there (i.e. while my family is still in Asia now)? They own a house but my brother lives with them together now.
To cover the property with your main residence exemption either you, your spouse or your children under 18 need to live there.
5. Do I need to get a market valuation the moment I stop renting and let my wife or my parents stay in the house as main residence? What do I need to be aware of before we decide to return to Australia?
No, just note the dates so the CGT discount can be calculated. Note the attached spreadsheet does not consider the reduction in the CGT discount for the period of time you are a non resident. Don’t expect much of a discount. No market value reset just a pro rata calculation on days covered and days not.
6. I was told that it is better from a tax perspective to buy another property as main residence when we move back and keeps renting out the investment property I purchased in 2015. Is there any truth in this? How does it work in our circumstances?
It would be nice to not have a CGT debt hanging over the family home but I can’t see how it would be better to buy another house especially if you have to borrow to do so because that interest won’t be tax deductible.. Again it would be crystal ball. And at least if you do die while living in this home you get out of all the CGT! As you have paid off some of the debt on this house it is not really the appropriate one to hold as a rental property. Good that you are going to use an offset account to reduce the mortgage. As long as it is a separate account, not a re draw facility you can take the money back out and use it towards buying another home to live in and then the loan that is no longer offset will be tax deductible because it is still the original borrowings to buy the house.
7. Is it possible to reduce land tax? We noticed that the amount is rapidly increasing each year.
I don’t know much about each state’s taxes. No land tax of course if it is your home. You do get a threshold in each state so the idea is to buy properties in a different state each time.
8. On a separate note, do we need to pay tax if my wife or I invest in Australia gov treasury bond in HK?
Not while you are a non resident for tax purposes.
Note that if your wife and children are living in Australia as tax residents in a house you own you are likely to be considered a resident of Australia for tax purposes by the ATO. This can be overwritten by a double tax agreement but it looks like you are in Hong Kong where there is no double tax agreement with Australia.
Please note this answer is limited by the information you have provided and should not be relied upon without further professional advice
