What is the simplest way of managing tax for Australian rental property for Australian expats?

Question

My husband and I have been living and working in the Netherlands since September 2008. We are Australian citizens but Australian non-residents for tax purposes. My husband is the sole income earner, and his income is taxed here in the Netherlands. We intend to continue living in the Netherlands for a few years, and then possibly move to another country for another few years prior to moving back to Australia. Our intention is to return back to Australia eventually on a permanent basis. We do not intend to apply for citizenship in any other country whilst we live overseas.

We want to purchase a few investment properties in Australia while we are overseas. Our overall intention is to be able to eventually retire in Australia on income from property we purchased there. We do not have any property in Australia, and have never bought property before.

I know that Australia and the Netherlands have a double taxation agreement. My question is, once we purchase our first and subsequent investment properties, what is the simplest way to manage it for taxation purposes? Is it possible to simply keep all the tax related issues in Australia (ie rental income, deductions carried forward etc) and therefore keep it exempt from tax in the Netherlands (or any other country we move to in the future)?

Thank you

Answer

I think you will find our Overseas booklet from the freebies section of the web site worth reading.
Australia retains its right to always tax its real property so you will definitely have to do an Australian tax return for the rental properties. Whether they are taxed in the Netherlands or not, I can’t tell you but if they are it maybe more attractive to hold them in your name or a structure. Even if the Netherlands have the right to a second pick at the profits (which I suspect they will) they will give you a credit for tax paid in Australia, that is the primary purpose of double tax agreements ie to make sure there is no double tax.
If the properties make a profit in Australia and they are held in your individual names the tax rate will be a minimum of 29 cents in the dollar. There is a trick here, if you have money still sitting in Superannuation in Australia, you can contribute the taxable profit to the superannuation fund (up to your cap) so that it is not taxable in your hands but in the superfund hands at only 15%. The trouble is if you don’t already have a super fund account in Australia it is going to be hard to open one out here while you are a non resident for tax purposes.
If the properties run at a loss then the loss is accumulated to be offset against future profits or capital gains.
Now back to the idea of using a structure. This again depends on whether the Netherlands is going to want to tax you as well. Sorry you will need to see an accountant over there about that and then we don’t know what the story will be when you change countries.
I am very interested in the possibility of you investing in Australia through your own self managed super fund (SMSF) because when you are 60 all the profits and capital gains are tax free and in the mean time the tax rate is only 15%. The catch is you can’t be a trustee of a SMSF while a non resident. Do you have any children that are in Australia that could also become members of the fund? I think trying to invest in Australia with an Australia SMSF is going to be messy but well worth the trouble. There would also be problems with the borrowings so I will need to know a lot more about your situation before I recommend that but as I said it will be worth the effort.

I’m afraid this sort of leaves me asking you more questions than you have asked me but if you can answer the following I can be more specific

1) Do you have someone in Australia that you can totally trust and can become a member of your SMSF?
2) Please ask an accountant in the Netherlands how they would tax Australian rental property owned by your husband or you directly and what the difference would be if the properties were instead owned in a discretionary trust or private superannuation fund.
3) How do you intend to finance the properties?
4) Are you expecting to pay a large enough deposit that the properties will be profitable?
5) How old are you both?


And this is just for starters. Quite a big issue.

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