Negative gearing is a strategy used by many Australians to make tax savings, but is this strategy still accessible to Australian expats that are living overseas? In this article, we explain what negative gearing is, what it means for Australian expats and whether it is an effective strategy for expats.
What is negative gearing?
Negative gearing is a tax strategy where the tax deductible expenses associated with a particular asset, are greater than the assessable income generated by that asset. The term “negative gearing’ is just accountants jargon for meaning that the asset makes a tax loss – i.e. the tax deductible expenses are less than the income generated by the asset.
This is a strategy most relevant for investment properties, although it can also apply to share investments held by tax residents of Australia – Note – for most non-residents, capital gains, and dividends from share investments are often non-assessable for Australian income tax purposes..
Taxpayers who hold assets negatively geared assets can generally deduct their negative gearing losses from their other income, (including as salary and wages) thus reducing the tax payable on other income, or potentially resulting in a tax refund for the person.
This strategy doesn’t just apply to residents, it also applies to non-residents who can use their negative gearing losses to offset other Australian income that they’ve earned during the year.
What does this mean for Australian expats who own Australian investment properties?
As explained above, non-resident Australian expats are also able to negatively gear any Australian investment properties that they may have.
What this means is that where applicable, non-residents can utilise their investment property losses to reduce their Australian taxable income from other sources.
If however the person doesn’t earn any other source of Australian income, Australia’s income tax legislation allows them to accrue their losses in their Australian tax return and carry those losses forward indefinitely, yes indefinitely. This means that those carry forward losses can be used at a later date when eventually the person starts to generate Australian sourced income again. This means that you won’t get the tax benefit straight away but it isn’t lost either.
Note that these carry-forward losses must be used at the earliest opportunity. The earliest opportunity will usually occur either:
- When the person returns to Australia and begins earning Australian sourced income again (e.g. Australian salary or wages etc); or
- When the person sells their property and makes a taxable capital gain; or
Whenever one of the above occurs, the person must offset their carried forward losses against that income. A consequence of the first point (i.e. returning to Australia) is that the timing of your return becomes very important to ensure that you maximise the benefit of your losses against your income.
Is negative gearing an effective strategy for expats to use?
Negatively gearing an investment property can be an effective tax-related strategy for individuals earning other Australian income, or for those who plan on returning to Australia at some point.
However, if cashflow is tight for you generally, negative gearing may not be the best strategy as it will put more pressure on your finances as you’ll constantly be out of pocket due to your investment property expenses exceeding your income.
Can non-resident Australian expats negatively gear their share portfolios?
We’ll be covering this in another article soon so stay tuned to our blog page as we’ll answer this more fully in that later article.
To answer the question though, it is possible for non-residents to negatively gear their share portfolio, however it’s not generally tax-effective to do so. What I mean by this is that, if the non-resident Australian expat borrowed money to purchase their share portfolio, the interest is not usually deductible!
Deductibility of interest for non-residents who borrow to finance their share purchases
Unlike for tax residents, where dividend income and capital gains are generally categorised as ‘assessable income’ and subject to income tax, dividend income earned by non-resident Australian expats are categorised as Non-Assessable, Non-Exempt (NANE) income, and capital gains earned by non-residents (for shares purchased and sold whilst the person was a non-resident), are similarly, non-assessable.
In most cases, this categorisation means dividend income and capital gains earned by non-residents are not generally taxed in Australia, an important concept for Australian expats to consider when formulating their investment strategies.
Under Section 8-1 of the Income Tax Assessment Act 1997, expenses are not generally deductible unless they’ve been incurred to earn assessable income.
The operative word here is “assessable”! As explained earlier, dividends and capital gains are generally non-assessable for a non-resident.
What this means therefore, is that interest expenses incurred by non-residents on loans used to purchase their Australian share investments are typically non-deductible. This is because those expenses were used to produce non-assessable income, NOT assessable income, and thus, the interest costs are unable to be deducted..
For more information about tax planning for Australian expats or any other information on your Australian tax obligations either now or in the future reach out to us for a consultation.