Reader question: I will be moving overseas soon and will require long term income from an investment in Australia. I was thinking of purchasing property and having the rent as a source of income, but after careful reading on the ATO website it seems I would be deemed a non-resident of Australia for tax purposes, therefore rental income would be taxed highly and I cannot claim any deductions etc to offset this. The tax would eat into too much of the rental income. My question: is there a better way to do this, for example purchasing property under a trust or company name based in Australia. Will this enable me to claim tax deductions and the tax free threshold etc and be declared as a resident for tax purposes?

If you were to purchase an investment property in Australia then it might be a good idea to purchase it in your own name.  Whilst you pay slightly more in tax as an individual, you do not have any of the establishment and ongoing running costs associated with operating a company.  Non-residents for Australian tax purposes only need to declare income derived in Australia that has not had any non-resident withholding tax deducted.  Non-residents can claim the usual deductions that are allowable for rental properties such as depreciation, rates, strata levies, repairs and interest on loans.  

In 2012-13, the first $80,000 earnt by non-residents is taxed at 32.5 per cent which is slightly higher than the company tax rate of 30 per cent.   But don’t get fooled with the headline rate.  Let’s say for example your property derives $15,000 gross rent for the year and has $5,000 of outgoings resulting in a net profit for tax of $10,000.  Whilst you would be paying $250 extra (2.5 per cent) if the property was in your own name, you would save thousands in accounting and establishment fees by not having it owned within a company or trust structure. 

If, by chance, you make a taxable loss you unfortunately miss out on the benefits of negative gearing as you wouldn’t have any other Australian income to offset it against.  There is not much that you can do about that except to carry forward your tax losses which you could one day offset against future net income.  Companies and trusts are very similar to non-residents in that they do not have any tax-free thresholds either and must also carry forward any tax losses.

This article first appeared in the July 2012 issue of Your Investment Property Magazine www.yourinvestmentpropertymag.com.au. Copyright Key Media Pty Ltd 2012.