We recently helped a new Australian expat client of ours structure the new loan on their Melbourne investment property in May of this, and given how frequently we come across this scenario, we thought it would be worthwhile sharing this story with our network as it may just help you to make smarter financial decisions.
Essentially, this is a story of an Australian expat purchasing a residential investment property, and with our guidance and the advice of his tax (financial) adviser, we were able to structure the financing on his property to allow him to manage how the gearing on his property, and as a result how much tax he would have to pay.
For privacy reasons, we will call our client Simon in this scenario. Simon decided that he wanted to purchase a residential property in Melbourne for $1.2M and he is planning to rent it out for the next 5 – 10 years while they continue to live and work in London. He has no intention of ever living in the property and plans to continue to rent it out, even once he moves back into Australia.
Simon is currently 46 years of age, and has been working offshore for a number of years, and has saved up over $1.5M in cash. Given his cash position and the fact that he has no definitive plans on what to do with this money, he was considering buying the property outright. This is a common situation that many expats find themselves in given the cash that accumulates, particularly for those that are living and working in low-tax jurisdictions.
In conjunction with Simon’s financial planner, we were able to sit down with him and explain the non-resident tax rates in Australia, and given that he is a non-resident of Australia for tax purposes, he would be up for a significant bill if he didn’t have any deductible interest to reduce his taxable income.
The tax rates for foreign residents are outlined in the table below:
Given the expected yield on his property, and the holding costs without any mortgage, it was estimated that Simon would be up for approximately $7,800 – $9,000 in Australian tax each financial year. As an Australian expat, it’s important to recognise that we are not entitled to the tax-free threshold that we would receive if living and working in Australia, and as a result everything is taxed from the first dollar.
Upon receiving this news from his Adviser, Simon was not thrilled about the result, and the property scenario started to look less attractive given the significant bite taken out of his rental income by the Australian Tax Office (ATO).
This was a relatively simple solution for Simon to structure his loan with a split between variable and fixed interest rates allowing him to utilise a 100% offset account against the variable portion. The resulting loan structure was as follows:
- Property Value: $1.2M
- Total Loan Amount: $800,000
- Fixed Amount: $400,000
- Variable Amount: $400,000
Simon was not free to keep as much or as little of his cash in the offset account which can offset up to the full $400,000 variable rate loan. This meant that while interest rates remain low and his rental yield is quite strong, he can keep less in the offset account to minimise his tax exposure. If the rental yield drops or his property is vacant, or even as interest rates start to increase, he can simply transfer more of his cash into the offset account.
Simon was thrilled with the result as it put him in control of his tax exposure through the simple strategy of splitting his loan to give him the best of both worlds – the low-interest rate on the fixed-rate component, and the 100% offset account against the variable portion. All of a sudden, Simon was very comfortable with the property scenario and expected cash flow.
Often, the solution can be quite a simple and inexpensive one to fix with the right guidance and advice.
LoanSuite Pty Ltd is your lending partner for all of your home loan, investment property, business, and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.
Book an obligation-free, complimentary consultation here today.
LoanSuite Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.