Tax on rental income earned in South Africa

[movingtoaus]

Hi

Does anyone have experience with paying tax in Australia on rental income earned in South Africa ? I am planning to keep a property in SA and rent it out. Does the converted ZAR income simply form part of your Aus$ income that you report in Aus ?

Would appreciate your help.

[Jordy]

Yes that is exactly what we did. We took the profit portion (rent less interest paid on bond less rental related expences) and converted it to dollars at the ATO stated rate and paid tax on it in Aus even though the money was never transferred to Australia..

The ATO publishes exchange rates and we used the one at 30th June each year.

EDIT: Just to add we didn't declare the first year when we did own tax, but in the second year I used a tax consultant to do our returns. He advised we had to declare it. Then we had to submit an ammendment to prior year's tax returns which the ATO accepted without penalty.

[Gerhardk]

It depends on your visa type.

If you are on temporary work visa then you do not have to declare it in Australia since you are only taxed in Australia on Australian source income (such as interest earned in Australia). For PR yes you have to include it and the calculation is similar to what you do for SARS just the year-ends are different (SA end of Feb, Australia end of June). If you are making a loss you can also generally claim it against other income. In some instances you may be able to claim building allowance and depreciation / capital allowances as well, but that is a long story.

You should use the yearly average exchange rate or the monthly rate, the year-end spot rate is not correct. The ATO notes that the exchange rate used must reflect a fair position so generally a year-end spot rate gives a different answer (sometimes in your favour but sometimes not).

If you pay tax on the rental income in South Africa then you can generally claim it as a credit in Australia.

[Eto]

Morning all,

What happens when you in oz and renting your house out in RSA, but never transferring the rental income to oz. You declare this rental in RSA and is taxed accordingly every year in RSA. Do you still have to declare it if residing in Oz as P/Resident or Australian Citizen with dual Citizenship?

Thanks

Eto

[21yearsoutofrsa]

Morning all,

What happens when you in oz and renting your house out in RSA, but never transferring the rental income to oz. You declare this rental in RSA and is taxed accordingly every year in RSA. Do you still have to declare it if residing in Oz as P/Resident or Australian Citizen with dual Citizenship?

Thanks

Eto

Yes. Australia taxes worldwide income. The taxes paid in RSA will be deducted from the tax payable in Australia so you will not pay twice.

[Eto]

thanks 18yearsoutofrsa

[Gerhardk]

To add to answer above, it is irrelevant where the income is earned or whether it is brought to Australia, the latter is not the taxing event, becoming entitled to income is the test. Also keep in mind cashflow and profit and taxable income are not the same, sometimes they are equal but often not.

[Tiermelk]

Gerhard, from a capital gains perspective - would it be better for movingtoaus to sell before he/she leaves SA? Let`s say he/she has only only property in SA being the primary residence.

In that case they won`t pay CGT in SA and can just bring the cash over... but what is the outcome if they keep the property and sell it after they`ve been in Aus for say 3 years to use as a deposit on a property here?

Cheers

[Gerhardk]

Tiermelk, the visa class will again determine the answer. Assuming person on a PR visa generally it would be better to sell primary residence before they move to Australia, I think there is a 2 year grace period - temporary living away from primary residence more than 250km (sorry can't recall the exact details) available in certain situations.

So assuming grace period 2 years only, as far I in recall you will not completely loose the primary residence exclusion, only partly. So if owned 3 years before moving to Australia and held for 3 years, I think only 50% (3/6) will be subject to CGT in SA. Will be great if SA tax practitioner can confirm this.

However, the position in Australia becomes really interesting. You are deemed to acquire property when you become an Australian tax resident and have to value the property. Then when you sell after 3 years you will make a capital gains / loss (roughly selling proceeds less value when you became a resident). Of course the primary residence exclusion concession in Australia will not be available on this property. But you have to take into account exchange rate differences as well so in reality you can make a Rand gain but an AUD capital loss! So you may have to pay tax in SA but no corresponding tax in Australia so you cannot utilise foreign tax rebate in Australia of the tax you paid in SA.

But if your view is that the Rand will strengthen against the AUD then the above position may be different and you can make a gain in both countries.

[movingtoaus]

Hi all. Thank you for replying. Really appreciate it. Valuable info. Thanks.

[fouche's]

Further to Question on CGT - if you are renting out your primary residence in South Africa and renting in Australia, you have 6 years from becoming a tax resident in Australia to sell your PR - the sale will then be exempt from CGT in Australia. However if you don't sell before the 6 years you will be responsible for CGT in Australia from becoming a Tax resident. You will be liable for CGT on a pro-rata basis in RSA. Always best to get proper valuations on all assets remaining in RSA at date of becoming a Tax Resident in Australia.

[Gerhardk]

Thanks fouche's, I am not clear whether the 6 year concession is available - have a look at ATO ID 2010/101 which supports the pro-rata approach in Australia (my posting above does not deal with this pro-rata calculation). The ID notes that the 'ownership period' will include the time it was held before becoming an Australian tax resident and the ID also notes that accordingly a partial exemption will be available, it does not refer to the 6 year concession. However I have read some articles that support your view.

As far as I am aware, even if it did apply then keep in mind the 6 years starts when you vacate the primary residence property in South Africa and starts earning rental income, not when you become an Australian tax resident (depending on the circumstances the two dates can be far apart). Also you may own a property in Australia (and live in it) and still qualify for the concession, but not both properties can qualify for primary residence exemption - an election needs to be made (on disposal).

[Tiermelk]

Great information, thanks guys! fouche`s - what would constitute a "proper valuation", valuation by an estate agent?

Cheers

[Mara]

I don't think an estate agent's valuation will suffice, it would probably have to be a valuation by a registered valuer.

[Jordy]

I don't think an estate agent's valuation will suffice, it would probably have to be a valuation by a registered valuer.

Some years back friends required a valuation for a new loan at the bank and they paid R3500 for a valuation. Would hate to think what a ripoff it is now days.

[fouche's]

TD 95/7 refers to the ability to make a choice under section 118-145 (6 year exemption) also pro-rata may apply in certain circumstances as mentioned above. CGT implications will be different depending on when RSA property ceased to be primary residence and whether/when individual became a tax resident/temporary tax resident.

I don't believe the ATO has any rules and the taxpayer will need to decide on what's proper. My view is that a better valuation will be required if a transaction is material and higher in value than say getting a valuation on a property of lesser value. You will only know if you got the right valuation if the ATO accepts the valuation.

[Jordy]

In light of this would a municipal valuation for purposes of rates and taxes be considered acceptable? ie the value as stipulated on rates and taxes invloices from city council

[Tiermelk]

In light of this would a municipal valuation for purposes of rates and taxes be considered acceptable? ie the value as stipulated on rates and taxes invloices from city council

In my experience municipal valuations will be lower than the market value, and you would like to maximize this valuation. So maybe get two or three valuations from different estate agents and use the average of those. Sounds to me like the proper thing to do, and I can not see that the ATO can/would dispute those? Maybe if your already being watched...

(naturally it is possible to talk to the agents and have the valuations adjusted to the cause.)

[Gerhardk]

Ideally the valuation should be done by registered valuer - not estate agent / or even accountant, but anything independents helps.

Fouche's, I read the ID 95/7 but then I did not understand the pro-rata view in the much later ID 2010/101 so hence I note it is unclear for me. Your view gives the better outcome if you make a AUD gain though.

[movingtoaus]

Hi everybody. Thank you for all the info.

One more question.

Lets say I move to Aus on a PR in Jan 2015, I stay there for 10 years and move back to SA in 2025. I keep my primary residence in SA and rent it out. From 2015 to 2025 I pay tax in Aus on the rental income earned in SA. During the 10 years in Aus I don't buy a house, I only rent.

Is the above allowed ?

[fouche's]

Hi movingtoaus

When you leave Australia CGT Event I1 will apply (individual stops being a resident) and you would be liable for CGT on the growth of the RSA property - if there is any AUD$ growth.

Regards

Louis

[movingtoaus]

Hi Louis. Thank you for the info.

I have a PR Aus visa.

If I understand correctly, the day I leave RSA, I become an Aus resident - and from that day I pay CGT on the growth of my RSA property ?

[Tiermelk]

More reading matter on this subject.

https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-or-loss/Market-valuation-for-tax-purposes/?anchor=Who_may_undertake_a_market_valuation#Who_may_undertake_a_market_valuation

http://forums.whirlpool.net.au/archive/1519022