When you own an overseas investment property as an Australian tax resident, the ATO permits you to claim depreciation deductions. These deductions fall under Division 40 of ITAA 1997 for plant and equipment and Division 43 for capital works deductions. However, understanding the specific rules and how they apply to foreign properties is crucial for maximising your potential tax benefits.
Under the ATO's guidelines, depreciation on overseas properties can be claimed similarly to local properties, but there are additional considerations. Firstly, the 2017 budget changes, which restrict claims on previously used plant and equipment for properties acquired post-9 May 2017, apply to overseas properties as well. This means if you purchase a second-hand property overseas after this date, you cannot claim depreciation on existing plant and equipment unless it's brand new.
Additionally, the effective life of assets needs to be assessed according to Australian standards, which can sometimes differ from local guidelines of the country where the property is located. Currency conversion is another layer; all claims must be converted to AUD using the exchange rate in effect at the time of purchase or installation of the asset.
Take a practical example of an Australian resident owning a three-bedroom apartment in Auckland, purchased for $800,000 AUD in 2021. The apartment includes new appliances valued at $10,000 AUD. Under Division 40, the investor can claim depreciation on these new appliances. If the effective life of these appliances is 10 years, the investor can claim $1,000 AUD annually. For capital works under Division 43, assuming eligible construction cost of $500,000 AUD and a deduction rate of 2.5% per annum, the investor can claim $12,500 AUD each year. At a 37% marginal tax rate, these combined deductions reduce the tax bill by approximately $5,018 AUD annually.
In our experience reviewing thousands of properties across Australia and overseas, investors often overlook the impact of currency fluctuations on their depreciation claims. Many also miss out on the opportunity to claim depreciation on new plant and equipment because they assume overseas properties are treated differently. Another common oversight is failing to align the effective life of assets with ATO guidelines, which can lead to incorrect claims.
The answer can differ depending on your situation. For example, properties acquired before the 2017 changes can still have claims on existing plant and equipment. Properties in countries with different tax treaties may also have specific rules. Additionally, if only part of the property is rented out, depreciation claims must be adjusted proportionately. Commercial properties overseas have different depreciation rules compared to residential ones, offering more flexibility in claims.
Given the complexity of international tax rules and the potential for significant tax savings, consulting with a Chartered Quantity Surveyor and an accountant is essential. They can ensure compliance with ATO regulations, accurately assess depreciation, and maximise your tax benefits.