An ATO analysis of 13 million tax returns from 2014 showed that about 5% of Aussie tax payers were earning money from investments made in other countries. With house prices beginning to cool and rental yields tightening across the country, should Aussie investors seriously consider offshore property investments?
Ben Kingsley, chair of the Property Investment Professionals of Australia (PIPA), said there are three main reasons why offshore property investment might be lucrative for some investors. The first reason is the significant yield potential.
“[Investors] may get a better yield offshore at the moment. Rental yields in Australia have contracted as property values have gone higher, so potentially there may be a more attractive rental yield that is coming from offshore property,” he told news.com.au.
Domestically, things aren’t looking very rosy. According to data from CoreLogic, rental yields hit record lows last November across Australia’s capital cities largely due to dwelling values continuing to rise at a faster rate than weekly rental rates.
The average gross rental yield has dipped to 3.2%, down from 3.5% a year ago and 4.1% five years ago. Tim Lawless, head of research at CoreLogic, says rental yields in Australia will continue to decline.
Second, buying offshore property can give Aussie investors an added lifestyle benefit.
“There are investors taking advantage of holiday access,” Kingsley said. “So they might be on holiday in South East Asia and see some type of development going on — a condo complex near the beach — and they can invest in one and rent out the room and get some income from that as part of a holiday accommodation. But they can also be attracted by the incentive of a couple of weeks holiday each year, where they can holiday in that location.”
Third, investors may be able to take advantage of a stronger foreign currency. If there is an improvement in the currency of the country they’re going to invest in and the Australian dollar falls against that, it could lead to significant uplifts in terms of currency exchange.
Rewards as well as risks
While investing in offshore property offers unique benefits, it’s a lot riskier than keeping your portfolio local.
Kingsley admits it probably isn’t a wise move to invest abroad unless you’re a seasoned and committed investor. Indeed, it requires a lot more research and effort to invest in and manage properties in other countries.
Investors will have to deal with a multitude of challenges and considerations. Who will collect the rent? What if the property is devastated by a natural disaster? “There are some real high-risk, time-consuming and potentially expensive considerations, especially if you have to travel to that country and sort out these issues. It is certainly for those who are a little bit more experienced,” Kingsley said.
Kingsley also recommends dealing with a legal agency overseas, such as an international law firm, to ensure that the transfer of title is done correctly.
Just as importantly, when searching for a good foreign market to invest in, Kingsley recommends looking for areas with strong employment, a commitment to infrastructure development, low crime statistics, as well as reputable schools.
Understand tax arrangements
There are some tax arrangements investors considering offshore property investment need to familiarise themselves with. All worldwide income needs to be declared as additional income to the Australian Taxation Office. This includes rental income from overseas property and any capital gains investors
would make if they were to sell their investment property.
They may also be required to pay tax on their rental income to the tax department of the country they’ve invested in. While they can claim a foreign income tax offset in their Australian tax return, special rules apply and it can be quite complex. To simplify the process, investors should seek professional tax advice when investing overseas.
Michael Mata, Your Mortgage, 11 January 2017