Buying property before working overseas: investment options

[narcissusford]

Hi all

I am seeking opinions on possible investment options.

First of all, my circumstances. I own a fully paid off apartment in Melbourne CBD, valued at approximately $500,000. The apartment is my PPOR. I have no other assets, apart from a bit of cash in the bank.

In the next 6-12 months, I am thinking of accepting a role in Dubai, which would see my income increase substantially. If my calculations are correct, I expect that I will be able to save approximately $100,000 per year, provided I satisfy the ATO's "foreign resident" tests. My plan, at this stage, is to stay in Dubai for 3-4 years, whereupon I will return to Melbourne.

From my perspective, my options are:

Option 1: Keep my apartment, and rent it out. Given that I have fully paid it off, I do not think I will be eligible for any meaningful deductions. Any surplus cash would then be put into term deposit of some sort. I view this option as delivering very conservative returns.

Option 2: Sell my apartment. Use the funds to buy a more expensive property (i.e. $1m) with an interest only loan. Live in the property for 6 months and establish it as my PPOR. Leave for Dubai and rent it out, and send money back to Melbourne periodically to meet mortgage commitments and sink any excess into an offset.

I believe that this option will (a) allow me to maximise deductions; (b) lock in 2013 property prices; (c) give me an investment vehicle for my overseas earnings; and (d) hopefully enable me to pay it off by the time I return, whereupon I will live in the property myself. It is my understanding that I can treat the property as my PPOR (and therefore enjoy CGT-free status) provided I return within 6 years.

Am I missing anything fundamental in my analysis? I appreciate that I need to be careful about structuring my affairs so as to avoid the "residency" tests, but from advice I've received to date, it would appear that owning a residence and renting it out is not, on its own, considered inconsistent with being a foreign resident.

Any thoughts would be appreciated!

 

[starter]

Option 3: use to the equity in your PPOR to invest. This will save on the selling cost and the interest will be fully deductible.

 

[baby blue eyes]

Agree with starter

 

[narcissusford]

Thanks Starter and Blue Blue Eyes.

If I did as you suggested, would it be advantageous to move to the higher valued property, establish it as my PPOR, and then leave for Dubai? That way, I will enjoy full deductible entitlements (except for the 6 months I am residing in it as my PPOR) and the more expensive asset will be CGT free upon eventual sale based on the 6 yr rule?

 

[geoffw]

1. Get professional advice on being a non resident for tax purposes. While you may save tax on your income you may lose tax on the income you receive for rent.

2. Using equity to buy another property will cut down on transaction costs like stamp duty and commission. Moving house will incur its own costs, and will be disruptive. That may offset some of the gains- it may make it not worth while moving.

I also like the option of using equity. Two properties for the same pric as one quite expensive property will probably provide better returns. Expensive properties can be more volatile and difficult to move- they have a more limited market.

 

[narcissusford]

OK thanks guys, you have given me something to think about.

 

[dubjohnston]

My understanding is that you will have to lodge a tax return in Australia for your Australian domiciled income and one in dubai for your dubai earned income.

My guess is that your Australian income will be limited and so there will be minimal (if any) tax savings from expenses. Use the calculator on the ATO site to determine tax payable. It has a box you tick for full, part or non-resident for the year - http://calculators.ato.gov.au/scripts/asp/simpletaxcalc/InputDetails.asp

I too am working overseas and have done previously also.

I have a company in Australia too that generates income but which holds retained losses but will profit this year. I am looking to set up a personal ABN number to 'contract myself' to my company to earn income in my personal name (could just pay dividends of retained earnings but i have negative retained earnings). This way I am spreading profits (NPBT) to entities that have the lowest average marginal tax rate

 

[WesternRat]

Agree with starter. Find a new property to invest in while you are away and make use of equity.

As it was your PPOR, if you decide to eventually sell, as you mentioned you have a 6-year window to do so without triggering a CGT event. Make the most of it and rent it out for for now, while you have two properties increasing in value.

 

[Terry_w]

If you become a non resident for tax purposes you will be taxed differently. Much higher rate with no tax free threshold.

And there was a recent case where an Australian went to work in Dubai for a number of years and he was found still be to a tax resident of Australia. So don't assume you will not be taxed in Australia on your Dubai income. I can find the case if you are interested in reading it.

 

[kum yin lau]

Hi, I did that >ten years ago. I bought my sister's house, was living in it prior to the exchange.

I took 2 loans to buy another house and the incomes were about the same as expenses.

Singapore has a double taxation arrangement with many countries whereby income earned in Singapore was taxed in Singapore.

I didn't lodge a tax return in Australia until 5 years later after I sold 1 house & I thought I'd better get the tax returns done.

Australian income [rents] was taxed from the 1st dollar which meant I quickly reached the highest income bracket. I escaped that by borrowing to the max & the residual income was very minimal.

It means that I had to keep on borrowing and keep on buying.

You don't have to buy property only. You can buy shares if you wish. In the tax year, what is accounted is the income, not the cap gain. Once you're back in Australia, then you can realise the cap gain in the most optimal tax year.

Everyone's circumstances are different so what you do will apply to you yourself.

Good luck & happy investing.

KY