Carried Forward Losses on UK Property

[Dingus]

Hi all,

I have searched the forums but with no avail so I was hoping you guys could help me.

I have a scenario where I have carried forward losses from a property that is located in the UK (due to no negative gearing in the UK tax system). As I am now living as a resident in Sydney, would I be able to use those carried forward losses in my Australian tax return?

The property is now positive cashflow and I understand that I would need to include this in my Aussie tax, however this puts me in a tax payable situation whereby in contrast, I would have carried forward losses to offset this in the UK.

Thanks for your help.
Cheers

 

[Rob G.]

Were you an Australian resident at the time you earned the rental income and incurred expenses in the UK ?

 

[Paul@PFI]

Hmmm... Did you lodge AUS tax returns showing the income in Australia in the past ? This probably would be a no if you were non-resident. Generally the only way for foreign losses to appear in a AUS return is when the taxpayer is an AUS tax resident.

There may be some CGT issues that could see a benefit.

There also may be a problem...Rental income and losses are shown in the foreign income section of an AUS return if the property is located offshore. Foreign income issues don't often offset ordinary AUS income.

Personal advice is my best suggestion.

I also understand you may be about to lose the UK CGT concessions. Its worth a rethink for the decision to hold UK property if you are an AUS resident. The DTA could see no CGT discount in the way AUS and UK taxes interact.

 

[Dingus]

Cheers guys for the feedback.

No prior returns as this is the first tax return in Australia...

I am a Australian tax resident now but have existing rental losses quarantined in my UK tax return... essentially carried forward foreign losses.

From a CGT perspective, I have 5 years until I can sell and it will remain CGT free (1 year left). Will this affect CGT declared in Australia - ie. will it be CGT free for the UK, but applicable for CGT in Aust? Or will the CGT free status carry forward due to the DTA?

 

[Paul@PFI]

That's impossible to answer without review.

However simple issue is its a UK loss. It cant be used here as its not a current year or prior year loss. It cant be bought into the AUS return on that basis.

Some CGT issues may impact
1. On commencing AUS residency there is a CGT event which results in the market value being acquired as the cost base.
2. The 12month CGT clock starts ticking that day

This may hamper access to those UK costs. Normally a resident can claim third element cost base items to adjust the cost base (up) when a deduction isn't claimed. However as your cost base commenced on the date you start residency these cost may be limited to those non-deductible ownership costs after the date of residency.

Well worth getting some personal advice so that income tax / CGT benefits aren't missed. If you were previously an AUS resident who left and is returning this issue can be further complicated.

 

[Dingus]

Thanks Paul for that.

Sounds like its a more complex issue than on first looks. Will discuss with a tax advisor and consider options.

 

[Rob G.]

1) Residency

Residency for both the UK and Australia is initially defined by their respective domestic rules.

If you had some presence in Australia in past years then you could have been a resident of both countries without realising.

Then the tie breaker in the Australia-UK double tax treaty would override and make you solely a resident of one country.

The Australian domestic residency rules are surprisingly broad and you might find that you were a resident in past years without knowing. How you filed previous tax returns does not determine residency.

2) Tax Losses

A tax loss is where deductions in a year exceed assessable income for which the expenses were incurred.

However, a non-resident is only assessable on income from Australian sources.

Whilst not an Australian resident then your UK investments are not for the purpose of earning assessable income and so deductions relating to those investments are not allowable.

Generally, a tax loss cannot exist on foreign operations of a non-resident that have no connection with Australia in any way.

3) Changing residency

On becoming an Australian resident, any assets that are not taxable Australian property (i.e. not Australian real estate interests) will be deemed to have been acquired at that date. Future accrued gains will be subject to CGT upon occurrence of a CGT event in relation to those assets.

If you already held Australian real estate upon becoming a resident then you keep the cost base and acquisition date attributes. However, some of the accrued gain prior to residency may not be eligible for the 50% discount.

4) Other issues

Heaps!

e.g. superannuation balances

e.g. how long you need to be a resident before being free of the UK inheritance tax ? Does this require loss of UK residency under domestic laws as opposed to being a DTA sole resident of Australia ?


5) Pay for good advice from a specialist firm

Advice is expensive for good reason. Specialist practitioners have to spend enormous time keeping up to date with legislation across multiple jurisdictions.