Loans Overseas and Interest Deductions

Discussion in 'Accounting & Tax' started by Mike A, 12th Oct, 2017.

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  1. Mike A

    Mike A Well-Known Member

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    If an Australian Tax Resident purchases a property within Australia and they have borrowed funds from overseas then generally they need to register for PAYG Withholding on the Interest Payments made to the overseas lender and remit 10% to the ATO or they DO NOT get a tax deduction for the interest paid.

    Section 26-25 of the ITAA 1997 provides that interest is not deductible if the taxpayer has not met the withholding tax requirements of the Taxation Administration Act 1953 (TAA 1953).

    Section 12-245 of Schedule 1 to the TAA 1953 provides that an entity must withhold an amount from interest that it pays to another entity if the recipient has an address outside Australia.

    HOWEVER if a non resident taxpayer holds property within Australia then under Section 128B of the ITAA 1936 the withholding tax requirements doesnt apply to them UNLESS it relates to a business in Australia. So the non resident taxpayer with Australian property but with a loan to an overseas entity doesnt meet the definitions within Section 128B.

    Always something fun comes along with clients every day.
     
    Last edited: 12th Oct, 2017
    Terry_w and Paul@PAS like this.
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The incidence of withholding of foreign rental income cant be too far off either. I have heard about a project to consider integrated reporting and likely withholding being undertaken with state REA regulators. Modelled on the UK I suspect.

    ...CGT is already reality (other than property under $700K)
     
  3. tc8

    tc8 Well-Known Member

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    Thanks - this is great info. The interest rate in Hong Kong is much more competitive than that of Australia. So I can purchase a property in australia (being a non tax resident) using a combination of cash/ loan from a Hk bank.
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes, but it is unlikely that an overseas lender would let you use an Australian property as security for the loan.
     
  5. Mike A

    Mike A Well-Known Member

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    Hsbc did for my client

    The private lending market is even bigger due to capital control restrictions
     
    Last edited: 12th Oct, 2017
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Multinationals will do it too, NAB Japan, CBA Singapore etc. But I don't think a bank without branches in Australia would do it - Kasikorn bank in Thailand for example.
     
  7. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Australian property security is actually well recognised by many foreign banks. And often as Terry says those with a office here are even easier.
     
  8. Beano

    Beano Well-Known Member

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    What interest rate are you paying (ex HK) ?
     
  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Of course you should factor in what the exchange rate between AUD / HKD will do over the loan term. You may end up owing far less or far more than you borrowed too. Rate is just the cost of interest. The interest may vary with rate changes as well as the debt.
     
  10. Mike A

    Mike A Well-Known Member

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    and if you try hedging the risk the cost of hedging plus the interest rate will probably not be worth it.