Taxes in Australia on inherited overseas property

Hi All - Looking for some guidance.

A friend who lives here in Australia (Australian citizen), inherited an apartment in Croatia probably around 5 years ago.

He’s now selling that apartment and will bring the profits back to Australia.

What are the taxes (if any?) that need to be paid here in Australia?

Appreciate any insights.

 

He will acquire a cost base of the apartment at its market value. And a capital gain might arise.

If the deceased was an Australian tax resident he will acquire the apartments tax cost base of the deceased (unless it was pre cgt and it will then be the market value).

If the apartment was rented overseas during the holding period that rental income is taxed in Australia with a possible tax credit for foreign taxes paid.

 

@Ross Forrester - what if there's no CGT payable in the country of origin?

 

Largely irrelevant

 

If tax is paid on the property in the foreign country it may be considered in the Australian return that includes (largely) the same gain. However the AU tax return will also consider what the AUD value of the inherited property was and its final sale in AUD terms. So a gain can occur in one country and a loss in another merely due to exchange rates.

Any foreign taxes may be credited here IF the country is a tax treaty partner. If not then no credit is allowed. Croatia and Australia have no tax treaty.

 

Sometimes in other countries you can make a payment that is not tax and the net result is that the tax paid in that country falls significantly.

In this case the payment that is not income tax does not give you a tax credit in Australia.

Often the person overseas encouraging you to pay something that is not income tax is the tax professional in that other country. And that tax professional will often give incorrect information to the Australian tax advisors.

So the poor Aussie gets whacked with a big Australian tax bill with no recognition for the sneaky other payment.

This is why I love being part of the Geneva Group Network. Having a trusted partner anywhere in the world gives me a trusted outlook over both jurisdictions.

And if the local jurisdiction has quirky arrangements we can understand and work through the net tax position.

 

Croatia may also have a "local tax" ie a bribe paid to the locals or a rigged price so that only a friend of a friend buys the property. Common (scam) in the balkans, incl Greece. I know someone who encountered this with Macedonia and lucky they had a relative on the ground who assisted and the issue went away once they knew they were dealing with a "local".

 

Thank you for the insights @Ross Forrester, @Terry_w and @Paul@PFI. Much appreciated.

I passed your info on just now and found out (needs to be confirmed) the deceased bought the apartment in Croatia for more money than my friend it's selling for. So guessing no CGT to worry about or much else by the sounds of things.

 

might even be a capital loss here which could be carried forward to offset future capital gains.

 

Lucky them if its on the coast it would have tripled in value.....

Cheers Ivan

 

As Paul wrote above, conversion of the cost and proceeds need to be done (at each of the purchase date, and the sale) - you need to do the calculations in AUD - so there will be an FX component which could be completely opposite to the Croatian gain/loss (I have no idea how that currency has moved).

 

Sounds like a capital loss which is awesome. Don't forget the effect of rental income.

 

Thanks again @Terry_w and @Ross Forrester. I'm not sure about the rental situation, but will pass that on.

Thanks @qak will pass your info on too. Will be interesting to see what the FX situation is, as I have no idea when it was originally purchased. That could do anything to the actual outcome re: gain or loss

Not on the coast unfortunately @Redwood, he might have kept it if it was!

 

Cheers

 

did i miss a something, it is not relevant how much the deceased purchased for but more the valuation at point of inheritance compared to the sale price 5 years on.

If it crashed after deceased purchasing and has increased from inheritance date to sale date there still could be CGT liability

 

Why is this the case?

 

Yes, it seems more logical that CGT is calculated on any increase in value from date of inheritance to date of sale.

 

have you factored in the exchange rate movement in your calculations ?

 

Except if its sold within 2 years. Then that could be CGT free.

The costbase of a inherited asset is determined by tax law and depends whether the property is the former owners home at death and when they purchased it in some cases.

Tax law is designed so that if the former owner had a tax liability (to Australia) for that property at the time of death then the tax liability transfers with the property. eg If your father owned the property and never lived there and you inherited it at his death. If the property was the deceased persons home and never subject to Au tax (as the former owner is Croatian for example) then the costbase may well be the market value at the date the person dies. Then if sold within 2 years of that date any increase in value may be tax free. These rules allow you to inherit from your father and also allows it to transfer to your kids without death acting to trigger tax. They are quite logical.