A Practical Q&A Guide for Australian Accountants

Purpose of This Guide

This document is intended to assist Australian-based accountants who are supporting clients with international property or hotel investments, particularly where income is generated offshore but the investor remains an Australian tax resident.

It focuses on practical tax reporting concepts, not legal or financial advice.

Q1. How are the returns tax-free until 80% of the initial capital investment has been returned to the investor?

A: From an Australian tax perspective, amounts received that are genuinely characterised as a return of capital are not assessable income at the time of receipt.

Why This Occurs in the ELLE Investment Structure

In the ELLE Resort & Beach Club structure:

• Investor funds are exchanged into the project SPV via a PT-PMA structure

• The operating entity uses a debt-to-equity ratio (4:1 or 80%)

As a result, early distributions are commercially and legally characterised as capital returns, not income.

How an Australian Accountant Typically Treats This

1. Return of Capital is not Assessable Income

Where documentation supports, amounts received during the capital return phase are treated as:

• Non-assessable return of capital

• Not included in assessable income

• Not subject to income tax in the year received

The Foreign Income Tax Offset (FITO) Is Not Relevant During This Phase

Because no assessable income is declared during the return-of-capital phase:

• There is no Australian tax payable

• Therefore, no FITO is required or applied during this period

Once the investment transitions to distributable profit, normal foreign income and FITO rules apply.

Note that documentation is key such as;

• Annual investor statements

• Distribution summaries clearly separating:

  • Return of capital

  • Assessable income (if any)

• Capital account tracking

• Currency conversion records (IDR to AUD)

The statements investors receive will support the capital nature of the distributions, making the accounting treatment in Australia straightforward.

Q2. (After the tax free period) Do Australian residents need to declare offshore investment income?

A: Yes. Australian tax residents are assessed on their worldwide income, regardless of where the asset is located.

This includes:

• Rental or operational income from offshore property

• Hotel or hospitality income distributions

• Foreign-sourced interest or profit allocations

Income must be reported in the relevant income year in Australian tax returns.

Q3. How is Bali hotel income typically characterised for tax purposes?

A: From an Australian tax perspective, income from a Bali-based hotel asset is generally treated as foreign-sourced investment income.

Depending on the structure, this may be reported as:

• Foreign rental income

• Foreign business income

• Trust or managed investment income

• Distribution income (net of foreign expenses)

The exact characterisation depends on:

• Ownership structure

• Whether income is pooled or direct

• The nature of the operating agreement

Q4. Is this different from standard Australian rental income?

A: Mechanically, no.

The principles are similar:

• Gross income declared

• Allowable expenses deducted

• Net income assessed

Key differences relate to:

• Currency conversion

• Foreign tax offsets

• Timing of distributions

• Documentation format

The tax logic remains familiar, even if the geography is not.

Q5. How is foreign currency income handled?

A: Foreign income must be converted to Australian dollars in a tax return.

Common approaches include:

• Spot rate on receipt

• Average annual exchange rate (ATO-accepted)

• Consistent method applied year to year

Consistency and documentation are more important than the specific method chosen.

Q6. What about foreign tax paid in Indonesia?

A: If tax is withheld or paid offshore, the investor may be eligible for a Foreign Income Tax Offset (FITO) in Australia.

Key points:

• Tax paid must be evidenced

• Offset is limited to Australian tax payable on that income

• Double taxation agreements (DTAs) may apply

Indonesia and Australia have a Double Tax Agreement, which prevents double taxation.

How the FITO Works for Australian Residents

The Foreign Income Tax Offset (FITO) is the mechanism used by Australia to relieve double taxation on income earned in Indonesia, as outlined in the Double Taxation Agreement (DTA) between the two countries.

If you are an Australian resident for tax purposes and you earn income from sources in Indonesia, that income is generally assessable in Australia. However, the DTA allows Indonesia to tax certain types of income at source. To prevent you from paying tax twice on the same income, the Australian Taxation Office (ATO) provides a foreign income tax offset.

Q7. Are depreciation or capital allowances available?

A: Once construction is completed, at a cost to the investor, a Tax Depreciation Schedule can be ordered and conducted by an ATO-approved Quantity Surveyor to produce a compliant property tax depreciation schedule. A schedule covers Division 43 (capital works deductions) and Division 40 (plant and equipment depreciation).

In many cases:

• Australian depreciation rules may apply to the investor’s interest

Q8. How are expenses treated?

A: Expenses that are:

• Directly related to income production

• Properly documented

• Incurred during the income year

Are generally deductible, including:

• Legal and accounting costs

• Interest (if applicable)

Again, the principles mirror domestic investment reporting.

Q9. What records should the client provide?

A: Typically:

• Annual income statements or distribution summaries

• Operating statements from the hotel manager

• Bank statements showing receipts

• Evidence of foreign tax paid

• Currency conversion methodology

Q10. Does this create compliance risk for the accountant?

A: Not inherently.

Accountants are not required to be offshore property specialists to:

• Report disclosed income

• Apply standard tax principles

• Use professional judgement

Q11. What about capital gains tax on exit?

A: For Australian residents:

• Capital gains on disposal of offshore assets are generally assessable in Australia

• Cost base and proceeds are converted to AUD

• Foreign tax credits may apply if tax is paid offshore to Indonesia

Holding structure and duration will influence CGT outcomes.

Q12. How does this interact with SMSFs?

A: SMSFs can hold offshore property interests, subject to:

• Sole purpose test

• Trust deed allowances

• Investment strategy alignment

Income and gains are still reported as foreign-sourced income within the SMSF.

Refer to the separate guide for SMSF. Request this guide if relevant.

Q13. What role does the accountant play in the client’s decision?

A: While accountants may not assess investment merit, they:

• Ensure compliance

• Provide clarity on tax outcomes

• Support informed decision-making

• Reduce uncertainty for the client by discussing it

International property income reporting is an extension of familiar tax principles, not a departure from them.

With:

• Clear documentation

• Consistent methodology

Australian accountants can confidently support clients investing in offshore hotel assets.

Disclaimer

This guide is general information only and does not constitute tax advice. Accountants should apply professional judgement and seek specialist advice where required.

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