Foreign property income - mismatched tax year

[CharlieM]

I own a foreign property and pay tax there on the income. I am also required to declare this income on my UK tax return. My questions arise because the tax years do not match up:
- UK tax year: April - April
- Australian tax year: 1 July - 30 June

My accountant has suggested using the Australian tax year that approximately matches the UK year on my UK tax return. For example, I would use my Australian tax return for 1 July 2017 - 30 June 2018 on my April 2017 - April 2018 UK tax return.

I can see the rationale for this: the Australian income, expenses, and tax paid are shown on official tax office records and can readily be matched to the numbers used on the UK tax return. Additionally, the Australian input documents (managing agent, interest charges, etc) are annual statements. Even if we split the totals across the tax years (e.g. 3 months from one tax year + 9 months from another), this would not accurately reflect when the income and expenses occurred in the UK tax year. For example, the rental income might have increased, interest paid would change when interest rates change, various expenses would have been incurred at different points during the year (service charges, maintenance, utilities, ...) As all the foreign income is being declared and tax paid on it, and in view of the points above, the approach suggested by my accountant seems to be practical. However, I am a little concerned that it may cause issues if enquiries are raised on my UK return at some point.

Has anyone else considered a similar situation (any mismatched tax year, not necessarily Australia), and if so what approach do you take?

[SteLacca]

You should return foreign income received (and foreign tax paid if applicable) on the UK Return in accordance with the UK fiscal year. It matters not whether it matches the overseas Return figures owing to the mismatch of years.

[maths]

I suspect HMRC would not be content with the suggested approach although your adviser may approach them and see if they would be happy with the practical approach suggested.

However, UK income tax is levied on rental profits as computed under UK tax rules. Against any such charge foreign tax levied on those profits is offsettable.

Given the different basis periods apportionment of the foreign tax is necessary
EG UK tax year 2017/18.
25% of foreign tax levied on foreign profits to 30 June 2017 plus 75% of foreign tax levied on profits to 30 June 2018.

[CharlieM]

Hi @maths, should the income and expenses also be apportioned that way (25% / 75%)? It would be possible to go through each individual rental income payment, expense, etc to apportion them to UK tax years - however the apportionment of the tax payable would then become complicated too (because income and expenses would not be spread equally across the year).

[maths]

The UK computation requires that profit for the UK tax year is computed on UK principles i.e. on an accruals basis.

Once the profit for the UK tax year is calculated and UK income tax calculated for that tax year any Australian tax paid is offset by way of a credit (as per my post above i.e. pro-rated); the Australian tax paid is that computed on Australian tax principles.

[CharlieM]

Thankyou - I understand that I receive "credit" in the UK for tax paid in another jurisdiction and that it is the UK tax year dates that are relevant for a UK tax return. My questions relate to how to apply this second point in practice. I have provided some information below which will hopefully explain my question better.

The tax is calculated based on the total income and total expenses for the previous year (e.g. for the Australian tax year ending June 2018). However, the income and expenses (on which the tax is based) are not distributed equally across each of the preceding 12 months. To provide some examples:
- Rent increase in December i.e. income for the first six months is different from the next six months
- Interest rate changes in October and February i.e. interest costs change
- Landlord insurance paid in May
- Body corporate fees (service charges) paid in July and January
- Repairs to stove made in April

These are just some examples showing that the income and expenses are not equally distributed across the 12 months. Using a 25/75 split for the tax (annual) but an item-by-item assignment of expenses/income would mean that the tax no longer corresponds with the underlying income and expenses. It would seem that the only practical approach would be to use a 25/75 split for tax, income, and expenses.

If anyone has experience in completing a UK tax return based on foreign income with a different-dated tax year, I would appreciate their views on the above.

[maths]

It doesn't matter whether the income/expenses are distributed equally over the 12 month period or not.

EG
Rent due for period January 2017 to June 2017 £100 per month. Rent due per month £200 for period July 2017. Rent increased to £300 for period January 2018 to 30 June 2018.

Irrespective of when rents actually paid, over the period July 2017 to June 2018 rental accrual is 6 x £200 plus 6 x £300.

For UK tax purposes for UK tax year April 2017 to April 2018:
Rental income accrual for period April 2017 to June 2017 is 3 x £100
June 2017 to December 2017 6 x £200
January 2018 to March 2018 is 3 x £300

Similarly for expenses.

As income/expenses in Aussie $, could use average exchange rates to convert into £.

[CharlieM]

Yes, it is possible to allocate the income and expenses to each UK tax year by looking at the exact dates. However, your suggestion (I think) is that the tax paid should be split 25/75 (i.e. 3 months from one tax year and 9 months from another, to correspond with the UK tax year). This method assumes that the tax paid can be equally divided among each of the 12 months - which is not correct if the income and expenses (on which the tax is calculated) is not equally divided between the 12 months. The question is about the correct way to apportion the tax paid, which is an annual payment.

[bd6759]

Draw up your account to whatever date you please. That gives you the taxable profit.

For UK tax purposes the profits are apportioned to 5 april, so if you dont use that date you need to apportion the profits from 2 sets of accounts.

The same goes for tax paid in Australia. You need to apportion the tax from 2 Aus tax years.


It is simple arithmetic.

[maths]

This method assumes that the tax paid can be equally divided among each of the 12 months - which is not correct if the income and expenses (on which the tax is calculated) is not equally divided between the 12 months.

No. The aggregate Aussie tax charge is simply allocated 25/75.