You may have heard a lot of talk about Negative Gearing, which is essentially where a property runs at a loss (i.e. the expenses are greater than the rent), and any loss is offset against other income for the taxpayer.
As a result, considerable reductions in tax can occur as a result of the loss.
A Simple example
Taxable income (net salaried income) $80,000
No deductions for this exercise
Tax payable $17,750
Salaried income $80,000
Property loss -$20,000
Taxable income $60,000
A reduction in tax of $6,500
The loss on the property reduces the taxable income and hence the tax by $6,500
A large portion of the property loss is usually due to depreciation, and interest expenses and if the property is held long term projected Capital Gain may outstrip the net losses, (after tax) over the years.
It is not uncommon to borrow up to 100% of the property cost especially if there is other equity – such as your own home from which the bank can take collateral.
The reduction in tax can be taken up on weekly basis whereby the tax office notifies your employer to reduce the weekly tax deduction based upon the expected property loss. This is called aPAYG Withholding variation. Based upon the above example a PAYG variation can be done to reduce the weekly tax by $115 pw ($6000/52)
PAYG Withholding variations need to be done preferably before the beginning of the financial year or shortly thereafter.
If the property is purchased during the year the variation should be done as soon as possible. The tax office does not allow current year variation within the last three months of the financial year.
If self employed and your business structure is such that you do not pay yourself a salary the PAYG withholding variation is not an option though variations can be made on the BAS return varying and Quarterly or monthly PAYGI ( pay as you go income installments)
Before any property purchase is made your financial position needs to be assessed for the ongoing ability to service any loans. We can assist by preparing cash forecasts and forward budget projections
Asset protection is a vital element where a business is concerned and we can give advice as to the best vehicle (structure – company, trust etc), to house your property.
a) Buyer Beware – like any purchase ultimately the buyer takes responsibility as he is the one who has to pay it off! Purchasing a property is usually the largest expense anyone makes, so it is worth the added cost of getting the property independently valued irrespective what the seller is spruiking it for. Some new developments may have an inflated price as a result of the marketing.
However as soon as the marketing stops, as the required quantity is sold, the price inevitably drops. We have seen instances where people who have bought properties though developers, borrowed heavily, only to find that once finished or shortly thereafter the value of the property did not hold up. In some cases the loan exceed the property value placing all sort of stress on the owner. Some prudent homework may have avoided such a situation.
b) Depreciation is available on residential property purchased after 21st August 1984. This includes the building itself as well as the furniture and fittings.
New properties will usually have depreciation schedules already prepared by the builder or an independent quantity surveying company that specialises in this. These are usually accurate but need to be checked which is part of the process that we undertake.
For older type properties – if a depreciation schedule is not provided by the seller, a specialist depreciation company can value the building and the chattels for this purpose. We have found the amount of deductions usually exceeds the cost of the valuation which is usually around $500.
We know of a number of reputable quantity surveyors – who do depreciation schedules that we can refer you to and will be happy to do so.
c) Initial Repairs
Initial repairs for a property within twelve months of purchase are not deductible. The reason for this it that it is assumed that the defect or needed repair was reflected in the purchase price.
If it can be proven that the repairs were caused by the tenants after the purchase of the building or by other means they can be claimed.
These non deductible repairs are treated as capital and are depreciated based on its relevant depreciation rate.
c) Costs of obtaining finance
The cost of obtaining finance such as:
- Legal fees
- Search and Title fees
- Loan and bank fee
If these costs are greater than $100 they are deductible over a period of five years or the term of the loan if the loan is less than five years. If less than a $100 it is fully deductible.
Interest on loans used for income producing purposes is fully deductible
Where the property is only used for partial rental – such as a holiday home the interest is apportioned based upon the income rental period.
e) Split loans
The tax office is looking closer into split loan arrangements. A split loan arrangement is where the one loan is used to finance a residential property and a rental property. In this case a proportion of interest needs to be made based on the actual amount of the loan needed for the rental property.
The tax office has been cracking down on instances where a home mortgage has been extended to take into account a rental property where all the interest or greater part is apportioned to the rental property.
f) Holiday homes
Where a holiday home is rented expenses such as interest can be claimed. However in order to claim interest where there was no rental, it is up to the owner to prove that the property was on the rental market for that period. Evidence of listings with real estate agents and advertising is acceptable. It needs to be legitimately on the market and not done as a shame exercise
Travel to and from the property for the purpose of inspection or repairs are deductible. If by car there are various methods of calculating these expenses.
Where the property is intestate, travel can be claimed if the principal purpose of the travel was for the property. However if the property inspection was incidental (i. e. one day out of a 5 day trip – the remainder being a holiday – then the claim will not be allowable.
Expenses that are deductible for rental properties:
Some of the expenses that are deductible are as follows:
- Managing Agent fees
- Council rates
- Water rates (if not paid by tenant)
- Land tax
- Repair and maintenance ( see above)
- Bank charges
- Letting fees
- Advertising fees to get a tenant
- Pest control
- Security patrols
- Building insurance or chattels
- Landlord insurance for defaulting tenants
- Legal expense to eject a tenant
- Bookkeeping fees re collection of rent and paying of expenses
- Tax agent fees on tax return preparation
- Body corporate fees
- Gardening and mowing expenses
- Electricity and Gas and gas if not paid by the tenant
Where and what to buy?
Should you buy an inner city property that is more expensive but may yield a higher capital gain factor in the long term or an outer city property that is, cheaper and more serviceable?
The answer to this question depends upon your circumstances and requires an analysis of your financial position.
We are associated with of a number of financial planners that recommend different types of property that have proven to produce results and offer good advice. Irrespective of the advice we always recommend that clients do as much homework as possible including if necessary independent property valuations if is close to purchasing.
There are a number of firms that are property advocates.They look for properties specifically based on the purchasers needs. These do not have to be new properties. We can point you in the right direction if you choose to go down this path.
To Positive or Negatively gear?
Ideally one wants a property that has no debt, who wants debt in the long term?
Whether one purchases a positively geared or negatively geared in the first instance should be based upon your individual circumstances.
You may want to go for income replacement compared to capital growth. This again depends your individual financial position as each individual’s position is different to anybody else.
Our independent financial planners can give you advice best suited to you needs.
Accounting record keeping
It is important that orderly record keeping occurs to ensure that all expenses are accounted for.
We at Robertson Accounting can assist you in this regard as well as ensuring the accuracy and hence the maximum tax advantage is available in preparing your Tax return.
CALL US KNOW TO MAXIMISE THE TAX BENEFITS YOU ARE GETTING FROM YOUR INVESTMENT PROPERTY