Taxing Questions

Taxing Questions

By David Shaw, Director
WSC Group
Certified Practising Accountants and Business Advisors


 In the past 10 years I have been privileged enough to develop a professional relationship with over 2000 property clients from all over Australia.  During this time our firm has developed an extensive knowledge of the critical tax issues which face all property investors.  We have also amended tax returns from other tax professionals which have resulted in clients receiving over $1 million in additional tax refunds on their tax returns.

 I have outlined below some of the important issues that property investors face from a tax point of view:

I have outlined below some of the important issues that property investors face from a tax point of view:

Basics Issues

Tax rates
Most property investors accrue tax benefits at 34% as most investors have a taxable income between $37,001 and $80,000 per annum (2012 / 2013 year).  If your taxable income is between $80,001 and $180,000 per annum your tax benefits accrue at 38.5% (2012 / 2013) and above $180,000 per annum your tax benefits accrue at 46.5%.  

Tax Variations
As an accounting firm we lodge over 900 1515 (tax variation) forms each year.  A tax variation will give you tax benefits from your property as an increase in your pay packet.  If you are a serious property investor with one or more properties the variation is a must to assist you with your cash flow.  Also, don’t forget to initially complete or update your variation once the land has settled on your first or any subsequent property.

Interest during construction
Investors constructing housing should be aware that Tax Ruling 2004/4 states that providing you purchase land with a view to constructing an income producing asset then the holding costs during construction will be deductible.  Our group regularly amends tax returns because a deduction has not been claimed for these costs.  As we can go back at least 2 years there is an opportunity to claim previously unclaimed deductions for the interest during construction.

 

Advanced Issues

Multiple properties and Land Tax
As you accumulate more properties the payment of Land Tax becomes a pertinent issue.  As property investors we should be aware of the Land Tax threshold in each State.

 

Queensland

$600,000

Tasmania

$25,000

New South Wales

$396,000

ACT

$75,000

Victoria

$250,000

South Australia

$316,000

Northern Territory

No land tax

Western Australia

$300,000

Not only do thresholds vary but in some States there are reduced thresholds for Trusts, for example in New South Wales there in no Land Tax threshold for Discretionary Trusts.  Also some States assess Land Tax at different times of the year, for example  in NSW and Victoria Land Tax is assessed on 31st December each year whereas in Queensland, WA, SA and Tasmania Land Tax is assessed on 30th June each year and in the ACT Land Tax is assessed four times during the year.

Different focuses for different decades

  • First 10 years – This is what I call your building years.  You are using tax benefits to hold your property and for capital city property generally it takes somewhere between 5-6 years for your property to become neutral geared.  The first 10 years is the time when you purchase properties with a view of creating your property asset base.  This sets you up with a great platform to achieve compound growth in your next 10 years.
  • Second 10 years – The second 10 years is the time when your properties are neutral and then positively geared before tax benefits.  You will also see more serious compound growth in relation to the value of your property.  These 10 years present an opportunity to keep building on your portfolio using your equity and positive cashflow on some properties to pay for negative cashflow on other properties.
  • Third 10 years – This is called the golden years and your properties are now positively geared.  This is a period when additional properties could be bought and you have flexibility in your decision making process because of the substantial equity you have accrued in your properties.
  • Fourth 10 years – We don’t like to talk about this but one day we will be leaving our property portfolio to our family.  There is concessional CGT rollover relief for deceased estates passing properties onto the next generation but the rules vary for pre / post capital gains tax assets as well as for your principal place of residence.

 

Purchasing a property in superannuation
Since September 2007 self-managed superfunds have been able to borrow to purchase property.  You will need to set up an instalment warrant structure with a Bare Trust.  To complete the property transaction you should allow a minimum of two months to complete a transaction.

A purchase of this type however, has the following limitations:

  • You can only borrow for the purchase of the asset so construction loans are not permitted
  • Once paid down you can’t redraw the loan amount paid down
  • You cannot use the equity of the capital growth in the property to purchase another property unless the property is sold and the cash is returned to the superfund.

Advantages:

  • Any capital gain will only attract a maximum of 10% tax in the superfund if the property is held for more than 12 months.
  • There will be zero tax on any capital gain if the property is kept and only sold when the members are in pension mode.

 

For a free consultation and financial health check please call 1300 365 125 or email info@wscgroup.com.au

 

Do you have more than $120k in your super fund? You could use your super to buy property - Find out how

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