By David Shaw, CEO of WSC Group
Certified Practising Accountants and Business Advisors
Being a successful property investor does not only involve having a good knowledge of property but also engaging skilful advisers to assist you in tax minimisation and having the right loan structures.
The more I advise clients in the tax structuring of their property investments, the more I realise that if you’re not careful you can create a number of problems for yourself which can cost time, effort and in some cases substantial amounts of money. This article outlines a number of crucial issues for the property investor.
As a general rule the following costs are deductible in relation to your investment property:
- Council rates – This includes any fees which the Council has charged including garbage fees and general service fees.
- Water rates – This includes quarterly charges as well as water excess fees.
- Insurance – For building, contents and landlords insurance.
- Interest – For both the main loan, which is typically 80% or 90% of the purchase price of the property and the shortfall loan, which is typically borrowed against the equity in your home.
- Travel – Not for pre-purchase expenses or for travel during construction but after the property is rented out.
- Financing costs – E.g., application fees, registration fees, mortgage insurance, search fees, building progress claim fees and other bank related borrowing costs. These however must be written off over 5 years unless they are under $100 where they are 100% deductible.
- Depreciation – Obviously new is better because building depreciation is calculated on the cost it actually took to build the building. Building depreciation is calculated at 2.5% and fittings depreciation is calculated at between 5% - 37.5% depending on the item being depreciated.
- Other Costs – Postage costs, telephone costs and costs in liaising with Agents. Postage costs might include the posting of documents in relation to the daily undertakings of the investment property.
- Land tax – As much as we hate paying this tax at least it is deductible.
- Repairs – Generally small repairs are deductible but larger refurbishments would most likely have to be capitalised and depreciated. There are also rules in relation to initial repairs which limit deductibility when you first purchase a property.
- Strata fees – This is mainly in relation to units although you have to be careful of some sinking fund costs which may need to be capitalised.
It is important to make sure that your record keeping is of a high standard as often clients miss deductions due to their record keeping being poor.
Ownership of Properties
I often have clients come and see me who have not considered this a very crucial issue. As tax deductions are based on your marginal tax rate it is important that the higher income earner, in most cases, owns a greater proportion of the property. The marginal tax rates for the 2013 - 2014 year are as follows:
||$0 - $18,200
|19% plus 1.5% Medicare levy*
||$18,201 - $37,000
|$3,572 + 32.5% plus 1.5% Medicare levy*
||$37,001 - $80,000
|$17,547 + 37% plus 1.5% Medicare levy*
||$80,001 - $180,000
|$54,547 + 45% plus 1.5% Medicare levy*
* From 1 July 2014, the Government will increase the Medicare levy from 1.5% to 2%.
Generally speaking, if one party earned $100,000 and the other party earned $60,000 then you may wish to have the property owned ‘tenants in common’ say 99/1 (as opposed to a joint tenancy which is a 50/50 ownership). This is sometimes limited by loan requirements with the banks but you should always try to maximise your deductions depending on earnings.
A Tax Variation is simply a pro forma tax return whereby you obtain your tax refund through having your payroll office reduce the amount of tax taken out of your weekly, fortnightly or monthly pay. Whenever I talk to a client about the importance of a Tax Variation I point out that the Tax Variation pays for between 50% and 96% of the cost of a property and while the Government has this extra tax it doesn’t pay you interest when you lend them money through the year. It is better to receive the $6,000 - $8,000 a year tax benefit which is generally received in relation to a newly constructed house and land package on a weekly, fortnightly or monthly basis instead of waiting until the end of the year when you complete your tax return. Not doing this may hamper your cash flow during the year and is not helpful if you wish to purchase additional properties.
We complete over 900 Variations for clients each year and I only have a couple of clients with more than 3 properties that don’t complete a Tax Variation.
Purchasing property in Superannuation
Since September 2007 self-managed superfunds have now 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, as a minimum, two months to complete a transaction of this type.
A purchase of this type however, has the following limitations:
New developments in the past 12 months confirmed by the ATO
- You can only borrow for the purchase of the asset so construction loans are not permitted. However, you can structure a completed house purchase if you are purchasing a completed house and land package
- Generally you can only borrow on an 80% LVR for residential property
- 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
- You cannot sub-divide property when an instalment warrant loan is involved
- Any capital gain will only attract a maximum of 10% tax in the super fund if the property is held for one year
- There will be zero tax on any capital gain if the property is kept and only sold in pension mode
The ATO has also clarified a number of issues in the past 12 months:
- Can you refinance loans – YES
- Can you purchase off the plan – YES if structured properly
- Can you purchase for initial repairs - YES
In addition to the ATO clarification we are now seeing advantages for clients in the following areas:
- Making super contributions which are effectively tax free by off-setting these contributions against tax losses generated by tax deductions
- Paying only 31.5% tax on excess contributions if the fund is generating sufficient property losses with multiple properties
For a free consultation and financial health check please call 1300 365 125 or email firstname.lastname@example.org
The above information is supplied by WSC Group.
Disclaimer: while due care is taken, the viewpoints expressed by sponsors do not necessarily reflect the opinions of Your Investment Property.
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