Hidden Tax Rules Investors Must Know

By Eddie Chung | 02 Nov 2016
Eddie Chung
Buying a property

Do you know… 
That you now have a potential withholding tax obligation when you buy a property in Australia, if the value of the property is $2m or more? This new tax rule started on 1 July 2016 and effectively makes all purchasers potential tax collectors if they buy real estate (or other taxable Australian property) from a seller who cannot produce a Clearance Certificate issued by the ATO declaring that the seller is an Australian tax resident. 

If the seller does not produce a Clearance Certificate, the amount to be withheld is 10% of the purchase price, unless the seller can provide a Rate Variation issued by the ATO that may reduce the withholding tax rate. 

Failure to withhold may give rise to penalties and general interest charges for the purchaser, so beware if you are buying a property at that value.

Do you know…
That you can negatively gear a property that is located outside of Australia in the same manner as a property located within Australia? As a tax resident of Australia, you are taxed on your worldwide income and capital gains. Therefore, if you have an investment property overseas, you will need to bring to account all the rental income you derived on the property, but you are also entitled to claim all the expenses you incurred on the property, including interest on loans you may have drawn down to acquire the property. 

If the total expenses you incurred on the property exceed the rental income you have derived, you may use the net rental loss to offset your other assessable income in Australia, subject to any exceptions provided for by the Double Tax Agreement between Australia and the other country in which the property is located. Also, be mindful that you may have tax obligations in relation to the property in the foreign country in which the property is located.

Do you know… 
That if you buy a property from a seller and the contract does not apportion the purchase price between the property and other depreciating assets included with the property, you are allowed to reasonably apportion the purchase price across the different assets with the help of an independent valuer or based on your own estimates? The apportionment can make a material tax difference to you going forward as different rates of depreciation and capital works deductions apply to different assets. 

On the other hand, provided that you and the seller are dealing with each other at arm’s length, you may detail the apportionment in the contract in writing, which will generally be acceptable to the ATO provided that the apportionment is made on a reasonable basis.

Do you know… 
That the fee you pay to a buyer’s agent for them to help you buy an investment property is generally not tax deductible, because the nature of their services is of a capital nature from your perspective? However, you may be able to include the fee in the cost base of the property as an incidental cost on purchase, as long as the fee is clearly related to the property you bought. This will enable you to effectively claim a deduction and reduce any capital gain derived on the property if and when you sell it in future. 

However, if you have incurred a buyer’s agent fee on a property you did not end up buying, the fee will neither be tax deductible nor included in the cost base of any asset you own.

Do you know…
That the cost of you attending property investment seminars is generally not tax deductible to the extent that the course relates to future property investment strategies or takes place before you have acquired an investment property? In contrast, if the course relates to managing properties you already own or how to maximise your investment returns on your existing properties, then the cost of the course may be tax deductible.

Owning a property

Do you know…
That the costs you incur when you fi rst buy an investment property for any initial repairs to fi x damage that existed at that time are not tax deductible? These costs are treated as capital in nature but may be included in the cost base of the property for future depreciation or capital works deduction claims. 

However, once the property has been rented out for some time and you incur costs to repair the wear and tear caused by your tenants, those repair costs will be tax deductible upfront, unless they are related to the acquisition of depreciating assets or to structural improvements, or constitute a replacement of an entire functional unit. You may claim capital works and/or depreciation deductions on such expenditure instead.

Do you know…
That you do not always have to buy a depreciation report from a quantity surveyor to enable you to claim capital works deductions? A simple way to save the cost is to ask the seller for the original construction expenditure in respect of the capital works or, if they do not have that information, a copy of the depreciation report prepared by a quantity surveyor; these are perfectly fine for you to use. Chances are that if the seller held the property as an investment, they would already have the details of the construction expenditure or a depreciation report prepared by a quantity surveyor to enable them to claim the deductions. 

Having said that, if you have to incur your own cost to obtain the report, you can take comfort in knowing that the cost will be tax deductible to you in any event, provided the quantity surveyor is registered under the Tax Practitioners Act to provide such a report as a tax agent’s service.

Do you know…
That if you acquire a property with a building and/or structural improvement on the land and you have used the property for income-producing purposes, you may potentially claim the ‘undeducted construction expenditure’ on the building and/or structural improvement if they are subsequently destroyed? This will be the case if the destruction is accidental or otherwise – you are generally allowed to effectively claim all the unclaimed capital works deductions associated with the building and/or structural improvement all at once upon their destruction, which may provide material tax savings.

Do you know…
That you are generally not allowed to claim borrowing costs in one go as they are incurred? Instead, you are required to claim the borrowing costs over the shorter of the term of the loan and five years. 

In addition, depending on the time during the income year at which the cost was incurred, you will have to apportion your claim based on that timing. For instance, if you incurred a borrowing cost of $1,200 in June and the term of your loan is fi ve years, you will need to apportion the claim and are only entitled to claim $1,200/5 years x 1/12 months = $20 for the year in which the borrowing cost was incurred. 

Do you know…
That not all body corporate fees are tax deductible, even though they are incurred on your investment property? Periodic body corporate fees that are general in nature are usually tax deductible. However, if the body corporate imposes a special levy for the purpose of making a structural improvement to the property (eg adding a storage room) or replacing an entire functional unit (eg replacing the existing lifts with new ones), then the body corporate fees will not be tax deductible. 

Selling a property

Do you know…
That if you have sold your investment property but the proceeds of the sale are not sufficient to enable you to pay out the entire loan that was originally drawn down to buy the property, the interest expense accrued on the remaining loan may still be tax deductible, even though the property has been sold and you are no longer deriving income from it? 

The same applies if you refinance the remaining loan – the interest should still be tax deductible. Be careful, however. If you have the capacity to pay out the loan but choose not to do so, the interest on the remaining loan may no longer be tax deductible on the basis that it may no longer be associated with the income-producing purpose of the original loan.

Do you know…
That if you break a ‘fixed loan’ by paying it out earlier than its originally agreed term and the bank charges you an ‘economic cost’, which is really penalty interest for terminating the loan prematurely, the economic cost may be tax deductible? This is available to the extent that the mortgage had been given to secure the loan that was used to acquire your investment property, on the basis that the cost is an expense incurred to discharge a mortgage.

Do you know…
That if your property is compulsorily resumed by an Australian government agency, you may be able to utilise a CGT rollover such that any capital gain you have derived on the involuntary disposal of the property can be ‘rolled over’ into a replacement property by reducing the cost base of the replacement property for future CGT purposes? Be careful with the fine prints of the rollover rules as the amount of compensation you receive may affect the operation of the roll-over, so make sure you enlist the help of your tax adviser as these rules are far from straightforward. 

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