As we come to the end of another financial year, The Property Planner, Buyer and Professor delve into all things property tax and uncover the myths that can lead you astray on your wealth creation journey. 

In this episode David Johnston, Cate Bakos and Peter Koulizos take you through: 

  1. All the deductions you can claim on an investment property so that you do not miss a trick when completing this year’s tax returns. 
  2. Depreciation, what you can claim as a tax deduction on fixtures & fittings, the building and when do you need a depreciation schedule?  With thanks to some great tips from our good friend Mike Mortlock from MCG Quantity Surveyors. 
  3. Capital Gains Tax and how you can avoid nasty tax bills that eat into your wealth if you ‘property plan’ ahead. 
  4. Negative gearing, how it works and why it doesn’t last forever – at some point all properties become positively geared. 
  5. Tax variations and the risks of using this as an investment strategy.   
  6. How your mortgage strategy is the foundation to maximising your tax deductions (good debt) and reducing your non-deductible borrowings (bad debt) if you have the right mortgage strategy and structure in place from the moment you purchase a property.    
  7. Expats, the changing tax landscape and how laws relating to capital gains tax and land tax have changed this year.  
  8. And of course, our ‘gold nuggets’, plus a sneaky third nugget from our host Cate!

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Show notes

  • What you can claim as a deduction on an investment property? 
    • Interest on an investment loan. 
    • Council rates. 
    • Property management fees. 
    • Repairs. 
    • Body corporate fees. 
    • Insurances. 
    • Depreciation, if relevant. 
  • Depreciation:  
    • Building – Depreciation is claimable on properties built after 15 September 1987. You can claim depreciation at a rate of 2.5 percent per annum (on investment properties). That means that the government estimates that it takes 40 years for a building to be worth zero after being built.  
    • One aspect that must not be overlooked when purchasing/selling property is that capital gains tax is payable on depreciation of the building. In other words, every dollar you claim in depreciation increases the capital gain, by reducing the cost base from the original purchase price.  
    • You can claim depreciation at the full tax rate, you will be paying more CGT – if you are eligible for CGT discount, you need to hold for at least 12 months.  
    • Residential property 2.5% over 40 years, for commercial 4% over 25 years – commercial property devalues much quicker.  
    • Don’t dive straight into commercial acquisitions – they are like hotels on a monopoly board, you should get some houses first.  
    • Fixtures and fittings – A Quantity Surveyor will value the fixtures and fittings and set out a schedule that will determine how much you can claim each year on your tax return.  
    • Engaging the services of a Quantity Surveyor doesn’t guarantee that your depreciation deductions will make you negatively geared. That will be determined by the overall differential between rental income versus total deductible expenses.  
    • Often a quantity surveyor will give you an indication of whether it would be beneficial before you go ahead and pay for it.  
    • Examples of fixtures and fittings that can be claimed include ovens, dishwashers, heaters, coolers, floor coverings and window furnishings. 
    • You need to have bought the fixtures and fittings yourself to claim depreciation – if you didn’t pay for the asset and you’re claiming depreciation on it, that doesn’t make sense. Multiple owners were paying for depreciation on fixtures and fittings, more than the value of the asset.  
    • When do you need a depreciation schedule? 
    • The property commenced construction after the 16th of September 1987 
    • The property has been extended, had a new kitchen and bathroom after the 16th of September 1987 
    • You bought the property brand new 
    • Remember tax is the icing on the cake – it should never be the primary reason for purchasing a property. You want to optimise the deduction, but you’re giving the tax man $1 to get 40c back.  
  • Capital gains tax – where you make a gain on the increase in property value 
    • PPR is capital gains tax free – ex pats may be benefitting under the rule where you have a house in Australia, stay away for six years and rent out the house and still be capital gains tax free – that is changing this year. If you have been away for more than 5 years and sell it after 30th of June, it will be considered an investment property, based on the day that you bought it.  
    • Because you’ve held it for more than a year, you pay half the amount – eg: if the value increases $300,000 – you pay tax on $150,000. 
    • Tax rate – it depends on what your marginal tax rate is – if you’ve made a gain that is added on to your income – the last portion is taxed at 47c in the dollar.  
    • Hold until after you retire – you pay less tax, because you’re not earning an income. 
    • You can offset capital losses to capital gains – if you sell in the same financial year.  
    • Capital gain in a family trust – spread over 4 people, but if you make a loss, you cannot distribute that.  
    • Mortgage strategy allows you to maximise the deductions on your expenses. 
    • The date of the capital gain is based on the contract date – to purchase and to sell.  
  • Negative gearing: you’ve made a cash flow loss so negative gearing in itself is not a good thing. You’d never buy an asset if you were planning on making a cash flow loss forever. All properties at some point become cash flow positive – rents increase and debt decreases.  
  • An investment property is a business – you have income and expenses.  
    • Income – rent – $20,000 
    • Expenses: 
      • Interest = $18,000 
      • Body corporate = $2,000 
      • Property management = $1,000 
      • Repairs and maintenance = $500 
      • Rates, water = $1,500 
      • Depreciation = $500 
    • Total loss of $3,500 
  • If taxable income for the year is $100,000, your taxable income would be reduced to $96,500. Tax break of $3,500 x 37% tax rate = $1,295 tax saving.   
  • Positively geared properties – when you pay tax, you’re making money.  
  • Tax variations – you can calculate PAYG tax factoring tax back benefits you’re expecting at tax time – endorsement from tax accountant – guesstimating how much tax you’ll be getting back each month. If you get it wrong, you’ll have a tax bill that may hurt you at mid-year. This is a signal that you may be too highly leveraged and your strategy is very high risk.  
  • Land tax – Calendar year calculation – state government tax, go to the state government website. If you’re reviewing and you have two investment properties, which you are turning into your home. Read the land tax act and how it applies to renovations and contiguous properties and some of the changes that have just occurred.  
  • Mortgage strategy – good debt v bad debt, you want all efforts to reduce non-deductible debt. Redraw from investment loans to pay for deductible expenses. Because you are increasing deductible expenses and at the same time, keeping your cash to offset the non-deductible expenses.  
  • It pays to get clear advice – it’s not easy for a mortgage broker, and ours are strategic – go through the 100 of strategies to put in place to optimise tax deductions, separate facilities, understand the purpose test.  

David Johnston – The Property Planner’s Golden nugget: tax ubiquitous and full of land mines, there is a lot to understand and it’s something that is not that well understood, a great advisor will have a really good understanding of all the different areas of tax and can provide you with enough general knowledge and information to education and empower you to make great decisions for yourself. It will cost a lot of money for a tax advisor to sit down and write all of these pieces of advice. Select the right advisor who can arm you with that general knowledge.  

Peter Koulizos – The Property Professor’s Golden nugget: you get some very clever accountants that are very good at reducing someone’s taxable income on your tax return, you can feel like you’re a hero if you do that and save tax, but if doing that costs you an opportunity when your income is insufficient for a loan you have to think about whether it’s worth it.  

Cate Bakos – The Property Buyer’s Golden nugget: your tax can be a mine field, find yourself a good accountant, but make sure it’s a good property accountant, if you are an expat in particular, I’d encourage you to get in touch with one much sooner than later. 

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