Property Investment is Lucrative – for some!
The Australian Tax Laws about Property Investment and Capital Gains (and sometimes loses) are ever-changing.
Do you really understand what you’re getting into? It doesn’t have to be a mystery.
Here, at Knox Taxation & Business Advisory, in Boronia, we have the answers to some of those burning questions you may have about what you should and shouldn’t do when it comes to Property Investment.
Whilst it’s something that everyone seems to be dabbling in these days, our strong advice to you is to seek professional advice so that you’re not left in the dark when it comes to making money on your investments, and particularly not caught when it comes to assessing your purchased property for Capital Gains Tax at the End Of the Financial Year.
At Knox Tax, we’d be pleased to take you through a consultative meeting, and give you a copy of our Property Investment Booklet.
Here, you’ll find details about how to enter the Property Investment market, and be informed about what to watch out for.
MAKE YOUR APPOINTMENT WITH KNOX TAX
CONTACT US – (03) 9762 7344
We’re here to help de-mystify what you think you know about Capital Gains Tax, and replace that with sound knowledge and advice. We’re always completely up-to-date about all things business and investment.
FREQUENTLY ASKED QUESTIONS ABOUT
CAPITAL GAINS TAX
– By Coral Page – Principal, Knox Taxation & Business Advisory
QUESTION ONE: Are your eyes wide open, or just peeping out of the corners?
There’s a lot of talk about buying into an investment property, but, professionally, I feel compelled to point out some of the things you ought to consider before buying something ‘off-the-plan’, or over-committing yourself with a property purchase believing it will pay for itself in rent, sustain you into retirement, and/or boost your SMSF.
Having been in public practice as an Accountant for over twenty years, and working with hundreds of property investors, I’ve seen the successes and failures – and particularly those who have neglected to consult with their Accountant or expert adviser, and have gone on to make bad and/or costly decisions. This may have been due to a poor choice of property, poor structuring of ownership, and/or not ensuring the affordability of the property was truly investigated and maximised.
Tax laws are complicated and forever-changing. You might address a particular issue, and then find this opens a “whole can of worms” – For instance, you could structure the ownership of your property to take advantage of the “now”, but where does this position you as a taxpayer (for Capital Gains Tax) in the future? There are many “grey areas” where the law is unclear and open to incorrect interpretation. It takes knowledge, experience, and usually the wisdom to ask a professional to (at least) bring you up to speed on what you should be aware of, in order to make the best decision possible.
I have personally witnessed the following scenarios, where ill-informed Property Investors have proceeded to:
- Buy several negatively geared properties at once, only to then find that there are no tax advantages in holding two of the properties, because the tax losses not only placed their income below the tax free threshold, but actually resulted in a negative income outcome;
- Buy properties in a trust and ‘expect’ the losses to be transferred to their individual return, and thus deliver a lovely refund. In fact, that’s not actually the case;
- Buy two properties in a company structure, on the advice of a “friend”, only to then discover there would be no Capital Gains Tax concessions – should those properties be sold;
- Have to sell their investment property at a loss, because they’ve been caught by property spruikers and developers. The property they’ve purchased subsequently lost value and/or hasn’t been tenanted as expected. Zero tenant means zero income. The owner then became unable to afford to hold the property, and the potentially forced sale price ended up not even covering the borrowings;
- Purchase an old property, pour significant funds into renovating it, and then discover these renovations are not tax deductible in their first tax return – and, worse still, must be included in the capital cost of acquiring the property. (Note: Investors may gain some consolation from the fact that it may be possible for these improvements to depreciated at 2.5% per annum);
- Purchase a property in joint names. Half of all the losses were then wasted, because one of the co-owners was not earning any beneficial income (and is not likely to);
- Purchase properties without being aware of allowable deductions. This may have eventuated where Tax Returns were prepared over a number of years, and the buyer had no knowledge that they could be claiming extra deductions of $3,000 to $4,000 per annum (that didn’t require an initial cash outlay).
I can only reiterate that, when entering into the property investment arena, it is essential to set the correct foundations. This includes:
- Selecting good property that will appreciate in value
- Financing it correctly
- Ensuring the ownership is as advantageous as possible, and
- Exploring every available means to take advantage of making the property affordable to hold.
This information is only the ‘tip of the iceberg’ when it comes to understanding the complexities, advantages and pitfalls.
Read on for some more of the finer points of Capital Gains Tax.
We’re your Capital Gains Tax Accountants in Boronia.
QUESTION TWO: Do you understand the notions of Affordability, Structuring and How to Decide on Whom to Invest With? And can you actually afford to become a Property Investor?
As Tax Accountants, and Professionals, our role is to help you look after your money, so we want to help you:
- Ensure that you minimise the holding costs of your investment, and
- Ensure the property is as affordable as possible.
Firstly, it’s vital that you purchase the right property, and that there is neither hint nor likelihood of extended tenant vacancies.
For our clients who are thinking about investing in a property, we assess the client’s financial situation and give an estimate of the weekly out-of-pocket cost they can expect to incur. I often have clients amazed at how affordable holding a property can be for their particular situation, or, on the other hand, it may be out of their reach at present, and they have to accept that saving or earning a little more income has to come first – before they take the plunge.
It’s important for our investing clients to not suffer with interest rate rises either, and given the interest rates are so low at present, I like to factor in scenarios of a one to two percent interest rate increase (to demonstrate what the extra cost is likely to be), thus ensuring my clients are aware of any potential rise, and will need to be able to accommodate it.
When, as a potential investor, you’ve set your sights on a particular property, and have received some detailed information, we prepare a cash flow that will demonstrate the real out-of-pocket expenses you’ll incur, and the after-tax cost per week – and that may be completely different to what spruikers and developers are telling you as they try to close the sale.
A combination of correct ownership structure, financing, depreciation reports, and tax instalment deduction variations all work together, to ensure that the cost of holding the property is minimised. And that’s something more that we can help you with at Knox Taxation & Business Advisory in Boronia.
Some of the key areas we address are:
- Tax Depreciation Report (Comparing Existing Property versus New Property), and
- Tax Instalment Deduction Variations.
QUESTION THREE: How should I structure my investment?
Establishing the correct foundation through structuring is vital, and it’s very important to receive sound advice from an expert in this field – not from a mate, or the bloke at the pub, nor the Real Estate Agent.
Again, this is something we can help you with at Knox Taxation & Business Advisory in Boronia.
Generally, the capital gains, the losses on sale, and the profits and losses incurred each year must be apportioned according to the ownership on the title – not to who is on the loan documents.
There is no one ideal structure for holding investment property, but it is important to take into account your personal goals, your work goals, and how long you’re likely to hold the property. For example, if a couple is purchasing the property, you should consider whether:
- One party is likely to cease work in the short term, or return to work. And what are your actual projected incomes?
- Do you wish to build a portfolio of property?
- Are your properties likely to become positively geared within the next few years, or are you, as the investor, in the position to positively gear some property?
You should also ask us about Asset Protection – maybe one of your ownership parties owns a business, and it may be important not to have valuable assets in their name. If you’re not sure, talk to us today at Knox Tax. We’ll set you straight.
QUESTION FOUR: Should I look at my ownership of an investment property as an individual, or as a partnership?
Do you realise that when a couple purchases a property, under joint ownership, the ownership defaults to 50:50 ownership?
However, should two or more of you be purchasing a property, and wish to vary the ownership to suit your situation, then the property needs to be purchased under “tenants in common”. This not only allows you flexibility in ownership percentages, but also allows each party to will their share of the property to a beneficiary of their choice. This, however, is not the case with joint ownership.
If it’s expected that your property will be negatively geared for a number of years, and the negative gearing benefits are likely to be substantial, then it makes sense for the high income earner to own the asset, and offset the tax deduction against their other income. However, a disadvantage of this strategy is that if the asset becomes positively geared, or is sold, and a capital gain is made, then that net profit or capital gain will be taxed at the higher earning individual’s more inflated marginal tax rate.
QUESTION FIVE: Company or Trust?
A significant disadvantage of holding a negatively geared property in a Company or Trust is that the excess losses are ‘trapped’ in that Company or Trust. They cannot be used to offset the investor’s/investors’ taxable income and, thus, deliver an attractive refund to assist with the costs of holding the property.
The losses are carried forward and can be used to offset future profits generated in the Company or Trust. However, these losses do not offset future capital gains, much to the disappointment of many of our clients. Capital gains can only be offset by capital losses.
At Knox Taxation & Business Advisory, we generally advise against the use of a Company to hold an investment property. A Company could be used to hold a property if it is positively geared, and where the investor wishes to use the 30% Company tax rate, or help with asset protection.
However, a Company does not give the asset the protection that a Discretionary Trust does, as the shares owned by a taxpayer are assets, and can be sold to satisfy the debts of a taxpayer.
The most significant disadvantage of holding property in a Company is that the Company is not entitled to a 50% discount on Capital Gains Tax; whereas an individual taxpayer is entitled to this discount. So do be wary. Not being able to access the Capital Gains Tax discount is a disincentive for holding assets in companies.
A Discretionary Trust, however, provides superior asset protection because, even if an individual taxpayer is bankrupted, the assets in the Trust are protected (as the individual owns no interest in a Discretionary Trust).
A Discretionary Trust can be used to distribute capital gains to beneficiaries in an effective manner, and the individual beneficiary is also able to obtain a 50% discount on Capital Gains Tax (in their own individual returns).
We’re here to further your understanding about the complexities, advantages and pitfalls of Capital Gains Tax, and we’re determined to help you make informed decisions about investing in property.
We’ll explain the terminology in much simpler terms that relate to your particular situation, make you aware of what you’re getting into, and carefully assess where you’re coming from – and, more importantly, where you’re aiming to get to.
A professional consultation with us, your Capital Gains Tax Accountants in Boronia, could well make the crucial difference between making a fantastic, or a diabolical decision that could affect YOUR future financial growth.
At Knox Taxation & Business Advisory, we’re much more than ordinary Accountants. We know business, how to help you grow, what you need to know to be financially protected – and how to explain everything until it sinks in, in words that work for you. One of those things we excel at is giving you the right advice to help you achieve a successful investment outcome.
QUESTION SIX: When purchasing property, what are the SMSF, Tax Depreciation & TID Variation Considerations I should be aware of?
You’ve already heard about the notion of entering into buying, working out if it’s affordable, structuring your investment, and with whom you should invest.
Have you ever been nagged to death by your child because she wants a pony, and she wants it now? “But Dad, I’ll look after it, I’ll ride it, you won’t have to do anything, and it’ll make me very happy – and it’ll keep me busy so I won’t annoy you!”
Mmmmmmm. Do you look at those big brown eyes and just say, “Okay, Pumpkin.”?
Thankfully, Dad does the research and finds out it’s going to cost $35 a week to rent a paddock, riding equipment will need to be purchased, it’ll need new shoes every six weeks, and then hard feeding in the summer. And then there’s bound to be vet bills, Pony Club fees, caring for the darn thing when the family goes on holidays – and the list goes on.
What seemed to be a shiny idea at first has suddenly turned to a nightmare. The same can be said for an adult drawn to the idea of investing hard-earned money into that ‘great new development up the road’.
It doesn’t have four legs and a tail – but all of your successful friends are doing it, and the Real Estate Agent makes it sound so appealing – and soooo incredibly simple!
Read on… to help you plan, prepare, and develop knowledge about the lurks and perks of buying into that alluring Investment Property.
QUESTION SEVEN: I’ve now got access to my Self-Managed Super Fund. Can I use it to buy a money-spinning property?
In recent years there’ been considerable publicity regarding purchasing residential property in a Self Managed Super Fund (SMSF), BUT this structure is only suitable for some people. It does have the advantages of the ultimate asset protection, and tax relief. However, for these tax benefits to be relevant, the property is locked away until the beneficiaries are at least 55 to 60 years old.
It’s important that the fund retains liquidity (i.e. it holds assets such as cash and securities that can be quickly converted to cash), so it needs a good balance of liquid assets as well as a property.
My view is that if residential property is to be held in a Self Managed Super Fund the deposit should be large enough to ensure that the property is positively geared, particularly when the limits for contributing to the Super Fund are capped at such a low level.
Many property spruikers and real estate agents are pushing potential investors towards Self Managed Super, which has the potential to be disastrous for many would-be investors. This trend has caught the attention of ASIC, and they have issued warnings accordingly.
Every investor’s personal and financial situation is different. I have clients who want to set up a SMSF and purchase property, believing it is going to generate a wonderful windfall for them in retirement. Just because a relative, business associate, or mate has property in their Super Fund does not mean it’s right for you.
There are many elements to consider when investing in property in a Super Fund, including the cost of setting up a SMSF and paying the ongoing annual costs. It is vital that you consult with experienced and reputable experts such as professional Financial Planners, Self Managed Superannuation Fund experts, or us at Knox Taxation & Business Advisory in Boronia. We’re your expert Accountants and Advisers who’ll take the time to impress upon you the importance of ensuring that your personal and financial situation and goals are all taken into account.
QUESTION EIGHT: Can you organise financing for me, or shall I just go to the bank?
Whilst we’re your Capital Gains Taxation experts at Knox Tax, this is a topic best addressed by your Mortgage Broker. They have the certified expertise to guide you with up-to-the-minute knowledge about what you should be aware of when it comes to establishing a loan for your proposed investment property. For example – Interest only loans may be most affordable, but many clients will want the option of being able to pay out the loan on the property without penalty, particularly if nearing retirement. Talk to us TODAY and we’ll refer you to a Mortgage Broker that we highly recommend to give you the best factual advice.
QUESTION NINE: What is a Tax Depreciation Report? Do I really need one?
Investors who purchased a property that was built after 16th September, 1987, should always invest in having a Tax Depreciation Report prepared. For investment properties constructed after this date, you will be entitled to claim a 2.5% depreciation rate on the cost of the building. It is this claim (for the cost of the construction of the building) that can make a property much more affordable for you as the investor, as a significant deduction can be claimed without the requirement to make a cash outlay.
It’s important to be aware of a little-publicised fact, that being that this 2.5% building write-off reduces the cost base of the property and will increase Capital Gains Tax upon disposal. However, it is twice as effective to claim the 2.5% deduction in the annual rental return than it is in the eventual cost base and capital gains calculation, due to the 50% Capital Gains Tax discount. This can work well for you (as an investor), if you’re on a high income and can make good of the tax deduction, but are not planning to sell the property until you retire, or if and when your income is reduced.
Generally, this Tax Depreciation Report is best obtained through a Quantity Surveyor for an approximate cost of between $600 and $700. This cost will be well and truly covered in your first investment year through tax savings, AND the cost of the professional Tax Depreciation Report is also tax deductible. If you’d like more clarification, you’re more than welcome to talk to one our experts TODAY – at Knox Taxation & Business Advisory in Boronia.
QUESTION TEN: Can you explain what a TID Variation is, and how it works?
We certainly can!
Just for starters, are you aware that the Tax Office allows you, as a Property Investor, to submit a “TID Variation”, that authorises an employer to deduct a reduced amount of tax from your regular pay?
This means that, instead of waiting for the nice big refund when your Tax Return is lodged at the end of the financial year, you can receive extra money in your pocket throughout the year. But do remember and be aware that your year-end refund will be reduced as a result.
Let’s say you’re waiting for a Tax Refund cheque of say $5,000 after 30th June 30, for the whole financial year. If you qualify for the TID Variation as a Property Investor, you can, instead, receive an extra $100 per week in your weekly pay packet throughout the entire year.
The ATO doesn’t pay you interest on this property tax because you waited for your end-of-year refund, so it is far better that you take advantage of having that money passed on to you weekly, so that you can then benefit from the interest yourself throughout the year.
Do be aware, that care needs to be taken when you’re lodging a TID Variation. It is a provisional Tax Return based on estimates for the upcoming Financial Year.
Consequently, it is important that you get sound professional Accounting advice from us, and to err on the side of being conservative when calculating expenses, rather than find out later that you have not paid enough tax throughout the year.
If you want to know more about TID Variations pertaining to your individual situation, make an appointment with us TODAY.
You’ll get the answers you’re looking for at Knox Tax.
And you thought buying a pony was a big decision!!! Just as your child may plead to persuade you that they know all there is to know, the same goes for investing in property. Sometimes we can make ill-informed decisions based on emotional excitement, or because we’re persuaded that ‘she’ll be right’ by someone else who thinks they have all the answers.
The very best advice I can give you is to think hard about any investment decisions, ask the right questions of the professionals at your fingertips, and do your homework.
BUT WAIT – THERE’S MORE!
- What expenses you can claim
- What expenses you can’t claim
- What’s claimable and deductible immediately (such as Repairs and Maintenance, Interest on Loans, Body Corporate Fees, Advertising for Tenants, and Travel to your investment property), and
- What’s claimable and deductible over a number of years to come (such as Borrowing Expenses, Depreciation of your Asset’s Value, and Capital Works Costs).
QUESTION ELEVEN: What Property Investment Expenses can I claim?
So you’ve taken the plunge! You’ve bought that alluring investment property. And you’re more excited than a Cheshire cat with a fresh bowl of Whiskers with hundreds and thousands on top.
Time to start collecting receipts, open a new manilla folder, sit down with the calculator and hopefully start collecting rent.
You can almost taste that extra income, but you find yourself staring cross-eyed at the balance sheet, wading through countless articles on tax deductable items for investment properties, and your stomach starts to churn as if you actually ate that bowl of sardines meant for the cat!
Ask us about Property Investment and Capital Gains Tax at Knox Taxation & Business Advisory in Boronia.
We’ll take you through the information you need to understand when it comes to what you can claim as expenses (both immediately and in the long term).
It’s important to know exactly where you stand right from the word go – and preferably get a handle on it before you sign the Deed of Purchase.
Read on for more FAQs.
QUESTION TWELVE: What expenses can I claim when I purchase an investment property?
Typically, there are four category questions that we’re deftly able to answer, and they are explained as follows:
(i) PRIVATE INVESTMENTS
If my property investment is private in nature (e.g. it’s a holiday house) how do I know what is and isn’t deductible?
Put simply, if your investment property is not earning rental income, then your expenses cannot be deducted.
Expenses on a vacant block of land need to be capitalised and included in the cost base for the Capital Gains Tax calculation – unless the property is earning (for example) agistment or farming lease income.
If your investment property is a holiday home and it’s let for part of the year, then your expenses must be apportioned between the rental period and your own private use.
(ii) IMMEDIATE DEDUCTIONS
Can we claim an immediate deduction for our investment property in this Financial Year?
This is an area where it’s best to seek professional advice, because it’s so important to get it right.
The list (below) is not exhaustive, but it does outlines the typical deductions we can claim in your Annual Rental Property Return.
In order to claim these expenses the property must actually be available for rent. You must be able to prove/show that the property is listed for rental with an agent, or that you have at least been advertising it for rental. You must also demonstrate that the requested rent is consistent with the market.
I’ve expanded on four of the most queried deduction categories for you:
- Repairs and Maintenance Deductions
The deductibility of repairs and maintenance can be a very grey area. For instance, painting would normally be considered maintenance, and be fully deductible in the year the expense is incurred. However, if your investment home was newly acquired, and needed to be painted at that time, the painting is deemed to be part of “initial repairs” – thus forming part of the capital cost. Judgment needs to be exercised to ascertain at which point the painting is no longer classified as “initial repairs”.
Repairs generally relate directly to wear and tear, or other damage, that occurred as a result of renting out the property. For example, if your tenants have damaged the property in the early years, then painting becomes a repair. Should this occur, however, I highly recommend that you take photos as evidence of the damage caused by your tenants.
However, if you are planning to rent out your main residence, or even a property you have inherited, and painting needs to be undertaken to get the property ready for rental, the painting can be claimed in the first year.
- Interest on your loan/s
If you’ve taken out a loan to purchase a rental property, the interest charged on that loan can be claimed as a deduction. However, the property must be rented, or available for rental, in the income year for which you claim the deduction. If it’s not rented or available for rental the income is not deductible, or it must at least be apportioned.
If you choose a Line of Credit to finance your property purchase, we recommend that the loan not be used for private purposes. If there is a fluctuating balance (due to a variety of deposits and withdrawals) and the loan is used for both private purposes and for rental property purposes, this can quickly diminish the amount of interest that can be claimed as a tax deduction.
Be aware that the calculation of interest, that can then be included in the rental deductions, in this type of instance, is also quite involved and time-consuming. Feel free to talk to us at Knox Taxation & Business Advisory. We’ll be happy to explain it further and help you with a formula for making the correct deduction calculations regarding interest on your loans.
- Body Corporate Fees (or Owners Corporation Management Fees)
These fees, covering general maintenance and administration for your collective property and grounds, are deductible in the year incurred. However, of this fee, funds are put aside by the Body Corporate Management Committee, for a special purpose fund, and thus may be used for capital expenditure. This aspect of your Body Corporate Fees must be capitalised. Need to know more. Call us at Knox Tax.
- Travel to collect rent, inspect or maintain the property
You may have heard the fallacy that you are entitled to make two trips per year to inspect your investment property. This has (possibly) arisen in the belief that this is reasonable, as far as the Tax Department is concerned. However, claiming two trips per annum, to travel interstate to “inspect rental properties”, is likely to be considered very unusual and raise eyebrows (which could then lead to an official audit by the Tax Department).
On the other hand, if you have decided to personally collect the rent, or undertake the garden maintenance for your property, then monthly visits (twelve trips per annum) would not be unreasonable.
With interstate property, if you fly to inspect the property, stay overnight and return home the following day, the airfare and accommodation expenses would be allowed, provided the whole purpose of the trip was to inspect the rental property. However, should the trip be combined with a holiday, then the expenses may need to be apportioned, taking into account what the main purpose of the trip was. You will need to decide the answer to this question – was the holiday incidental to the trip, or was the inspection of the property incidental to the trip?
Other deductible areas we can help you with
- Council and Water Rates
- Insurance (such as Building and Contents, and Public Liability)
- Land Tax
- Gardening and Lawn Mowing
- Agents Fees and Commissions
- Advertising for Tenants
- Stationery, Telephone and Postage
- Legal Expenses (incurred in relation to your tenant, not in relation acquisition or disposal)
- Borrowing Expenses.
At Knox Tax, you’ll find the answers you’re looking for about all of your Deductible and Non-Deductible Property Investment expenses.
(iii) EXPENSES DEDUCTIBLE OVER A NUMBER OF INCOME YEARS
(and this includes depreciation of fixtures and fittings)
There are three types of expenses that you may incur for your rental property that may be claimed over a number of income years. They are:
- Borrowing Expenses
- Amounts for the decline in value of your depreciating assets, and
- Capital Works Deductions.
These are expenses directly incurred in taking out your loan. If your total expenses are less than $100, the expense can be written off in the same year. Otherwise, if the cost is more than $100, your borrowing expenses must be claimed over a period of 5 years (or the period of the loan).
(iv) DECLINE IN VALUE OF DEPRECIATING ASSETS
Depreciating assets are generally items than can be easily removed and replaced, and these are not part of the building structure. For example – a free standing bookcase can be depreciated at the higher depreciation rates, although a built-in bookshelf must be claimed at just 2.5% (as part of the cost of construction or special building write-off).
The types of fixtures and fittings (plant and equipment) that the Tax Office allows you to claim deductions for are items such as: stoves, dishwashers, curtains, heaters, air conditioners and carpet. The depreciation rates typically range from 10% to 25% of the cost (per item), which can be claimed per annum. If your list items are less than $1000 in value, they can be added to a “low value pool”, and written off at 18.75% in the first year, and 37.5% thereon.
Plant and equipment costing less than $300 (per owner) can be written off each year. For example – for joint owners, items under $600 can be written off, as the cost of the item can be split between the owners, resulting in a $300 return each.
QUESTION THIRTEEN: What are Capital Costs?
Earlier, I referred to the acquisition of a Building Surveyor’s Report, and it is in this that the capital cost of constructing the building can be written off at 2.5% – for normal residential property, over the next 40 years. This applies to property built after 16 September, 1987, and is often referred to as “special building write-off”.
It is calculated on the original cost of constructing the building, plus improvements at their original cost. It has nothing to do with the purchase price of the home.
Up until May 1997, this building write-off was of significant benefit, as the capital cost claimed did not have to reduce the cost base of the building, and therefore the capital gain wasn’t increased. However, the building write-off applied to properties built since this date reduces the original cost of the property – and therefore increases the capital gain.
For a full explanation about how Capital Costs may be ascertained for your investment property, we recommend seeking professional advice. Better still, come and see us at Knox Taxation & Business Advisory. Not only will we explain the ins and outs of Capital Gains Tax, Capital Costs, and everything else, you’ll also be able to Tax Deduct your visit.
QUESTION FOURTEEN: Capital Gains Tax – friend or foe?
If you acquired a property after 19 September,1985, you may make a capital gain or capital loss when you sell the property (or your share in the property).
- You will make a capital gain from the sale of your rental property, to the extent that the capital proceeds received are more than the cost base of the property.
- You will make a capital loss to the extent that the property’s reduced cost base exceeds those capital proceeds.
- If you are a co-owner of an investment property, you will make a capital gain or loss, according to your ownership interest in the property.
The cost base and reduced cost base of a property includes the amount you paid for it, together with certain incidental costs associated with acquiring, holding and disposing of it (for example, legal fees, stamp duty and real estate agent’s commissions). Certain amounts that you have deducted, or which you can deduct, are excluded from the property’s cost base or reduced cost base.
You may then quality for a 50% discount on the capital gain – provided you hold the property for more than twelve months.
Your capital gain or capital loss may be disregarded if a rollover applies – for example, if your property was destroyed or compulsorily acquired, or if you transferred it to your former spouse under a Court Order (following the breakdown of your marriage).
Often investors become very worried about Capital Gains Tax. However, keep in mind that because of the 50% discount, you will generally not pay more than 15% tax on your gain. This means that you keep 85% of the gain.
QUESTION FIFTEEN: What should I give my Accountant at Tax Time?
Your investment property should be a passive investment that should make you money – without being a burden. If you get your Real Estate Agent to pay for outgoings (such as Rates, cleaning and repairs) for your rental property, and they just invoice you each month, it will minimise your workload. If you have to pay for something yourself, please keep a record and bring to us at tax time. We do not need the receipts.
(i) In Your First Year of Purchase
You need to ensure you supply us, as your Accountants, with the following:
- Quantity Surveyor’s Depreciation Report (if relevant)
- The Conveyancing Settlement Letter and Notice of Adjustments.
- Real Estate Rental Property Summary
- Bank Statements for your Loan.
- A Summary of the extra payments you have made (with regards to your investment property) that were excluded from the statement from the Real Estate Agent. We do not need to sight receipts. However, it is important to never throw them away, even after five years, as they are essential in the case of an ATO audit, and to assist with calculating any capital gain in the future.
(ii) In Your Second and Subsequent Years
Bring along all the above (except for the Quantity Surveyor’s Depreciation Report, and the Conveyancing Settlement Letter and Notice of Adjustments).
Now you have the full picture!
And the next time someone channels Tom Jones and asks you, “What’s new pussy cat?”, you can safely say, “I did my homework, I’ve invested wisely in a property I can afford, my SMSF is now working for me, and with the help of my Accountants in Boronia, at Knox Tax, I’m not giving the Tax Man anything more than he deserves. So there!!
Okay it’s not nearly as simple as that, but with the right help, you can eventually step up from Whiskers to Crayfish – at least for the cat!
The very best advice we can give you is to think hard about any investment decisions, ask the right questions of the professionals at your fingertips, and do your homework.
Don’t wait until you’re in doubt, drowning in dockets or until the EOFY. Collect your FREE Property Investment Booklet during your consultation.
We’re always here to help – all year round.
Coral Page and the Knox Tax Team