Tax Advice Investment Property

5 Taxes of Investment Property

How you structure your investment for tax purposes will have a significant impact on your potential returns and future growth. The main goal is to maximise the family’s wealth and protect its assets. This can only be achieved if you seek tax advice and establish your structure before you invest.

Key factors to consider are :

• Who should have the right to receive income and/or capital gain, both now and in the future?

• Are you a high-risk person where the asset should be protected against possible future creditors?

• Are there family concerns as to who should own the asset or receive income from it in the future?

• Are there statutory requirements governing which structure should own the investment?

There are five main areas of tax that can effect property investors, they are –

• Income Tax

• Capital Gains Tax

• Land Tax

• Stamp Duty

• Depreciation

It’s very important to seek tax advice on all of the above you before you invest.

Investment Property Ownership Structures

Purchasing as Joint Tenants (Equal shares)

This is the most common form of property ownership and is generally a husband and wife each having a equal ownership.

The advantage is that this structure is free to establish and is easy to understand and operate. The disadvantage is that tax deductions are limited to the percentage of the ownership you actually own. As a simple example, if there are $12,000 in deductions for a property the husband and wife can only claim $6,000 each. If the husband was the only income earner this limits his ability to claim maximum deductions whilst the deduction to the wife would be wasted if she had no taxable income.

Purchasing as Tenants in Common (in unequal shares)

To get around the above problem many people have been advised to put the majority percentage ownership into the name of the highest income earner, For example 99% Husband, 1% Wife. The long term problem is that as the property becomes positively geared or is sold many years down the track, the income or profit is allocated as per the ownership percentage and could result (in this case) in the husband paying more income tax or increased capital gains tax.

Company Structures

A company is subject to different tax laws. A company pays tax at 27.5% (2019)⁹ whether it earns one dollar or a million dollars. This could be of benefit to an individual paying the highest marginal rate of 45% (2019). It is generally recommended that a company structure be avoided if your investment strategy is to purchase a property and hold it for long- term growth as a company pays capital gains tax on the entire growth of a property when it’s sold. Other structures like ‘Joint Tenants’ and ‘Tenants in Common’ may only pay tax on 50% of the growth. Company structures may be advantageous for developers and short term deals.

Trust Structures

There are many different types of trusts and they are all used for different purposes. Trusts are based on the concept of a ‘Trustee’ looking after an asset on behalf of a ‘Beneficiary’. Common Trusts include ‘Unit Trusts’, ‘Family’ or ‘Discretionary’ Trusts, ‘Hybrid’ Trusts and ‘Bare’ Trusts and all have different advantages and disadvantages depending on how they are used.

Self Managed Super Fund Structures (SMSF)

A SMSF is a special type of Trust that holds assets on your behalf until retirement. In simple terms, you can move the balance of your existing fund and pay your Super Contributions into your SMSF and then decide the best investment options. SMSF’s can have between 1 and 6 members and generally can invest in property, shares, managed funds, cash or other assets provided the investments are in the best interest of the fund members. Be sure to speak to a licensed financial advisor before investing your Super.

Investment Property Depreciation

Did you know, depreciation is usually the second largest tax deduction available to investors after interest payments?

While many investors consider location, purchase price and tenanting ability when contemplating a purchase, they often overlook depreciation as an important factor.

Depreciation can aid cash flow resulting in the investor having thousands of additional dollars each financial year. Perhaps the biggest factor in getting the most depreciation benefit is the age of the property.

Whilst both new and older properties will attract some depreciation deductions, the Australian Government has now legislated amendments to plant and equipment (division 40) deductions on second-hand residential properties.

Put simply, if you purchases a second hand property today, you will be unable to claim deductions for Plant and Equipment (items like dishwashers, air conditioners, blinds, floor coverings).

You will still be able to claim capital works deductions for the structural component of a property however these are at the lower rate of 2.5% over 40 years.

Brand new properties have the benefit of being able to claim plant and equipment deductions from the start, which could result in tens of thousands of dollars in tax deductions (over $30,000 difference in the example tables) as opposed to a second hand property of the same value.

This makes the choice between a new property and a second hand property even more important as the deduction available can drastically alter the cash flow and therefore the ability to service your investment.

This is just another reason to seek tax advice on the deductions available to you before you invest.

Investment Property Claims

If you invest in a rental property or rent out your current property, you’ll need to keep records right from the start, work out what expenses you can claim as deductions, and declare all your rental-related income in your tax return.

Any capital gain you make when selling or otherwise disposing of the property will be subject to capital gains tax (CGT) except in some circumstances where you rent out the home you’ve been living in.

If you have an investment property that is not rented or available for rent – such as a holiday home, hobby farm, or another dwelling you choose not to rent:

the property is subject to CGT in the same way as a rental property
you generally can’t claim income tax deductions for the costs of owning the property because it doesn’t generate rental income
you may be able to include your costs of ownership in the property’s cost base, which would reduce any capital gains tax liability when you sell it.

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⁹27.5% when the company as an aggregated turnover less than the aggregated turnover threshold – which is $25 million for the 2017–18 income year.

¹⁰https://www.bmtqs.com.au/tax-depreciation-calculator. A second hand house built in 2016 purchased in 2019 & brand new house built and purchased in 2019, for the same price and both with a medium level of finish, approx 200sqm in size in Brisbane using a 37% marginal tax rate.

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