If you are considering or presently trading in financial instruments you need to know the tax treatment of gains and losses in the various instruments. The ATO has many rules that govern how you claim these losses and how gains are taxed. There is also a mixture of what is traeted as normal income and losses and what is treated as capital gains and losses.
You therefore need to know how to structure your affairs effectively.
The structure that you trade in also influences the tax outcomes. You will be surprised at the options available. We can tailor a specific structure for you that will make your nvesting programme as efficient as possible.
To qualify as a share harder for example is harder now with the current ATO policies. You need to be aware of the effects that the tax treatments have on your cash flow with investments. It also can influence when you buy and sell shares in line with your tax planning.
Other trading instruments such as CFD’s and futures, have a different tax treatment.
Warrants have a combination of trestments depending on their structure.
As you can see, it is really imortant for you to understand what you are doing
Are you renting out a residential or Commercial property?
There are a number of considerations you need to be aware of.
There are a number of areas where property investors make mistakes with their tax . The area of repairs versus capital improvements is one of the most common. Interest claims on rental property are another area where investors miunderstand the tax laws and deductibility of interest.
If you have a property that was once your principal place of esidence you need to talk to us immediately.
If you are about to rent out the property that is presently your principal place of residence, and you have borrowed to purchase another property to live in, you need to talk to us immediately.
It sounds simple to rent out a property, the tenants pay your Mortgage and you accumulate wealth as the property price just goes up and you will be able to retire rich !!!!! Does this scenario sound familiar ?
Well, not many people find that this is the actual script that plays out over time. You manage to rent your property through an estate agent, who finds you the tenant from hell, the rental is not what you throught it would be, interest rates are rising, the tenant leaves and you cannot rent the property out due too damage or need for repairs etc
What is Negative Gearing?
Negative Gearing by definition is where you borrow to acquire an investment and the interest and other tax deductible costs you incur exceed the income you receive from the investment.
While Negative Gearing is commonly associated with rental properties, it can also be applied to other types of income-producing investments such as shares and managed funds using what is often called ‘margin loans’. In terms of property investment, negative gearing refers to a situation where your expenses to maintain the property (including mortgage interest) exceed the rental income.
Creating wealth through purchasing an investment property is a well established practice in this country. The attraction of borrowing or gearing to invest is that it enables you to invest in shares or property that might otherwise have been unaffordable. For individuals, the loss can also be offset against other assessable income and the tax benefit will depend on your marginal tax rate.
The Risks
Make no mistake, it can be a risky business because while gearing can amplify your gains, it can also magnify your losses. There is no better example than the 2008 US sub-prime lending crisis where the collapse of the US Property Market left some 30% of mortgagees with a loan balance higher than the value of their property.
If you negatively gear property, you need to understand some important points:
- Properties are expected to generate profits only through capital gains and the gains need to be greater than the total losses incurred over the course of the holding period. Of course, there is no guarantee that the value of the property will appreciate, or at least appreciate enough to cover your losses.
- Investing in property requires planning and extra caution must be exercised when a property is projected to generate a negative cash flow. Tax benefits should not be the only reason for the property purchase.
- For taxation purposes, depreciation on the building could be tax deductible, however, the depreciation also reduces the ‘cost base’ of the property. The greater the depreciation you apply on your property, the lower the cost base value which may result in a larger taxable capital gain on sale.
- Negative Gearing isn’t suitable for all investors. Although it can lower your tax liability, the tax implications will depend on your personal situation and the type of investment you choose. Negative Gearing implies a negative cashflow that you need to fund from other sources.
- You have to remember that the family home is a purchase from the heart while an investment property needs to be a purchase from the head. You’ve heard the old saying that the three most important things when buying a property are: ‘location, location, location’ and this is even more important when buying an investment property.
Case Study
Let’s assume you buy a unit for $400,000 in your personal name and borrow $350,000 to fund the purchase. The funds are borrowed at an interest rate of 8% and the weekly rent is $450 or $23,400 a year. Ongoing costs including agent’s fees at 7% of the rent, rates, insurance, repairs and maintenance and other expenses are summarised below:
Profit and Loss Statement Rental Income – 52 Weeks @ $450 $23,400 Interest – $350,000 @ 8% $28,000 Water Rates $968 Council Rates $1,282 Insurance $900 Repairs and Maintenance $600 Agents Commission – 7% of $23,400 $1,638 Bank Charges $12 Body Corporate Fees $1,000 Total $34,400 Net Profit (Loss) ($11,000)
After expenses, net income for the year will be $17,000 ($23,400 minus $6,400), equivalent to a net rental yield of 4.25%. However, annual interest repayments are $28,000, so you have actually ‘lost’ $11,000 during the year ($23,400 minus $34,400 = -$11,000).
In this example, you will reduce your taxable income by $11,000 being a loss on the investment property. If you had a taxable income greater than $150,000 in the 2008 financial year you would be on the highest marginal tax rate of 46.5% (including the Medicare levy) and this tax deduction would have the ultimate effect of reducing the after tax loss on the property from $11,000 to $5,885 or $113.17 per week.
If you are on a lower rate of tax of 31.5% (including Medicare levy) the after tax loss on the investment would be reduced from $11,000 to $7,535 (or $144.90 per week).
How We Can Help
The real benefits of negative gearing are only realized when you combine the correct tax and financial advice with the right property and loan product. You should always seek expert advice to make sure the purchase is within your budget and will provide taxation and financial benefits in the long run.
When buying an investment property we can assist you in several areas:
- We have written a comprehensive booklet on Negative Gearing that explores what you can claim, what costs form part of the cost base for capital gains tax purposes and how negative gearing works for tax purposes. It is available to our clients in conjunction with a negative gearing consultation.
- Evaluate the tax consequences – Using an intelligent software tool we can prepare a 10 year cash flow analysis of the proposed property, taxable income forecasts and equity projections.
- Where to buy – through the services of a buyer’s advocate we are able to help you locate the right property in the right location.
- Finance – through our affiliation with a mortgage broking group we can help you find the right loan that is correctly structured for taxation effect.
- The tax loss on the property can pose a major cashflow issue, however, we can prepare a PAYG variation application so that your regular paypacket reflects the annual tax saving.
 10 Year Cashflow Analysis |  10 Year Taxable Income |  10 Year Equity Forecast |
If you are interested in finding out more about negative gearing call our office today.
Keep Excellent Records for Your Investment Property.
As your accountants we are committed to helping you simplify your record keeping and aim to minimize your tax return preparation costs.
Rent Manager
If you own an investment property Rent Manager will keep all your rental property tax records in one place.
Historically we have found the calculation of capital gains on the sale of property to be a source of major headaches and frustration due to the loss of source documents. Rent Manager keeps your purchase and sale records for capital gains tax purposes plus all the information you need to prepare your annual tax returns. It also allows you to analyse potential investment property purchases through the ‘property analysis’ module.
Rent Manager includes the following features:
- Record the rental income and expenditure for your investment property
- Record information from the real estate agent monthly rental summaries
- Keep track of any mortgages including interest and bank charges
- Keep a log of your car travel for collecting rent and conducting property inspections
- The Annual Summary provides all the information for completing your annual tax return
- Keep records for multiple properties
- Calculate Depreciation of furniture & fittings
- Calculate Tax Deductible Building Allowances
- Record ‘cost base’ details and any loans to finance the property
- Record property purchase, sale and improvement details so you don’t get caught when you need this information for Capital Gains calculations
- Easy to follow manual and online help
- Print all the key reports that your accountant needs to complete your tax returns
- Full 90 day money back guarantee
Rent Manager is the perfect tool to manage your property, makes completing your tax returns easy and gives you peace of mind that you have the capital gains tax information you need when you finally come to sell the property. Copies are available from our office.
Do you live on acreage and want to claim Primary Production status? The ATO has a series of tests that are applied to determine whether you can claim PP status. If you have 10 acres or less, you will probably have real difficulty convincing the ATO that you have a viable financial operation.
You can claim PP status but you need to have a planned approach that will create a profit, whether it be by way of crops or livestock or even goat mohair production.
If you presently own or are contemplating buying a rural property you need to first employ the services of an agricultural scientist to assess the property for water, soil type, salinity levels, geographical orientation for sun etc. The correct choice of activity once all these factors are known can make a huge difference to yields of whatever you decide to grow on the property. This translates into actual cash and profits for your chosen venture.
If the ATO disputes your Primary Production status, they will employ an agricultural scientist to visit your property and assess it to see if you can be profitable with the activities that you are involved in.
We aim to be more than just another accounting firm simply offering you accounting and taxation compliance services. Our intention is to be a proactive and innovative accounting and advisory firm focussed on creating a long lasting relationships with you as one of our valued clients. We recognise the need to provide you with personal, timely, quality advice and provide cost effective strategies and solutions for your business situation. Most importantly, our focus is on growing your profits and your wealth together with a lifestyle.
In an age of increasing financial complexity we have responded to the needs of our clients and now offer a complete range of accounting, taxation, business advisory and financial services.
Our client database extends across a number of industry sectors and we understand the issues that confront micro, small and medium sized businesses. We have the experience and expertise to help you as a business owner in the areas that often make the difference between just surviving and being a thriving profitable business.
Wouldn’t you like to have a happy clientele and profitable business, with a lifestyle that allows you to enjoy the fruits of your labour?