Property investors have multiple ownership structure options.
When managing your tax affairs, it’s important to think with FastLane Tax & Accounting Services, not just about filing your annual tax return.
We’ve covered several tax topics that we believe are essential for current or prospective property investors. Click here to download a free fact sheet for property investors or select a topic from the table below.
Our services include:
So what is negative gearing, and how can it benefit you?
Gearing refers to property investors borrowing to invest in an income-producing asset, such as property. Most property investors finance their purchases with a loan. Negative gearing occurs when the cost of borrowing exceeds the income generated from the property.
When your rental expenses surpass your rental income, it results in a net rental loss. This loss lowers the taxable income of property investors, which in turn reduces their tax liability.
The tax benefit from this loss is only a portion of the net rental loss. The exact percentage depends on the property investor’s marginal tax rate (see table below).
For example, a property investor earning $30,000 with a marginal tax rate of 16.5% would gain a tax benefit of $165 from a net rental loss of $1,000. On the other hand, a property investor earning over $180,000 would benefit by $465. Therefore, negative gearing tends to benefit higher-income property investors more.
It’s important to keep in mind that while a tax loss may increase your refund, a loss is still a loss – meaning your investment is costing you money. A negatively geared property will only be profitable if the capital growth exceeds the sum of losses over the ownership period for property investors.
It’s crucial to assess whether your property investment is truly profitable. For more details, refer to our separate post on this topic.
Marginal tax rates 2010-11
| Taxable Income | Marginal Tax Rate |
|---|---|
| $0 – $6,000 | Nil |
| $6,001 – $37,000 | 16.5% |
| $37,001 – $80,000 | 31.5% |
| $80,001 – $180,000 | 38.5% |
| $180,001 and over | 46.5% |
Selecting the right loan involves more than just considering the interest rate and features.
While interest on a loan is tax-deductible, principal repayments are not. Many investors choose interest-only loans because:
The comparison becomes clearer when you look at the after-tax cash flow (see below). A difference of $7,000 could determine whether you can afford a property or not.
| Interest Only | Principal & Interest |
|---|---|
| Loan Amount | $250,000 |
| Interest Rate | 7% |
| Monthly Repayments | Nil |
| First year of loan | Assume 31.5% rate |
If an investor has both a home loan and an investment loan, they should prioritize paying off the home loan first. This is because the investment loan is tax-deductible, and a portion of the interest is refunded on your tax return. For instance, if your marginal tax rate is 30%, a tax-deductible loan effectively costs 30% less than a non-deductible loan.
To maximize tax benefits, investors should:
Investors should also avoid using their investment loan for non-investment purposes. Although it may seem straightforward, mixing uses can lead to tax complications. Tax deductibility of loan interest depends on the loan’s use. If only 90% of the loan funds are used for investment purposes, only 90% of the interest can be claimed as a deduction.
For example, if an investor has an investment loan of $225,000 and redraws $25,000 to buy a car, the loan becomes 90% deductible ($225,000/$250,000), complicating interest calculations.
However, redrawing the loan for property-related expenses, such as repairs or improvements, will not affect its deductibility.
Receive Your Tax Refund Early and Enhance Your Cash Flow
However, you don’t need to wait until July to receive your money back. You can access the tax benefits sooner by adjusting the amount of tax withheld from your paycheck.
Your employer cannot reduce your tax withholding rate without authorization from the ATO. To lower your withholding tax, you must complete a PAYG Withholding Variation.
This form can be filled out and submitted online. Within a few days, the ATO will notify your employer’s payroll department of the new, reduced tax rate to apply to your pay.
Having immediate additional cash flow can ease the burden of rental expenses, such as loan repayments. Effective cash flow management is crucial, especially for highly leveraged investors.
Take Kate, for example. She is a property investor who has borrowed 95% of her investment property’s value. Being negatively geared, she anticipates a tax refund of $11,000 due to interest expenses, depreciation, and other deductions.
By lodging a PAYG Withholding Variation, the ATO can authorize Kate’s employer to withhold approximately $400 less tax from each fortnightly pay. This extra $400 in her paycheck helps Kate manage her loan repayments more comfortably.
While the PAYG withholding form can be complex, especially for first-time applicants, you need to detail all your properties in the initial application. For subsequent years, you only need to update the form with any new properties, simplifying the process.
If you believe that enhanced cash flow would be beneficial and need help with lodging a PAYG Withholding Variation, please contact our office to schedule an appointment.
A capital gain is the difference between the sale price and the cost base (purchase price plus capital costs).
Include:
Lack of documentation can increase your capital gain and tax liability, so maintaining good records is essential. For long-held properties, a CGT Asset Register by your tax agent can simplify record-keeping and tax planning.
Remember, for CGT purposes, the sale date is the contract date, not the settlement date. For a large capital gain, consider these strategies:
Depreciation can significantly improve the cash flow of your investment property.
Depreciation helps improve your investment property’s cash flow by recognizing the asset’s decline in value over time. As assets like fixtures and buildings age, their value decreases, and you can claim these losses as deductions.
When you buy real estate, you acquire:
Depreciation applies to these assets over their ‘effective life,’ as set by the ATO. For instance, ceiling fans might have a 5-year life, carpets 10 years, and buildings can be depreciated at 2.5% per year.
Key benefits of depreciation include:
A depreciation report, typically costing around $700 and tax-deductible, can help maximize your deductions. BMT Quantity Surveyors is a reliable provider, known for their thorough and clear reports. They assess whether a report is beneficial and will send it to your accountant.
You can also calculate depreciation yourself if you have purchase details and the ATO’s effective life list. Separate deductions for capital allowances (e.g., appliances) and capital works (e.g., building structures) are included in different parts of your tax return.
Amendments can be made to prior tax returns to include missed depreciation, with an amendment period up to four years in some cases.
Optimizing your depreciation claims can significantly enhance your property investment return. Our experienced team can assist you in leveraging these tax benefits to minimize tax, maximize yields, and improve cash flow
