Author Archive
Tax Newsletter – December 2015/January 2016
November 19, 2015 | 
Author Tax negotiation limited to known debt amounts
Two company taxpayers have been unsuccessful before the Federal Court in seeking to set aside statutory demands issued by the ATO.
The matter essentially involved two individuals who carried on property development activities through several entities (including the taxpayers) and their recollections of an alleged “global deal” with the ATO at a meeting on 10 April 2014 to resolve various debt recovery disputes – including security arrangements – while objections and appeals were on foot. The taxpayers contended that, after the meeting, the ATO sought demands that were contrary to the “deal” (this included a demand for a security in the amount of $8 million in relation to a related trust) and made “threats” to issue statutory demands. The statutory demands against the two taxpayers were issued in September 2014.
The Federal Court dismissed the taxpayers’ applications to set aside the statutory demands. The Court said it did not doubt that the individual representing the taxpayers held a “genuine subjective belief” that he and the ATO had entered into a binding legal agreement at the April 2014 meeting that went beyond the terms of the Deeds of Agreement, which were subsequently executed. However, it considered the representative’s subjective belief was not supported by either objective documentary evidence or by the evidence of the ATO representatives who attended the meeting, which it preferred. Among other things, the Court accepted the ATO’s evidence that the negotiations involved only “established debts” reflected in a spreadsheet that was used at the meeting and did not include further tax liabilities, including those of the trust.
TIP: The above case demonstrates that to avoid confusion among negotiating parties, particularly in relation to future treatment of liabilities, agreements as to arrangements and the terms must be reached and agreed to by the parties in a subsequent written Deed of Agreement.
CGT roll-over for small business restructures on the way
The Government has released exposure draft legislation that proposes to provide roll-over relief for small businesses that change their legal structure. The proposed measures were announced in the 2015–2016 Federal Budget, and will apply to the transfers of assets occurring on or after 1 July 2016. Public consultation closes on 4 December 2015.
The proposed measures will provide an optional roll-over where a small business entity transfers a business asset to another small business entity without changing the ultimate economic ownership of the asset. The roll-over can also apply to affiliates or entities connected with the small business entity for assets they hold that are used by the small business entity.
The roll-over will apply to gains and losses arising from the transfer of capital assets, depreciating assets, trading stock or revenue assets between entities as part of a small business restructure. Discretionary trusts may be able to access the roll-over if the assets continue to be held for the benefit of the same family group.
TIP: The proposed new roll-over is in addition to roll-overs currently available where a sole trader or partner in a partnership transfers assets to, or creates assets in, a company in the course of a business restructure. Note also that, with any proposed “tax relief”, the devil is in the detail. Please contact our office for further information.
ATO starts issuing “certainty” letters
The ATO has commenced contacting more than half a million individual taxpayers to let them know that their recently submitted tax returns “are shipshape and will not be subject to further review”. The ATO said people who receive one of its “certainty” letters (also known as “A-OK” letters) can be assured that the ATO is happy with their tax returns, and has closed its books permanently on their returns, providing there is no evidence of fraud or deliberate avoidance.
The letter is being trialled with a sample of people who meet certain criteria. This includes having broadly simple tax affairs, a taxable income of under $180,000, and a good lodgement and compliance history. Depending on the success of the trial, the ATO said it aims to expand the program to more taxpayers for Tax Time 2016.
TIP: Despite the aim to provide “certainty”, it remains to be seen how the letters will operate in practice, particularly if the Commissioner can change his position on the issued letter if taxpayers amend their 2015 tax return or if the Commissioner relies on the concept of fraud or evasion to invalidate the certainty letter.
Government rejects SMSF borrowing ban recommendation
Direct borrowings by superannuation funds via limited recourse borrowing arrangements (LRBAs) are safe (at least for the next three years), following the Government’s decision to reject the Murray Financial System Inquiry recommendation to ban or restrict LRBAs. This is welcome news for trustees of self-managed superannuation funds (SMSFs) who have faced uncertainty about the future of such borrowing arrangements, which have become popular for investments in direct property and shares.
In releasing its response, the Government said that it did not agree with the recommendation. While the Government noted there are “anecdotal concerns” about LRBAs, it said the data did not justify policy intervention at this time. However, the Government said it will commission a report on leverage and risk in three years’ time. According to the Government, this timing will allow recent improvements in ATO data collection to wash through the system. The report will be used to inform any consideration of whether changes to the borrowing rules might be appropriate at a future date.
TIP: Despite the Government’s “green light” for LRBAs, a decision to establish an SMSF and invest in property using an LRBA is not one to be taken lightly. It would be prudent to obtain professional tailored advice on any possible LRBA issues that should be considered before committing to purchase a property via an SMSF.
Car expenses and FBT concessions on entertainment
A Bill is currently before Parliament that introduces two important changes. Key details are as follows.
Work-related car expenses
The Bill proposes to repeal the “12% of original value method” and the “one-third of actual expenses method”. Taxpayers will continue to be able to choose to apply the “cents per kilometre method” (for up to 5,000 business kilometres travelled), or the “logbook method”, depending on which method in their view best captures the actual running costs of their vehicle.
The Bill also proposes to provide a streamlined process for calculating the “cents per kilometre method” by providing a single rate of deduction. That is, the current three rates based on vehicle engine capacity will be replaced with a single rate of deduction. In the 2015–2016 income year, the rate will be set at 66 cents/km. The changes are proposed to apply from 1 July 2015.
TIP: So the Government will set 66 cents/km as the rate for using the “cents per kilometre method”, irrespective of a car’s engine size. Based on 2012–2013 figures, this would see those who drive smaller vehicles getting a slight increase in deductible expenses, and those who drive larger cars having a decrease in their deduction.
FBT concessions on salary packaged entertainment benefits
The Bill proposes amendments to the law governing fringe benefits to introduce a separate grossed-up cap of $5,000 for salary sacrificed meal entertainment and entertainment facility leasing expenses for certain employees of not-for-profit organisations, and all use of these salary sacrificed benefits will become reportable. The changes are proposed to apply from 1 April 2016.
TIP: Note that organisations affected include public and not-for-profit hospitals, public ambulance services, public benevolent institutions (except hospitals) and health promotion charities. It may be prudent to discuss with your adviser as to whether the above changes apply to your circumstances.
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Property Newsletter – November 2015
SMSF loans caught in APRA crackdown
As Australia’s banking regulator continues to force finance lenders to tighten their lending standards, we take a look at how SMSF loans have been affected.
Lending via self-managed super funds (SMSF) began in 2007 after regulations where changed to allow SMSF’s to borrow money for investment purposes.
However, under the Australian Prudential Regulation Authority’s (APRA) recent crackdown on investor loans, borrowing via SMSFs to purchase an investment property has become much harder.
APRA’s changes to investor loans are designed to cool the residential property markets in Sydney and Melbourne, where house values have skyrocketed on the back of record-low interest rates and high demand from property investors.
As part of the changes, finance lenders are required to adhere to a limit of 10% growth in investor loans as well as hold more capital on their books.
The latter has led to many lenders completing billion-dollar capital raisings in recent months and, more recently, raising interest rates on some loan products, including SMSF loans.
Following APRA’s changes, some lenders have withdrawn SMSF products altogether.
Those lenders that have remained in the space, though, have been forced to tighten their loan requirements, meaning applicants must meet much stricter criteria.
The changes differ from company to company, however, most lenders have reduced their loan-to-value ratio (LVR) from 80% down to 70% for SMSF loans.
Lenders that have left their LVRs at 80%, though, have stopped offering interest-only loans, and applicants must make principle and interest repayments.
Some lenders are also requiring a minimum starting balance in the fund before a property can be purchased.
Additionally, some lenders are demanding SMSFs have some capital invested in different assets other than the property being acquired. For example, a $400,000 property purchase at a 70% LVR with a $280,000 loan amount would require the fund to have a minimum of $28,000 left over after all purchase costs.
Amid these changes, it’s important for investors considering purchasing property through an SMSF to seek advice from brokers and financial planners who specialise in this area.
5 tips for investing in a buyer’s market
Purchasing an investment property in a buyer’s market can be a spring board to significantly growing your wealth. Here are 5 tips to help investors make the most of favourable market conditions.
Buyer’s markets are an opportune time for investors to start or build their property portfolios.
Typically, in a buyer’s market there will be more properties for sale, fewer buyers and values may have softened.
While these factors provide favourable market conditions for property investors, to fully leverage these benefits here are 5 tips you must remember.
1) Secure finance pre-approval before starting your search for a property. Although there are generally fewer buyer’s in a buyer’s market, competition can remain tight in some segments of the property market or for some property types. By organising finance pre-approval, you’ll be in a much stronger position to beat any other buyers.
2) Don’t necessarily jump at the first property you find. As stock levels increase in a buyer’s market, investors will inevitably have more choice. To help you secure the best deal, determine the type of property you want to acquire (i.e. development site, established house etc) and compare similar properties before making an offer on a property.
3) Don’t rely on the whole market to rise. Never assume you’ll make a profit by simply acquiring a property in a buyer’s market and selling it during the next upswing. Make sure to complete sufficient research and purchase an investment property in an area that has strong growth fundamentals.
4) If you’re ready to buy, don’t delay. Many investors, too often, sit on their hands and wait for the property market to start rising again. However, by that time investors would have missed out on capital gains and may have to pay more for a property.
5) Weigh contracts in your favour. Property investors will have greater negotiation power in a buyer’s market, and should demand favourable contract terms and conditions, such as longer due diligence periods.
3 ways to become a developer
Do you want to become a property developer but aren’t sure where to start? Here are 3 ways to fulfil your goal, regardless of your level of knowledge, expertise or time constraints.
If you want to try your hand at property development, there are 3 options you can take, each distinctly different and requiring varying levels of involvement.
These 3 options allow anyone to become a successful property developer, irrespective of their experience, knowledge or time limitations.
- Do it yourself Developing property by yourself is by far the hardest and most time consuming of the 3 options. This requires you to complete a large amount of research and due diligence to ensure you’re finding the right site and completing the right type of development. You’ll also have to deal with the extensive red tape associated with councils and builders. Developing property by yourself is generally completed by seasoned investors who’ve a thorough understanding of the property and building industries.
- Appoint a development manager By appointing a good development manager you’ll be working alongside industry specialists who’ll be able to guide you through the entire process. A development manager will provide you with valuable advice as how to mitigate the risks and maximise profits. You maintain control over the project and your level of involvement can be as high or low as you prefer. You won’t have to dedicate as much time to the development because the development manager will take care of a lot of the research and red tape for you.
- Invest in a development syndicate Development syndicates provide exposure to much larger opportunities that may not have been an option as a sole investor. Syndicates also require less capital investment from each individual participant. They are ideal for more passive investors who are either time poor or don’t have extensive knowledge about property development. As an investor in a development syndicate, you can simply sit back and let industry specialists complete all the work on your behalf.
Dealing with late rental payments
In an ideal world, tenants would pay their rent on time. Unfortunately, this is not always the case, so how should you broach the issue of late payments with your tenants?
For the majority of property investors, rental income is relied upon to repay their loan on the property.
So when a tenant fails to pay their rent on time, the ramifications can be far greater than simply being out-of-pocket for a short period.
Conversations about money can be uncomfortable at the best of times, so if you’re managing your own property, late payments can put you in an awkward situation.
However, it’s critical to take the correct action immediately, otherwise, it sets a bad precedent and the tenant may believe that it’s okay to pay their rent late.
If you’ve engaged the services of a property manager, you won’t have to worry about the hassle of dealing with late payments, though, because the property manager will take care of this for you.
To help mitigate the risk of late rent, payment periods should be agreed upon with the tenant prior to signing a lease agreement – this information should also be included in the lease contract.
Tenants should also be encouraged to set up direct debit payments, so rent is automatically transferred to coincide with the due date.
It can be a good idea to have the transfer set up 2 or 3 days prior to the due date to take into consideration transfer delays between different banks.
If a tenant fails to pay their rent on time, it’s important not to jump to assumptions and conclude that they haven’t paid deliberately.
The tenant may have simply forgotten and needs reminding. Perhaps they’ve transferred the rent but there have been technical issues between banks.
Alternatively, the case could be much more serious and they may have been injured at work or lost their job. In these instances, it’s important to take a sensitive approach to the situation.
Of course, if a tenant continues to fail to pay their rent, there are a number of legal avenues to take.
Investor acquires 3 properties in 18 months
After experiencing some “ups and downs” in the property market, this investor decided to engage professional help. The result was 3 properties purchased in 18 months, and there’s more to come.
Andy Harrison started investing in property in 2003 and said he’d had a mixed experience going it alone, choosing “some good areas and some bad areas”.
“I soon realised that it’s not just about investing anywhere, you have to find the rights pockets within the right suburbs,” he said, also noting that individual property selection was key as well.
Based in Boddington, Western Australia, Andy decided to seek professional advice and engaged Momentum Wealth in 2013 after booking a free consultation with one of the company’s consultants.
At the time he wasn’t sure how many properties he wanted to acquire or how fast he wanted to grow his portfolio.
Andy said he just wanted to “go for it”, so he enlisted the help of Momentum Wealth’s buyer’s agents to find him his next investment property.
Subsequently, he bought a 3-bedroom, 1-bathroom villa in Dianella in May 2013.
“Using the buyer’s agency service takes the headache out of doing your own research, because its hours and hours of time that I just don’t have,” Andy, who is a small business owner, said.
Highly impressed with the outcome, Andy purchased two more investment properties in 2014, again using Momentum Wealth’s buyer’s agency service.
This time he bought a 4-bedroom, 1-bathroom house in Forrestfield and a 3-bedroom, 1-bathroom house in Thornlie.
“I wasn’t scared to max myself out and see how far I could go,” he said.
Since then, Andy has built an ancillary dwelling, commonly known as a granny flat, at the back of his Thornlie investment property.
The ancillary dwelling allows Andy to receive two rental incomes from one property (one from the main residence and one from the ancillary dwelling), which significantly boosts the rental yields.
While he utilised Momentum Wealth’s planning and development team to oversee the construction of the ancillary dwelling, Andy wasn’t scared of doing some of the heavy lifting himself, including renovation works to the main residence and landscaping on the property.
As the owner of a painting business, Andy was also looking for various ways to reduce his taxable income.
Property investment proved to be an effective solution, according to Andy.
He said since purchasing the properties he has cut his tax rate to close to one-fifth of what he was previously paying.
In addition to using the buyer’s agency and planning and development services, Andy also utilised Momentum Wealth’s finance brokers to adequately structure his loans.
“The finance team went over and above what they were supposed to do,” he said.
“If we had any issues with the bank or we were not quite sure, they sorted it out for us, which was brilliant.”
Looking ahead, Andy said he wanted to continue to purchase as many investment properties as he could.
“I’d like to have 10 properties within the next 6 years,” he said.
After purchasing 3 properties through Momentum Wealth, in addition to two other investment properties he already owns, he’s now at the halfway mark to achieving that goal.
Andy said he’d be referring to his Property Wealth Plan to help him along the way.
“That’s basically our bible,” he said, referring to the Property Wealth Plan, which was prepared by a Momentum Wealth property strategist.
“We quite often pull it out and have a good read. Even now when we’re looking forward to the next stage it helps us know exactly where we’re going.”
If Andy’s recent investment history is anything to go by, his next purchase shouldn’t be too far away.
What drives wealth in commercial property?
Those who aren’t attune to commercial property may assume that wealth is created in the same method as residential property. However, this isn’t necessarily the case.
When it comes to commercial and residential property, both asset classes share similar macro-economic drivers, including population, income and economic growth as well as supply and demand factors.
However, the means in which wealth is created through commercial and residential property generally varies.
For example, commercial property typically generates net rental income of about 7-9%, while residential property typically generates net rental income of 3-4%.
On the other hand, residential property has historically recorded higher growth rates compared to commercial property.
Wealth is created in different methods dependent upon if you own commercial or residential property.
Below are the main points associated with residential and commercial property that typically affect wealth creation.
| Residential | Commercial |
| · Generates lower income
· Owner pays most expenses · Lower vacancy rates · Shorter-term tenants · Easier to finance · Higher historical growth rates |
· Generates higher income
· Tenant pays most expenses · Higher vacancy rates · Longer-term tenants · Harder to finance · Lower historical growth rates |
Generally, residential property is the best option as a starting point in property and during an investor’s accumulation phase (i.e. when they’re building their property portfolio) so they can continually leverage their equity to make their next acquisition.
Conversely, commercial property is the best option, generally, when investors are nearing retirement and need a source of income (i.e. they retire and use the rental yields as their disposable income).
Ideally an investor will retire with a balance of residential and commercial property and a sold income stream to set them up for life.
Property trusts: listed vs unlisted
Property trusts are generally offered in two forms – listed or unlisted. But what’s the difference and the pros and cons of each?
Property trusts allow investors to gain access to larger, higher yielding investment opportunities at significantly lower price points than they could buying directly on their own.
Typically, trusts are either listed, in which they’re traded on a stock market (such as the Australian Securities Exchange), or unlisted, in which they’re privately held and there is no public market.
Investors in listed trusts can buy or sell at any time – the same as they would trade shares on the stock market.
While this may have its advantages, it can also mean that the unit price can be more volatile as it imitates the share market rather than the property market.
Conversely, investments in unlisted trusts are usually locked in for the duration of the trust. The duration of an unlisted trust depends on its type, for example commercial acquisition or development.
An unlisted trust may only hold a single or a small number of specific assets.
Asset can only be bought or sold in the parameters set out in the trust constitution, and some decisions require a vote by unit holders (i.e. the investors) with voting rights in proportion to each investor’s interest.
There are pros and cons to each form of trust and individual investors must determine what the best fit is for them.
| Listed property trusts | Unlisted property trusts |
| · Buy or sell at any time
· Unit price can be volatile and imitate share market |
· Capital locked in for duration of trust
· Unit prices less volatile and imitates the property market |
Tax Newsletter – November 2015
Unbundling phone and internet expense claims for work purposes
Individuals can claim deductions for mobile, home phone and internet expenses that have been incurred for work purposes. However, correct apportionment for work use is a key issue. According to the ATO, as there are many different types of plans available, taxpayers need to determine their work use using a reasonable basis.
For example, phone and internet services are often bundled. When a taxpayer is claiming deductions for work-related use of one or more services, they need to apportion their costs based on their work use for each service. If other household members also use the services, the taxpayer needs to take into account that use in their calculations.
TIP: If the taxpayer has a bundled plan, the ATO says they can identify their work use for each service over a four-week representative period during the income year. This will allow the taxpayer to determine their pattern of work use, which can then be applied to the full year. Please contact our office for assistance.
Student loan debt recovery from overseas
As part of the 2015 Federal Budget, the Government announced that Australians living and working overseas who have a Higher Education Loan Program (HELP) or Trade Support Loan (TSL) debt would soon be required to repay that debt in line with the obligations that apply for debtors who live and work in Australia.
The repayment obligations are expected to apply from 1 July 2017, based on income earned in the 2016–2017 financial year. The repayment obligations would only commence once the individual’s income reached the minimum repayment threshold. People heading overseas for more than six months would be required to register with the ATO, while those already overseas would have until 1 July 2017 to register.
TIP: The Government is intending to facilitate reciprocal arrangements with foreign governments. That is, the Government intends to share details of individuals to allow foreign governments to identify if their citizens with student loan debts are living and working here in Australia. At this stage New Zealand and the UK have been flagged for reciprocal arrangements.
TIP: Individuals can make voluntary repayments at any time to reduce their HELP debts. Currently, if you make a voluntary HELP repayment of $500 or more, you get a 5% bonus. If your HELP debt balance is less than $500 and you make a voluntary repayment to pay out the debt, you also get a 5% bonus. Voluntary payments are in addition to compulsory repayments. Any voluntary repayments you make are not tax deductible.
SMSF trustees warned to plan for cognitive decline
The ATO has highlighted the issue of cognitive decline, noting that dementia is on the rise and that it is important for trustees of self managed super funds (SMSFs) to have plans to ensure that financial matters will be effectively managed, if and when trustees no longer have the capacity to manage their funds.
“SMSFs are in reality usually managed by one trustee and require a high level of financial decision-making. While many trustees remain perfectly capable of effectively managing their financial affairs well past retirement age, there is a risk that some with diminished capacity to effectively manage their fund may nevertheless continue to do so. Most don’t have a plan for what to do if they get to this point”, said Kasey Macfarlane, ATO Assistant Commissioner, SMSF Segment, Superannuation.
In this regard, Ms Macfarlane said, it was essential that trustees “agree in advance about decision points and exit decisions, to have a will and appoint an enduring guardian and power of attorney”.
Tax debt release application refused
The Administrative Appeals Tribunal (AAT) has refused a couple’s application to be released from their tax debts after finding the couple (the taxpayers) would not suffer serious hardship if they were required to satisfy the liability. The tax debt the taxpayers sought to have released amounted to some $25,000. The taxpayers argued they should be released from the tax debts because their financial position was due to “serious family difficulties and problems”, which had distracted them from their tax affairs.
Although the AAT was sympathetic towards to the taxpayers, it concluded they had not discharged the onus of proving that they would suffer serious hardship if they were required to pay the relevant tax debts. The AAT reached this conclusion after calculating the taypayers’ fortnightly income and expenses. In this regard, the AAT noted the taxpayers were making more than the required minimum mortgage repayments and could draw down on their home loan.
Even if it were a case of serious hardship, the AAT said, it would not exercise the discretion to waive the debt. Among other things, the AAT noted that one of the taxpayers was a beneficiary in the estate of her mother and stood to receive approximately $200,000.
TIP: Serious hardship exists when payment of a tax debt would leave you unable to provide for basic living necessities for yourself and dependants. The Tax Commissioner has the discretion to release you from eligible tax debts; however, even if the Commissioner is satisfied that serious hardship would result from payment of the tax debt, he is not obliged to exercise the discretion in your favour.
Retiring partner’s individual interest in net income of partnership
According to a recent ATO Taxation Determination, where a retiring partner receives an amount representing his or her individual interest in the partnership net income, that amount is assessable under section 92 of the Income Tax Assessment Act 1936. This is the case even if the partner retires before the end of the income year or the payment is received in a subsequent income year. Furthermore, the way the payment is labelled or described will not change the ATO’s conclusion that the receipt represents the partner’s share of partnership net income and needs to be brought to account under section 92.
The ATO notes that a partner’s individual interest in the net income of a partnership is essentially a question of fact in each case, to be determined by reference to the partnership agreement, the partnership’s accounting records and any other relevant documents. The ATO notes that its approach in the Determination is a departure from several private rulings, in which it took such receipts into account under the capital gains tax (CGT) rules. The ATO says that an amount representing an individual interest in partnership net income may also represent capital proceeds from a CGT event; however, any capital gain that would otherwise arise is reduced to the extent that it is assessable under other provisions.
TIP: The Taxation Determination applies to assessments made after 3 June 2015. The ATO says it will not seek to disturb favourable assessments made before that date.
ATO targeting ride-sourcing drivers and eBay online sellers
The ATO has announced that it will acquiring details of ride-sourcing drivers from ride-sourcing facilitators. The data will be matched electronically with ATO data holdings to identify people. The ATO said the aim of the data-match is to identify taxpayers that can be provided with tailored information to help them meet their tax obligations, or to ensure their compliance with the tax law. The ATO estimated that records relating to between 10,000 and 15,000 individuals will be matched.
TIP: The ATO has affirmed that people who provide ride-sourcing services are providing “taxi travel” under the GST law. The ATO has previously advised that it expects all drivers involved in providing ride-sourcing services to be registered for goods and services tax (GST). Please contact our office for information and assistance.
The ATO is also acquiring online selling data from eBay relating to registrants who sold goods and services to a value of $10,000 or more during the period 1 July 2014 to 30 June 2015. The data requested includes information that will enable the ATO to match online selling accounts to taxpayers, including names, addresses and contact information, as well as information on the number and value of transactions processed for each online selling account. It is estimated that records relating to between 15,000 and 25,000 individuals will be matched.
Property Newsletter – October 2015
How delays can cost your development
If you’re completing a project that’s being bankrolled with development finance, you’ll want to avoid delays in your project.
One of the most important points that novice developers often forget is the issue of interest costs. Typically, a development loan is a 2-year term and once the term is exceeded the loan is supposed to be repaid in full. However, if it’s not repaid, then the developer will continue to incur interest on the outstanding loan and potentially at higher rates than during the term of the loan.
While most residential developments take up to 18 months to complete, if you don’t have the right builders and contractors working for you, you’re likely to face time blowouts. Delays of a few months can leave developers with little time to sell their finished products and repay the debt before the loan term finishes.
In one instance, a developer engaged Momentum Wealth after failing to repay their loan by the end of the term because their project had suffered major delays. The developer was paying penalty interest of 13%, or about $14,000 per month. Our finance brokers were able to refinance the developer’s loan with a specialist private lender at 9% for an extended term. This significantly reduced the developer’s repayments and provided them with additional time to complete and sell the finished project.
Interest expenses can turn a highly profitable project into a potential loss. Therefore, it’s important to avoid excessive interest costs by using reliable builders and contractors with a good track record of completing projects on time and on budget.
Many investors who want to develop but don’t have the time to manage the project often appoint a development manager, who will manage the entire project and keep the builder to their time frames. Momentum Wealth is managing over $170 million in projects for our clients. If you’d like to speak to one of our development specialists, please call us on 9221 6399 to see how we can help you with your project.
Demand not the only equation
Many investors place a large focus on the future demand of properties when searching for their next acquisition. However, there is another equally important factor that must be taken into consideration. Although robust demand for property is important to help ensure values rise, many investors don’t consider the supply side of the equation.
Oversupply of property in your investment area has the potential to significantly restrain the capital growth of your assets. Quite simply, investors need to look at their properties and consider how easy it is for others to build additional dwellings of the same type in the same location. In other words, how much competition will your property have and could this increase significantly?
In any market that has a high supply of a specific asset, including housing, consumers of that product will have more choice, which subsequently reduces your ability to demand a higher price. A good example of this is residential estates on the urban fringe of metropolitan cities, where large areas of land can be readily developed for new housing. Another example is apartment buildings in central business districts, where new, large-scale apartment complexes can be easily built.
Typically, it’s best suited to acquire investment properties in established areas with high demand and limited availability for new stock to be added. This can help contribute to higher capital growth from your investment properties.
How to build your way to wealth – part 3
Property development is regarded by many investors as the Holy Grail because of the huge profits on offer. So what does it take to be a doyen of development?
In Part 2 of this article series we outlined steps four to six to becoming a successful property developer. This included the necessity to complete a feasibility study, identifying your tax status and buying your development site wisely. In the final part of this three-part series we explain steps seven to 10 – the need to structure your finances correctly, choosing the right designer and builder and deciding whether to hold or sell your development.
Adequately structure your finances
Just about every developer will have to take out a loan to finance their project. For development loans, it’s best to engage a finance broker who specialises in this segment as the terms and conditions can vary significantly, compared to a normal home loan. Loan-to-value ratios, term periods, interest rates and others important issues are vastly different for development finance so it’s best to utilise a broker that has a firm understanding and proven track record of securing loans for development projects.
Choosing the right designer
Typically, it’s best to engage a building designer or architect as opposed to a builder direct. Using a builder direct will mean they own the copyright to the plans and if, for any reason, you don’t want to use that company, you’ll have to restart the planning process, or pay a hefty fee for the copyright. By engaging a building designer or architect, you’ll own the copyright and will be able to tender the plans to builders and choose the company that offers the best deal. Ensure you designer or architect has completed similar projects in the past. Designing a duplex in a middle-class area on a tight budget is significantly different to designing a boutique apartment complex with premium features in an upper class location. Make sure to see examples of the previous work they’ve completed.
Picking the correct builder
With your plans complete you can tender your project to various building companies. Approach builders who have a proven track record of delivering similar projects. When it comes time to selecting a builder, it’s not always best to select the one with the cheapest quote. Also consider the builders quality, reliability and construction time. It’s important to thoroughly compare quotes as some may include items which other builders consider optional extras. It can also be useful to include penalty clauses in the contract, which means the builder will receive a smaller fee if they don’t finish the project in the agreed timeframe.
Develop and hold or develop and sell
Generally it’s best to hold your property and use the equity to finance your next project. By holding, you’ll avoid having to pay income tax, selling agents fees and services tax, which reduce your profit margin. If you decide to sell, make sure the timing is right and there is sufficient demand from buyers.
It’s evident that property development can deliver massive financial windfalls, however there are a myriad of risks that have to be considered and mitigated. To optimise returns and minimise risks, it’s wise to engage independent professional help, such as development finance specialists, buyer’s agent and project manager.
Property management: balancing price with performance
It might be tempting to engage the cheapest property manager you can find, but it could prove to be one of the most costly decisions you’ll ever make. For serious property investors, choosing a property manager based purely on their fees carries significant risk. You wouldn’t choose the cheapest stock broker to manage your shares, so why would you choose the cheapest property manager?
At the end of the day, if you engage a cut-price property manager you’re likely to receive a significantly lower standard of service. This is because the property managers at these agencies are forced to oversee a higher number of properties – sometimes hundreds of properties for each manager. Consequently, these property managers are swamped with work and can’t provide an adequate level of service to each customer.
With cheaper agencies you’re also likely to encounter a higher turnover of property managers. This is because they simply can’t cope with the huge workloads, become burnt out and have to change employees. In other cases, some agencies might offer a cheaper upfront fee, but then charge for additional services.
Eventually, the fees with the budget agency start to add up and might be the same, or more, than with a premium property management firm. Even worse, if owners don’t opt for these additional services, such as property inspections, the condition of the property may suffer and rents won’t be optimised.
Another area that suffers is staff training. If profits are marginal, there is no budget to provide adequate education and keep staff up-to-date with legislation.
As a property investor, you need to weigh up the importance of potentially saving a few hundred dollars each year at the risk of harming the performance of one of your most valuable assets.
Remember, property management fees are a tax write off meaning you’ll pay less tax and recoup some of the cost.
Not your typical investment suburb
Offering good schooling, parks and amenities, this affluent beachside suburb is one of the most expensive in Perth with a median house price of $1.7 million.
City Beach, located in the Town of Cambridge, is one of Perth’s most sought-after suburbs. It boasts a long stretch of beach down its western border, is just 10 kilometres to the Perth central business district and comprises many parks and ovals, including Bold Park and Wembley Golf Course.
The suburb has a population of about 6,400 residents with a median age of 44 years. About 40% of the population are in professional employment, which is double the average.
There is a low concentration of state housing, with the area mostly zoned low density residential (R20 and under) with about 88% of dwellings listed as houses.
About 80% of properties are either fully owned or being purchased while just 13% are being rented – the Perth average is more than double that at 29%.
There are multiple primary schools within the suburb as well as the International School of Western Australia and many prestigious private schools, including Hale College.
City Beach is the fourth most expensive suburb in the Perth metropolitan area with the median house price of $1.7 million.
Neighbouring suburbs include Swanbourne, Scarborough, Floreat, Churchlands and Mount Claremont.
The suburb’s main shopping centres are City Beach Boulevard, Ocean Village and the major shopping centre in neighbouring Floreat, Floreat Forum.
5 features to look for when acquiring a commercial property
If you’re seeking to purchase a commercial investment property, here are five features you need to consider to help attract your future tenant.
When purchasing a commercial investment property there are a number of macro and micro economic factors you need to examine to ensure you acquire a high-quality asset.
These include the area’s future demand and supply for similar properties, major infrastructure initiatives and broader economic activity, among others. However, it’s also crucial to consider some specific aspects of the property itself, particularly tangible features that a future tenant will look for and find appealing. These features generally differ depending upon the type of commercial property, such as industrial, retail or office, because tenants in different properties demand different amenities.
Here are five features you need to consider in your next commercial property to help you attract your future tenant.
Industrial/warehouse
- Truck turning circles.
- Truss heights – standard heights are typically about 7-8 metres.
- Office component – typically about 25%-30% of floor space needed for offices.
- Overhead crane facilities.
- Door access – is this big enough for bulky goods?
Retail
- Foot/car traffic – is the shop frontage in view of a highly-used footpath or road?
- Accessibility – is there good public transport or major roads nearby?
- Locus of activity around the property.
- Car parking – is there sufficient parking facilities and are these paid parking or free?
- Signage rights – what are you and your tenants entitled to?
Office
- Employee accessibility – are there sufficient parking facilities or is it close to public transport?
- Telecommunication – is this sufficient for tenant needs?
- Sufficient useable floor plate.
- NABERS/Green Star rating – is it a high-performing building?
- Air conditioning facilities.
While these are not the only aspects you need to consider when searching for a commercial investment property, they’re a good start and are features that are generally demanded by tenants.
What is a property trust?
You may have heard about property trusts, but what are they and what benefits do they offer investors?
Property trusts are a great way for investors to access property assets, either commercial or residential, but in a different structure from direct property ownership.
Property trusts can either be listed, meaning they are traded as shares on the Australian Securities Exchange, or unlisted, meaning they are held by investors and there is no public market.
Property trusts are generally offered in two forms, either wholesale or retail, with the latter being offered less frequently because these demand more onerous compliance requirements.
Typically, investors will buy units in a trust with the number of units they hold proportional to their interest in the property. For example, if the trust had 5 million units at $1 each and you owned 250,000 units you effectively own 5% of the property.
However, investors are not on the property title – the trustee of the trust holds the property on behalf of the unit holders.
Investors can buy their units in their choice of tax vehicle (i.e. under their own name, self-managed super fund, discretionary trust or company).
Commercial property trusts generally pay distributions to investors on a quarterly basis while the property is held and then a final payout of the gain once the property is sold. For example, if you own 5% of the units on offer, as in the example above, you would receive a 5% share of the rent returns and 5% on the sales proceeds when the property is sold.
Issues relating to a trust can be voted on by investors as provided for in its constitution and voting rights will be proportional to the amount of each investor’s interest.
Property trusts are a great way for investors to gain exposure to high-quality property assets which they may not be able to afford on their own.
Finance Newsletter – October 2015
RATE CRASH!
Do you have the best rate available?
If your interest rate is over 3.99% variable then you may be able to save thousands per year by changing loans and or banks. I have access to a Major bank that is currently offering customers a 3.99% variable rate .This NOT a honeymoon rate; discount is for the life of the loan. Conditions apply – owner occupied homes 80% LVR maximum. If you are interested in saving thousands per year call Mercia Finance to see if we can show you how to benefit from a better rate.
Investors will have read that most banks are increasing the rate on investment loans. This includes current investment loans. If you are a property investor check your rates and find out if these increases apply to you. If you are not sure ask Mercia Finance for an obligation free loan check. Some institutions are not increasing the rates for investors. So this is a good time to make sure you have the best loan for your circumstances.
If you have questions regarding any type of loan, call Dan Goodridge on 04144 233 40. Our service is free of charge to you the borrower and we have access to all the major lenders in WA.