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Property Newsletter – April 2016
April 7, 2016 | 
Author Hypothetical borrowers shine light on lenders’ changes
New research shows the Australian Prudential Regulation Authority’s (APRA) crackdown on investor loans is taking effect with average loan sizes recording a sharp drop.
APRA has increased scrutiny of financial lenders’ practices in recent times in a bid to bolster the nation’s banking system.
To compare how lenders evaluate their clients, APRA created four hypothetical borrowers.
Using the four borrowers, APRA surveyed 20 banks, building societies and credit unions in December 2014 to determine how they evaluate these clients.
To test how lender’s policies had changed in response to APRA’s crackdown on property loans, the watchdog ran a second survey in September 2015 using the same four hypothetical borrowers.
The results found that the maximum loan sizes to property investors dropped 12% on average. Meanwhile, the maximum loan sizes for owner-occupiers dropped 6% on average.
Lenders tighten investor-loan criteria
To determine how different lenders evaluate these four hypothetical borrowers, the survey utilised four data points. These are:
•Borrower’s income
•Living expenses
•Interest rate for the new loan
•Interest rates for their existing loan
Most lenders use these four factors to determine a borrower’s Net Income Surplus (NIS), which is used to determine the serviceability capacity of a borrower.
The research found that lenders were now applying higher interest rate stress tests to existing loans with rates of between circa 5-8% in December 2014 compared to 6-9% in September 2015 – with most typically above 7%.
Many lenders had also raised the borrower’s minimum living expense assumptions, while some lenders applied larger discounts to borrower’s incomes, particularly those on less stable sources of income, such as overtime, bonuses and commissions.
Given the changing financial lending market, investors should engage brokers who specialise in investor loans to ensure they’re optimising their borrowing capacity.
Building approvals a telling sign for investors
Despite the soft property market, building approvals for medium density houses in Perth have grown, highlighting the continued shift in buyer’s attitudes towards these dwelling types.
The number of medium density housing building approvals in Western Australia increased 0.4% to 8,001 in the year ending November 2015.
Although the growth was only minor, the number of approvals was still higher following a 35% increase in medium density approvals a year earlier and amid a slower property market in the state.
The growth in the medium density housing segment also came at a time when approvals for stand-alone dwellings dropped by 12.9%.
The new figures were released last month in Bankwest’s Housing Density Report. Bankwest said the resilience of the medium density housing space would be underpinned by Perth’s population growth over the next decade.
“Perth’s population is forecast to grow by 33% to 2.8 million in 2025, bringing an extra 700,000 people into the city,” Bankwest said.
Medium density housing has become more popular in Perth in recent years as residents increasing want to live closer to their places of work, specifically the CBD, as well as the Swan River, coastline and established amenities, such as café and retail strips and train stations.
The shift towards medium density housing highlights the importance of acquiring investment properties in Perth’s inner metropolitan ring.
As the city’s population continues to grow, so too will the demand for properties within this zone.
Properties that have large land components in suburbs with restricted supply capacity are likely to perform the best in the long term.
While the move to medium density housing has increased in Perth in recent years, the city is still lagging behind its capital-city counterparts.
Medium density building approvals comprise just 30% of total building approvals in Perth compared to 57.9% in Melbourne, 64.5% in Brisbane and 69.4% in Sydney, according to the report.
Concerted and coordinated approach maximises returns
When it comes to designing your property development, a coordinated effort between builders, architects and town planners is needed to optimise your site.
During the design process of a property development, many investors will either engage a builder or architect to help determine the size and number of dwellings to build.
This stage of a development is highly important because the decisions made now will have a big influence on the final yield of the project.
As such, a better approach is to incorporate both building specialists and architects into the design process, as well as town planners, who have a firm understanding of the residential design codes that govern what can and cannot be built.
For example, a client recently engaged Momentum Wealth’s developments team with a 1,000 square metre development site located in a north-east suburb in Perth.
With a zoning code of R40, the site was, on face value, suitable for the development of 8 multi-dwellings.
However, particular to this site was a 5.5 metre slope to the rear.
Typically, sloping blocks can be more costly to develop because they present unique challenges in terms of drainage, excavation and building height.
Subsequently, more site and earthworks typically need to be completed.
In this case though, our in-house town planners and development specialists worked with designers to utilise the natural contours of the site to the client’s advantage.
The final design, which recently received building approval, comprised a 2-storey building on the street front and a 3-storey building at the rear with car parking in between.
The sloping block meant the height variation between the front and back building was negligible, despite the extra storey at the rear.
Adding the extra storey also allowed us to include 10 dwellings, compared to the original design of 8, and an additional 150sqm of floor space.
Using the innovative design, the projected yield for the client has increased by more than 30%.
This project is an excellent example of why it’s important to incorporate building specialists and architects as well as town planners into the design process.
This approach will help to ensure you utilise your development site to its fullest potential and, in turn, optimise your returns.
Legal risks and liabilities: the real cost of self-managing
Are you considering self-managing your property portfolio? The decision to do so may prove significantly more costly than you think.
It’s not uncommon for novice investors to consider managing their own portfolios, particularly if they only own 1 or 2 properties.
However, by taking on the responsibility to self-manage, you’re also likely to be taking on more risk, not only financially, but legally as well.
So what are the risks if you decide to forego professional property management?
Firstly, and perhaps most importantly, self-managing landlords are susceptible to legal action if they don’t fully understand the legal requirements for leasing a property.
This can include the requirements for installing smoke alarms or ensuring minimum security obligations, among many other issues.
Furthermore, self-managing landlords may also be vulnerable if they don’t understand their own rights and the rights of the tenant.
It’s not uncommon to hear stories of tenants who stop paying their rent or who’ve trashed their rental property.
In such circumstances a professional property manager will mitigate the risk of this occurring by compressively screening applicants and understanding the legal recourses should such incidents occur.
Self-managing landlords who haven’t followed proper procedures may find that their landlord insurance company either discounts or refuses to pay a claim.
Should the need arise to go to court, a good property manager is able to act on the owners behalf, will know how to adequately prepare for a hearing and have supporting evidence and information to back up their case.
It’s important to remember, also, that the cost of hiring a property manager is tax deductable, so any perceived savings from self-managing are likely to be negligible.
Subsequently, the real savings made from self-managing don’t outweigh the benefits of engaging a professional property manager.
Eden Hill: Old suburb provides affordability
Eden Hill: This suburb was first developed nearly a century ago and provides an affordable option for property buyers.
Eden Hill is located 11 kilometres north-east of the Perth CBD and comprises about 3,500 residents.
It’s bounded by Morley Drive East to the north, Walter Road East to the south, Wick Street to the west and Lord Street to the east.
The housing stock in the area dates back to the 1920s when the first significant residential development occurred.
However, with the suburb being rezoned in recent years, more infill development has since occurred.
The stock comprises approximately 88% stand-alone houses, 7% duplexes, villas and townhouses and 5% flats, units and apartments.
As well as its proximity to the CBD, the suburb’s main drawcard is its relative affordability.
With a median house price of $477,500, according to REIWA, the suburb sits below Perth’s median price.
This is reflected in the suburb’s demographics with about 14% of resident identifying as professionals, compared to the state average of about 20%.
About 18.5% of residents also identify as technicians and trades workers (WA 16.7%) and 17.9% as clerical and administrative (WA 14.7%).
The Eden Hill Primary School is located within the suburb and Hampton Senior High School is directly to the west.
Morley Galleria Shopping Centre is also 4km to the west and the Bassendean Shopping Centre is 2km to the south.
Its closest train stations are Bassendean and Success Hill, also located about 2km to the south.
Property syndicates’ popularity grows amid planning changes
Property syndicates have increased in popularity in recent years, but why have they suddenly become a more prominent investment strategy?
It’s not uncommon to see media reports touting the success stories of “average investors” who’ve joined a property development syndicate.
Less than a decade ago, though, property syndicates in Perth were all but unheard of and usually the domain of sophisticated investors with the right connections.
So what’s changed in that time for syndicates to be more commonplace?
Perhaps the biggest catalyst has been the Western Australian government’s planning blueprint, Directions 2031, which was released in 2011.
The report outlines the government’s planning strategy for metropolitan Perth including the identification of key activity centres and transport links.
One of the document’s key goals is to achieve a 47% infill target – that is 47% of new dwellings need to be built in established suburbs, rather than developing new land estates on the urban fringe.
As such, many local councils are updating their town planning schemes to comply with the state government’s objectives and meet set population targets.
This includes increasing housing density, for example from R20 to R40, particularly around key activity centres and public transport nodes.
These zoning increases have led to a more conducive environment for the construction of medium density residential developments, such as boutique apartment complexes between $3 million and $20 million.
These types of developments are generally too large for single investors to bankroll and too small for the consideration of big state and national developers.
Therefore, property syndicates, whereby a number of investors pool their money, are a great avenue to fill this gap in the market and have proven to be highly lucrative for investors.
This development activity is also supported by rising demand for medium density housing, which is increasingly attractive to buyers for its affordability advantages, lower required maintenance and proximity to key amenities, such as transport links, employment hubs and retail and café strips.
Bigger isn’t necessarily better in commercial property
Many investors envisage city skyscrapers and large shopping complexes when commercial property comes to mind, particularly those unfamiliar with the market. However, bigger isn’t necessarily better in commercial.
Given that much of the mainstream media focuses on these segments of the market, it’s understandable that many investors only think of the big end of town.
Of course, individual investors wouldn’t be able to afford an office tower, for example, as these large assets typically cost a minimum of $20 million and are owned by big institutional and superannuation funds.
But that doesn’t mean individual investors can’t afford a high-quality commercial property.
Indeed, investors should think small when it comes to commercial property, and look to the suburbs.
Commercial space within smaller suburban shopping centres can make a good starting point.
Although retail has suffered with the rise of online shopping in recent years, service providers, such as hairdressers, will continue to need bricks and mortar stores to operate.
Investors should consider suburban shopping centres that are anchored by a large supermarket and also comprise other specialty stores, such as a baker, butcher and chemist, for example.
Similarly, specialty medical spaces, for chiropractors, physiotherapists and general practitioners, will continue to see demand over the long-term and can make great investments.
Investors must be aware of vacancy rates and market rents, though, as these can vary widely between suburbs and property types.
Unfortunately, most of the published statistics on the commercial property market relate to the CBD statistics, so it can pay to engage a buyer’s agent who will hold a firm understanding of the local suburban markets.
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Finance Newsletter – April 2016
RATE CRASH!
Do you have the best rate available?
If your interest rate is over 3.98% variable then you may be able to save thousands per year by changing loans and or banks. I have access to a bank that is currently offering customers a 3.98% variable rate .This NOT a honeymoon rate, discount is for the life of the loan. Conditions apply – owner occupied homes, principal and interest payments, 80% LVR maximum – includes redraw facility. 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. Call us anytime. After hours is OK.
Tax Newsletter – April 2016
Deadline looming for SMSF collectables compliance
The ATO has reminded trustees of self managed super funds (SMSFs) that if they have investments in collectables or personal-use assets that were acquired before 1 July 2011, time is running out to ensure their SMSFs meet the requirements of the superannuation law for these assets. Assets considered collectables and personal-use assets include artwork, jewellery, antiques, vehicles, boats and wine.
From 1 July 2011, investments in collectables and personal-use assets have been subject to strict rules to ensure they are made for genuine retirement purposes and they do not provide any present day benefit. SMSFs with investments held before 1 July 2011 have until 1 July 2016 to comply with the rules.
The ATO says SMSF trustees have had since July 2011 to make arrangements, and it expects that they will take appropriate action to ensure the requirements are met before the deadline.
TIP: Appropriate actions may include reviewing current leasing agreements, making decisions about asset storage and arranging insurance cover.
Overseas student debts: repayment thresholds
From 1 July 2017, anyone with a Higher Education Loan Programme (HELP) or Trade Support Loans (TSL) debt who is living overseas and earning above the minimum repayment threshold will be required to make loan repayments to the Australian Government, just as they would if they were living in Australia. The HELP minimum repayment threshold for 2016–2017 is $54,869.
TIP: If you have a student loan debt and are planning to move overseas for longer than six months, you need to provide the ATO with your overseas contact details within seven days of leaving Australia. You should also factor in potentially having to make repayments from 1 July 2017.
ATO data-matching for insured “lifestyle” assets
In January 2016, the ATO advised it was working with insurance providers to identify policy owners on a wider range of asset classes, including marine vessels, aircraft, enthusiast motor vehicles, fine art and thoroughbred horses. The ATO has since formally announced the data-matching program that covers these “lifestyle” assets, and will acquire details of insurance policies for these assets where the value exceeds nominated thresholds for the 2013–2014 and 2014–2015 financial years.
The ATO said it will obtain policyholder identification details (including names, addresses, phone numbers and dates of birth) and insurance policy details (including policy numbers, policy start and end dates, details of assets insured and their physical locations). The data-matching program will provide the ATO with a more comprehensive view of taxpayers’ accumulated wealth, as well as assist in identifying possible tax compliance issues.
TIP: It is estimated that records of more than 100,000 insurance policies will be data-matched. The ATO has released a list of insurers involved with the data-matching program. Please contact our office for further information.
Market value of shares is not the selling price
The Administrative Appeals Tribunal (AAT) has ruled that the “market value” of a parcel of shares in a private company that a taxpayer sold in an arm’s-length transaction (together with the other two shareholders’ shares in the company) was not the proportion of the sale price he received from the sale of all the shares. Instead, the AAT agreed it was a discounted amount; the taxpayer was a “non-controlling” shareholder, so the market value was less than simply his one-third share of the sale price.
As a result of this AAT decision, the taxpayer passed the $6 million “maximum net asset value test”, allowing him to qualify for small business capital gains tax (CGT) concessions, where otherwise he would not have.
The Commissioner has appealed to the Federal Court against this AAT decision.
TIP: This decision demonstrates that the actual selling price of an asset may not always represent its “market value”. In this decision, the AAT agreed with the taxpayer’s valuer that “all other things being equal, the average price per share of a controlling shareholding will be higher than the average price per share of a non-controlling shareholding because of the value of control”.
Individual not a share trader
The Administrative Appeals Tribunal (AAT) has found that a taxpayer (a childcare worker) was not carrying on a business of share trading, and accordingly was not entitled to claim a loss resulting from her share transactions. In the year in question, the taxpayer turned over approximately $600,000 in share transactions (including both purchases and sales).
In deciding that the taxpayer was a share investor and not a share trader, the AAT considered each of the key indicators established in case law. The AAT decided that a lack of regular and systematic trade, especially in the second half of the income year, when only 10 transactions were made, went against the taxpayer’s contention that she was conducting a share trading business.
TIP: The AAT weighs up all the relevant factors in cases like this. There have been cases where the AAT has found that a taxpayer was carrying on a business of share trading, and has therefore allowed them to claim a deduction for their losses.
Small business restructures made easier
The Government has made changes to the tax law to provide tax relief for small businesses that restructure. The tax law changes provide an optional rollover for small business owners who change the legal structure of their business on the transfer of business assets from one entity to another. The effect of the rollover is that the tax cost of the transferred assets is rolled over from the transferor to the transferee.
This optional rollover is in addition to existing rollovers available where an individual, trustee or partner transfers assets to, or creates assets in, a company in the course of incorporating their business.
The changes to the tax law will take effect on 1 July 2016.
TIP: You must meet strict eligibility requirements in order to access the rollover. Among other things, the rollover must be part of a genuine business restructure that does not change the ultimate economic ownership of the assets. There are also tax consequences you should be aware of.
Tax law changes to treatment of earnouts
The Government has recently amended the tax law concerning the capital gains tax (CGT) treatment of the sale and purchase of businesses involving certain earnout rights.
Specifically, the changes provide for a “look-through” treatment. Under the amended tax law, capital gains and losses that arise in respect of look-through earnout rights will be disregarded. Instead, payments received or paid under the earnout arrangements will affect the capital proceeds and cost base of the underlying assets to which the earnout arrangement relates when they are received or paid (as the case may be).
The changes apply from 24 April 2015.
TIP: These changes to the tax law do not apply for events that occurred before 24 April 2015. However, transitional protection is provided, subject to conditions, for taxpayers who have reasonably anticipated these changes to the tax law, which were originally announced by the former Government.
Finance Newsletter – March 2016
RATE CRASH!
Do you have the best rate available?
If your interest rate is over 3.98% variable then you may be able to save thousands per year by changing loans and or banks. I have access to a bank that is currently offering customers a 3.98% variable rate .This NOT a honeymoon rate, discount is for the life of the loan. Conditions apply – owner occupied homes, principal and interest payments, 80% LVR maximum – includes redraw facility. 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. Call us anytime. After hours is OK.
Taxation Newsletter – March 2016
Tax relief for small businesses that restructure on the way
Small businesses are important to the Australian economy, as they facilitate growth and innovation. However, as a small business develops over time, its initial legal structure may no longer be suitable for the business. Where a business has to restructure to accommodate growth, the transfer of assets from one legal structure to another could give rise to unwanted tax liabilities, even though the underlying economic ownership remains the same.
With this in mind, the Government has proposed amendments to the law to provide tax relief for small businesses that restructure on a genuine basis. If the legislative amendments are enacted as proposed, the changes would apply for restructures occurring on or after 1 July 2016. In introducing the Bill, the Assistant Treasurer said that this legislation completes the Government’s $5.5 billion Growing Jobs and Small Business package. Ms O’Dwyer said the Bill will reduce risk and complexity, and will make it easier for businesses to grow.
Trusts’ ABNs to be cancelled if no longer carrying on business
The ATO has advised that the Registrar of the Australian Business Register (ABR) will begin cancelling the Australian Business Numbers (ABNs) of approximately 220,000 trusts, where there is evidence they are no longer carrying on an enterprise.
A trust’s ABN will be cancelled where available information indicates that the trust has not lodged business activity statements and/or trust income tax returns for the last two years. Exclusions to these ABN
cancellations apply for trusts that are registered with the Australian Charities and Not-for-profits Commission (ACNC) or are non-reporting members of a GST or income tax group.
The ATO said entities will receive a letter if their ABNs had been cancelled. This letter will include the reason for the cancellation, and a phone number to ring to have the ABN reinstated immediately if the entity does not agree with the decision.
Withholding tax for car allowances
Car expense deductions for individuals were simplified from 1 July 2015. Employers who pay their employees a car allowance need to withhold tax on the amount they pay over 66c per kilometre. If employers have not been doing this, the ATO notes they should start now to avoid their employees having a tax debt.
TIP: Employers should consider having a discussion with affected employees about whether to increase the withholding amount for the remainder of the financial year to cover the shortfall.
If you have any questions, please contact our office.
Travellers with student debts need to update contact details
Australians with a Higher Education Loan Programme (HELP) debt and/or a Trade Support Loans (TSL) debt who are moving overseas for longer than six months will need to provide the ATO with their overseas contact details within seven days of leaving the country. International contact details can be provided to the ATO using its online services (eg an ATO account linked to myGov).
From the 2016–2017 income year, anyone who has a HELP or TSL debt and earns above the minimum repayment threshold will be required to make repayments regardless of where they live.
TIP: Students’ debt will be indexed each year until it is paid off. You can make additional voluntary repayments at any time, including from overseas, to reduce the balance of your debt.
Small business tax concession refused as threshold test failed
The small business capital gains tax (CGT) concessions contained in the tax law allow eligible small businesses to access tax concessions on capital gains made from the sale of certain CGT assets.
There are threshold tests for accessing the concessions outlined in the tax law. Importantly, the taxpayer must be a small business entity, or a partner in a partnership that is a small business entity, or the taxpayer’s net assets, together with certain associated entities’, must not exceed $6 million. This is the Maximum Net Asset Value (MNAV) test.
A recent case before the Federal Court examined whether a taxpayer was entitled to the tax concessions. In particular, the Court looked at whether the taxpayer had correctly excluded a debt (a pre-1998 loan) from the MNAV test calculation. The taxpayer had not included the pre-1998 loan on the basis that it had no value, being “statute-barred” under the relevant state legislation, in this instance the Limitation of Actions Act 1936 (SA).
However, the Court dismissed the taxpayer’s appeal. The Court confirmed that the pre-1998 loan could not be regarded as having no value, and that the loan amount of $1.1 million should be included in the MNAV test calculation. The inclusion of the amount meant that the sum of the net values of the relevant CGT assets exceeded the $6 million MNAV threshold. As a result, the small business CGT concessions were not available to the taxpayer.
TIP: This case highlights the importance of satisfying the basic conditions to access the small business CGT concessions, in particular when an asset originally excluded from the MNAV test is subsequently included in the test calculation and results in the breach of the MNAV threshold.
“Wildly excessive” tax deduction claims refused
A professional sales commission agent has been largely unsuccessful before the Administrative Appeals Tribunal (AAT) in claiming tax deductions for work-
related expenses, including home office expenses, various grocery items and overtime meal allowances.
The case concerned the taxpayer’s deduction claims in his 2011 and 2012 tax returns. The taxpayer worked as a professional sales commission agent and his employer did not provide him with a dedicated office or workspace. His original claims (which changed throughout the course of the AAT proceeding) totalled over $63,000 for 2010–2011 and over $53,000 for 2011–12, representing at least 30% of his employment income. During the proceedings, the taxpayer abandoned a claim for a $5,388 payment to his seven-year-old son for his “secretarial assistance”.
The AAT found that the taxpayer’s home office claims were “wildly excessive”, and that the taxpayer and his representatives failed to critically analyse how these claims helped produce the taxpayer’s assessable income. The AAT rejected everything claimed under “staff and client amenities”, as it considered the products were overwhelmingly consumed by the taxpayer’s family, making the claims “outrageous and utterly unacceptable”. The claimed meal allowances were also rejected in their entirety. However, the AAT did not disturb heating and lighting expenses allowed by the Commissioner.
GST credits not available for payments on behalf of super funds
The ATO has issued GST Determination GSTD 2016/1, which provides the Commissioner’s view on whether employers can claim input tax credits for expenses paid on behalf of superannuation funds.
The Determination notes that employers may pay expenses on behalf of superannuation funds for administrative convenience. It provides that an employer is not entitled to an input tax credit if a superannuation fund makes an acquisition and the employer pays the expense on the fund’s behalf (eg the super fund obtains legal advice but the employer pays the legal adviser). This is because the advice is supplied to the fund and not to the employer. However, the Determination notes that the fund may be entitled to claim a reduced input tax credit under the financial supply rules (contained in the GST Act), provided the requirements of those rules are satisfied.