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Tax Newsletter – November 2015
October 16, 2015 | 
Author 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.
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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.
Taxation Newsletter – October 2015
Excessive deduction claims on holiday homes on ATO hit list
The ATO is increasing its focus on holiday home investors and, in particular, whether they are correctly claiming deductible expenses. A key concern is when people make claims for expenses when the property was not available for rent. The ATO has recently advised that it will be sending letters to taxpayers in approximately 500 postcodes across Australia, reminding them to only claim the deductions they are entitled to, for the periods the holiday home was rented out or was genuinely available for rent.
TIP: Holiday home investors should be aware that the ATO appears to be taking a broad approach in monitoring rental deductions. Where relevant, it may be prudent for holiday home investors to take this opportunity to review the rules surrounding holiday home tax deductions to ensure that any risks or issues are addressed in a timely manner. It may also be a good idea to review records now so that you are prepared should the taxman come knocking. If you have any questions about this issue, please contact our office.
Foreign property investors – reduced penalty period ending
The ATO has reminded foreign investors that the reduced penalty period for possible breaches of Australia’s foreign investment rules for purchases of Australian real estate will close soon. The reduced penalty period is only available until 30 November 2015. From 1 December 2015, new criminal and civil penalties will apply. The ATO said if foreign investors disclose a breach of the rules for residential real estate purchases during the reduced penalty period, depending upon their circumstances, they may:
- be given a concessional period of 12 months to divest themselves of the property, rather than a shorter period;
- not be referred for criminal prosecution.
Payroll tax grouping – know the rules
For payroll tax purposes, businesses may be grouped with other businesses if there is a link between the companies. Businesses may be deemed linked in several ways. One of the most common ways is where two or more businesses are controlled by the same person or persons. However, there are specific exclusions under the payroll tax grouping rules which could apply for a business depending on the circumstances. This will require making an application to the relevant state or territory revenue authority.
When a group exists, only a single tax-free threshold will apply to the whole group. That is, the separate businesses themselves will not each have the benefit of the tax-free thresholds. Each member of the group will be liable for any outstanding payroll tax of the other group members. Therefore, it is important for businesses to identify whether they could be grouped for payroll tax purposes.
TIP: The potential eligibility for exclusion from the payroll tax grouping rules should be assessed. Furthermore, as business conditions may change and as part of the overall management of a business, it may be prudent to regularly examine your business’s payroll tax obligations.
No GST credits for mining accommodation
The Full Federal Court has dismissed a taxpayer’s appeal from an earlier decision which held it was not entitled to input tax credits for acquisitions relating to providing accommodation to employees and contractors working in the Pilbara.
The taxpayer, Rio Tinto Services Ltd, was the representative member of the Rio Tinto Ltd GST group, which carried on a large-scale mining enterprise in outback Australia. The group provided and maintained residential accommodation for its workforce in various locations, comprising some 2,300 houses and apartments. This was operated at a considerable loss, for example, in 2010 the taxpayer received $6.1 million in rent but the associated costs exceeded $38.8 million.
The case was conducted as a test case for GST paid in October 2010 on expenditure including construction and purchase of new housing, repairs, cleaning and landscaping. The taxpayer claimed it was entitled to input tax credits of nearly $600,000 for acquisitions made in providing and maintaining residential accommodation for the group’s workforce in the Pilbara region. It argued the housing for its workers were a necessary part of its mining operations.
The Full Federal Court said it was clear from the facts that all of the acquisitions related wholly to making supplies of rental residential accommodation. Although the supplies of accommodation were for the broader business purpose of carrying on the taxpayer’s mining operations, it said this did not alter the fact that the acquisitions all related to supplying premises by way of lease, which were input taxed supplies.
ATO’s proportionate compliance approach to SMSFs
From 1 July 2014 the ATO has three new regulatory compliance powers to deter and address contraventions of the superannuation law by trustees of self-managed super funds (SMSFs). These three new powers include the ability of the ATO to issue education directions, rectification directions and administrative penalties. The new laws were introduced to give the ATO more flexible and proportionate powers to deal with the various levels of noncompliant behaviour by trustees.
It is important for trustees to understand the ATO’s compliance approach to administrating the SMSF sector. A key message that the ATO has been communicating to all trustees is for them to rectify a breach as soon as it is identified. According to ATO Assistant Commissioner, SMSF Segment, Superannuation, Kasey Macfarlane, in these circumstances, the ATO would be “unlikely to apply further sanctions unless other factors are identified, such as if the same or similar contraventions frequently arose”.
Ms Macfarlane said the ATO uses “the new powers and penalties to drive compliance, not to increase revenue”. “So while you can expect to see us actively using the directions powers, in a large percentage of cases our application of SMSF administrative penalties will be more judicious, via favourable remission requests, for first offences,” she said.
Find your small lost superannuation accounts
A Bill has been introduced into Parliament which contains legislative amendments to increase the account balance threshold below which small lost member accounts will be required to be transferred to the Commissioner of Taxation, ie from $2,000 to $4,000 from 31 December 2015, and from $4,000 to $6,000 from 31 December 2016.
TIPS:
Moving all your super from multiple accounts into one account (known as “consolidating your super”) might help you to save on fees and make managing your super easier.
There may be sound reasons for maintaining a separate small superannuation account. It may be prudent to assess those reasons and, if those reasons are still valid, to take steps to ensure that you remain an active fund member.
Individuals are able to claim back their superannuation from the Commissioner at any time. Interest, calculated in accordance with the Consumer Price Index (CPI), has been payable on unclaimed superannuation money repaid since 1 July 2013.
Please contact us for further information.
Property Newsletter – September 2015
Investor loan changes continue to unfold
Australia’s finance watchdog, the Australian Prudential Regulation Authority (APRA), has continued to increase pressure on the country’s lenders in a bid to restrict further growth in investor loans.
Since the June edition of Property Wealth News, when we first reported APRA’s intentions to implement tougher lending criteria for investor loans, Australian lenders have moved to meet the new requirements.
This entails lenders observing a speed limit of 10% annual growth in investor loans, which is designed to cool the overheated property markets in Sydney and Melbourne, which have been driven largely by investor activity.
Effectively, there’s no silver bullet for lenders to meet the new requirements and as such these institutions are changing any, or all, or the following to meet the 10% target:
- Acceptable loan-to-value ratios
- Serviceability requirements
- Interest-rate buffers
- Negative gearing allowances
- Rent allowances
- Rate adjustments
To ensure lenders are taking the necessary steps to increase scrutiny of investor-loans, APRA has begun auditing these financial institutions on a weekly basis.
Amid these changes to assessing investor-loans, property investors should seek advice from brokers that specialise in investment finance.
This is particularly pertinent for investors who are considering purchasing a property within the next 12 months, but also applies to any other property investors to ensure their loans remain the most suited to their long-term circumstances.
Why property selection is critical to creating wealth
Not all properties in one single city or suburb record the same growth rates and the cost of buying the wrong property could be higher than you think.
While anyone with a deposit or enough equity in their home can become a property investor, buying a high-performing investment property is a totally different ball game.
It requires a comprehensive understanding of the property market, a firm knowledge of the underlying economic drivers that will lead to higher capital growth and literally hundreds of hours of research and monitoring the market to find the right property.
Quite simply, finding the right property is hard work, and then you have to make sure your finances are structured effectively as well as negotiating the purchase to ensure you secure the best price and contract terms.
However, when it comes to property investment, the hard work is generally worth the reward.
For example, if an investor purchases an investment property for $500,000, the capital gains will be substantially different depending on the growth rate.
At a compounded growth rate at a moderate 5%, the capital gains on the property will be about $140,000 after 5 years and about $320,000 after 10 years.
While these returns might seem sufficient, the capital gains are significantly more if the compounded growth rate is only slightly higher at 8%.
At this rate, the capital gains on the property will be about $235,000 after 5 years and about $580,000 after 10 years.
Given this, it’s easy to see why property selection is critical to optimising your wealth.
The performance of your first investment property will also have a large impact on how soon you can purchase subsequent investment properties.
Indeed, the sooner you can purchase another high-performing investment property the quicker you can build your wealth, so it pays to select the right property the first time.
How to build your way to wealth – part 2
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 1 of this article series we outlined the first 3 steps to becoming a successful property developer.
This included the necessity to know the intricacies of the property development industry, to hold a firm understanding of the property market and the essential considerations when searching for a development site.
In the second part of this three-part series we explain steps four to six – the need to complete a feasibility study, determining if you’re an investor or a developer (as this will impact your tax bill) and how to buy your site wisely.
- Complete a feasibility study
After you’ve located a potential site that you believe meets your criteria, you’ll need to complete a feasibility study to ensure it does. Unless you’ve done this before, you’ll need to engage professional assistance to compile a feasibility study. The aim of this is to determine the size of the profit, or loss, that you would make should you proceed with the development.
The following information should be detailed in a feasibility study:
- All easements or covenants on the land title and any impact on development
- Analysis of soil to determine engineering and drainage requirements
- Position of utilities and services, such as power poles and sewerage drains
- A calculation of building and subdivision costs
- A detailed timeframe of the project
At this stage you would have invested a considerable amount of time into the project, however if it doesn’t pass a feasibility study you’ll need to consider a different site.
- What’s your tax status?
Whether you’re considered a developer or an investor can determine the amount of tax you’ll have to pay on the development.
For example, as an investor you will pay tax on any profits from your development but if you hold onto the property for more than 1 year you may be entitled to a 50% discount.
Conversely, as a developer you may not be eligible for a tax discount and you may have other tax obligations.
To provide peace of mind, you should seek advice from tax accountants to determine your likely tax status.
Your accountant should also be able to advise as to the best type of structure to acquire the development, whether it’s an individual name, joint ownership, as a company or in a trust. Each has its own financial and legal pros and cons.
- Be an intelligent buyer
The amount you pay for your development site is one of the few factors that is within your control and this will have a considerable impact on the profitability of your project.
It’s also important to secure favourable contract clauses. Ensure an adequate due diligence period is included in the contract so you can conduct thorough research into the site’s profitability as well as walk-away clauses that allow you to cancel the acquisition if you’re not fully satisfied.
Keep in mind, sales agents work for the seller so it can be wise to engage the services of a buyer’s agent to oversee negotiations and ensure contracts are weigh in your benefit. A buyer’s agent can also keep your identity and motives confidential.
The third and final part of this article series, to be published in the October edition of Property Wealth News, we will explain how to properly structure your finances, how to choose the best designers and builders and whether to sell or hold your final product.
What your property manager needs to do at the end of a tenancy
While landlords fear vacancy periods in between tenants, there are certain matters your property manager needs to attend to before a new tenant can move in.
It might seem ideal for a tenant to move into your property the day after another vacates, thereby ensuring no disruption to your rental income.
However, this rarely occurs and in the large majority of situations, this is not entirely practical.
Generally, there has to be at least a few days when the property is empty so the property manager can conduct the necessary tenant-vacate checks.
One of the most important tasks to complete when at the end of a tenancy is the final inspection and the completion of a property condition report.
This is necessary to ensure the property has been adequately cleaned and prepared to a suitable condition for the new tenant.
It’s also a chance to identify any excessive wear and tear to the property, if any items have been wrongly removed or left at the property or if there is any damage to the property.
In some instances, the outgoing tenant may be required to revisit the property to amend any issues and, subsequently, the property manager will have to reinspect the property to ensure the problems have been addressed.
Provided these processes have been followed, the bond can be finalised and the appropriate amount returned to the tenant before the property condition report is updated.
While a brief vacancy period allows the property manager time to complete the necessary processes, it’s also a good time for the landlord to consider any maintenance issues.
Ideally it’s better to complete larger jobs when the property is vacant, such as painting, flooring or minor renovations, which will help to optimise rents.
Although landlords do lose rental income during vacancy periods, these times should be used to ones’ advantage because completing tenant-vacate checks and maintenance jobs will ultimately
Buzzing inner-city suburb highly sought after
This affluent suburb is located in the hustle and bustle of inner metropolitan Perth making it a highly sought-after area for many younger people.
Highgate is situated just 2 kilometres from the Perth central business district and has a population of nearly 2,000 residents with a median age of 33 years.
As well as being located close to the Perth CBD, Highgate’s other major drawcard is the Beaufort Street café strip, which features a variety of cafes, restaurants, retail and nightlife offerings.
Given these highly appealing aspects, Highgate’s average house price is considerably high at $840,000.
About two-thirds (61%) of dwellings are rented in the area, which is more than double the Perth average of about 29%.
Highgate comprises a mix of residential zoning ranging from R30 through to R80, however the City of Vincent has released a draft town planning scheme that incorporates rezoning throughout much of the suburb.
In addition to the slated zoning changes, revised criteria for development has also been proposed.
The suburb has many parks, including the well-known Hyde Park, and multiple primary schools which service the area.