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Tax Newsletter – November 2014
October 20, 2014 | 
Author Offshore income tax “amnesty” nearing its end
The deadline to take advantage of the ATO’s initiative to allow eligible taxpayers to come forward and voluntarily disclose unreported foreign income and assets with reduced penalties is nearing. The ATO has urged taxpayers with offshore assets to declare their interests ahead of a global crackdown on people using international tax havens.
The Tax Commissioner Chris Jordan earlier this year announced the initiative to allow eligible taxpayers to come forward and voluntarily disclose unreported foreign income and assets. In announcing the initiative, known as “Project DO IT: disclose offshore income today”, the Commissioner warned that it provides a last chance opportunity for those who haven’t declared their overseas assets and income, to come back into the tax system before 19 December 2014, to avoid steep penalties and the risk of criminal prosecution for tax avoidance.
TIP: It should be emphasised that Project DO IT covers both “inadvertent” and “intentional” actions to hide offshore income and/or gains. The ATO has advised that where taxpayers may be unsure as to their eligibility for the initiative, they can contact the ATO’s Project DO IT team to discuss the issue and this can be done anonymously. Please contact our office for further information.
Subsidy to encourage employers to hire mature workers
The mature age worker tax offset will be abolished by the Government from the 2014–2015 income year and later income years. However, a new expenditure program being delivered by the Department of Employment, Restart, will provide alternative support by way of subsidy of up to $10,000 to employers who hire mature age job seekers.
The Restart program offers a wage subsidy of up to $10,000 (including GST) to eligible employers of mature age job seekers. The job seekers must be 50 years of age or older, and have been unemployed and receiving income support for six months or more. To receive the full payment, a business must employ the same employee for at least 30 hours per week for an ongoing period of two years. The Restart wage subsidy can also be claimed on a pro-rata basis if you hire a mature age worker part time, for at least 15 hours a week.
Doctor obtains tax relief for olive-growing activities
A medical practitioner has been, in the main, successful before the Administrative Appeals Tribunal (AAT) in seeking to have losses from his olive growing activities deducted from his other assessable income. The taxpayer had carried on an olive growing and olive oil production business for 15 years.
The taxpayer had applied to the Tax Commissioner to be relieved from the “non-commercial loss provisions” under the tax law for the 2010 to 2014 income years, inclusive. Under those rules, unless he is granted relief, he has to wait until the olive oil business starts to generate profits before he can claim his losses. The Commissioner refused the taxpayer’s application.
The AAT held the Commissioner’s decision not to allow the taxpayer immediate access to his losses was not the correct or preferable decision. The AAT decided the taxpayer should be allowed the relief from the “non-commercial loss provisions” under the tax law for the 2010 to 2013 income years, but not the 2014 income year.
The AAT also made several recommendations to the Commissioner as a result of issues raised during the proceedings. These were that the Commissioner:
- considers the use of an alternative approved form for applications of this nature;
- ensures, as far as possible, that any alternative approved form:
- asks applicants to provide all the information the Commissioner considers necessary for a proper consideration of the application; and
- takes into account the legislative amendments enacted in 2009 (ie the income requirement which means that taxpayers with taxable income over $250,000 have to rely on the Commissioner’s discretion).
- provides additional guidance to the Commissioner’s officers.
Tax claims for R&D costs mostly allowed
The AAT has mostly allowed a company’s deduction claims for research and development (R&D) expenditure at the 125% premium rate, but disallowed other claims in respect of overlapping expenditure.
Over an extended period, the taxpayer conducted various plant trials to test possible ways to improve its copper and lead concentrators and its copper smelter. The taxpayer sought to deduct a considerable part of its expenditure incurred during those plant trials at the premium rate of 125% as “research and development expenditure”.
The Commissioner refused most of the taxpayer’s claims arguing they were not deductible at the premium rate because they were “feedstock expenditure”, which is expressly excluded from the statutory definition of “research and development expenditure” under the tax law. The Commissioner also argued that, due to an overlap of the taxpayer’s R&D activities at its Mt Isa copper concentrator and Mt Isa smelter, certain expenditure became “feedstock expenditure” and was not deductible at the 125% rate.
The AAT allowed most of the taxpayer’s claims, but accepted the Commissioner’s arguments on the overlap issue.
The Commissioner has appealed to the Federal Court against the decision.
Compensation for providing domestic help taxable
The AATl has affirmed a decision of the Commissioner that a payment made to an individual for compensation for domestic assistance was assessable as ordinary income under the tax law.
In 1997, the taxpayer’s husband suffered a serious injury while white-water rafting during a team-building exercise organised by his employer. The husband was unable to work and the taxpayer gave up full time work to become a carer.
In 2012, the husband lodged a claim for compensation for domestic assistance under the Workers Compensation Act 1987 (NSW) in respect of the domestic assistance provided by the taxpayer. The Workers Compensation Commission awarded the taxpayer a lump sum of around $179,000.
The AAT said there was no basis that the compensation payment could be described as a loss of income earning capacity as argued by the taxpayer – rather, it was of the view that the payment was to ensure that the taxpayer was provided with a sufficient payment to cover her loss of income.
Perfecting a security interest over corporate property
A security interest in corporate property must be registered on the Personal Property Securities Register (PPSR) as soon as possible.
A recent Federal Court decision involving a loan from a self-managed super fund (SMSF) to a company which was later placed into voluntary administration has highlighted the importance of understanding the new Personal Property Securities regime. The Federal Court held the SMSF trustee was merely an unsecured creditor in relation to the commercial loan to the company after finding that its security interest had not been registered on the PPSR in time to avoid the interest vesting in the company (in liquidation).
TIP: The take-home message from the case is that a failure to register a security interest on the PPSR within 20 business days of the creation of a security agreement over corporate property leaves the lender/mortgagor in the hands of the gods in terms of later perfecting the security. For corporate property, a failure to register within 20 business days means that the security interest must have been registered at least six months before the administration or winding up of the grantor company.
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Property Newsletter – October 2014
When the honeymoon is over
You’ve probably seen the television commercials or maybe the full-page newspaper advertisements. The headline is always the same, a home loan interest rate so low that it’s difficult to ignore.
In a bid to acquire market share from their competitors, lenders are aggressively advertising home loans with very low introductory or ‘honeymoon’ interest rates. But are these attractive loans worth all the hype?
The idea behind these types of loans is simple. They essentially offer a discounted interest rate for a short period of time, normally the first 12 months of the loan.
The catch is that once the honeymoon period is over, the interest rate reverts to a much higher rate, such as the lender’s standard variable rate. These loans may also have excessive fees, making them surprisingly expensive.
Overall, they can cost a borrower hundreds of dollars more each month, or tens of thousands of dollars over the course of the loan.
Savvy borrowers treat introductory-rate home loans with caution as the short-term reprieve rarely makes up for the long-term financial strain.
Introductory-rate home loans can be of value to certain borrowers, such as those who plan to pay off their mortgage during or shortly after the honeymoon period, or those who plan to later switch to a better deal.
But it’s important to be aware of any fees or penalties that may be triggered on such an event.
Your broker is the best person to talk to about whether an introductory-rate home loan is suitable for your specific needs.
Confession: What buyers’ agents really think about auctions
The popularity of auctions seems to be increasing in the Perth market, despite the wariness of some locals.
And while the vast majority of properties are still sold via private treaty, there is a feeling that over time auctions will take an increasing share of the market.
But what do local buyers’ agents, who buy property for a living on behalf of their clients, really think about auctions? Do auctions provide good opportunities to snap up a bargain or do they stack the cards in the seller’s favour?
We can’t speak for all buyers’ agents in Perth, but given Momentum Wealth has the biggest team around, we can certainly shed some light on the pros and cons of buying at auction.
Overall, it’s fair to say that the auction process is designed to be in favour of sellers. The aim is essentially to flesh out as many potential buyers as possible (by not quoting a price) and then put these buyers in a competitive environment to hopefully trigger a bidding war. And there are many ploys used by selling agents and auctioneers to encourage the process.
There is often considerable pressure and emotion involved with auctions, which is why they can be a buyer’s worst nightmare. And it’s because of this pressure that buyers’ agents are often employed to represent buyers at auction.
Given the choice, most local buyers’ agents would probably prefer to buy via private treaty over auction. This is because they have better control over the negotiation process and can ultimately achieve a better result for their client, the buyer.
Critically, with private treaty, a buyer’s agent can include conditions in the contract that protect the interests of the buyer, whether in regard to finance or inspections. Under auction conditions, offers are generally cash and unconditional.
That said, with the right bidding strategy, auctions can provide excellent buying opportunities. However, you need to do your research and prepare for the unpredictability of the process.
Perhaps the best scenario for a buyer is when a property is passed in at the auction and the seller, becoming increasingly desperate to sell, happily entertains a lower offer.
It is worth remembering, however, that smart property investment is about acquiring the right type of assets, not necessarily getting a great deal upfront. So the focus should also be on the property and not the method of sale.
Momentum Wealth makes history to win REIWA awards
Momentum Wealth is honoured to have received two awards at the Real Estate Institute of Western Australia’s (REIWA) 2014 Awards for Excellence.
Momentum Wealth was presented with the Best Large Residential Agency of the Year award, which recognises excellence in customer service, property management and agency achievements.
It is the first time a buyer’s agent has received the award breaking a long history of selling agents winning the accolade.
Furthermore, Momentum Wealth property wealth consultant Kent Cliffe won the Buyer’s Agent of the Year award, which acknowledges excellence in leadership, contribution and innovation to the property industry and the ability to overcome business challenges.
The awards ceremony was held at Crown Perth on September 18 and was attended by more than 300 delegates, including WA attorney general and commerce minister Michael Mischin and REIWA president David Airey.
Following on from the state awards, Momentum Wealth and Kent will represent WA at the national finals, to be held in March next year in Perth.
At Momentum Wealth, we’d like to thank our clients for their on-going support and helping us to win these highly-esteemed awards.
Five things you need to know about a damaged fence
Dividing fences can often be an area of contention for adjoining property owners, especially when they are damaged and in need of expensive repairs. Here are five things you should know about it.
#1 – Who is responsible?
Generally speaking, when a shared fence is in need of repair, owners on each side of the fence are both responsible, whether the owners are investors or owner-occupiers.
According to the Dividing Fences Act 1961 (the Act), owners must contribute in equal proportions to the repair of the fence, and a ‘repair’ in this sense includes situations where the fence simply needs realignment or re-erection.
#2 – Disagreements
Consider a situation where the owner on one side of the fence wants to replace a damaged fence, but the other owner doesn’t believe the fence is in need of replacement. What happens?
In cases like this, if an agreement can’t be reached, the owner wanting to replace the fence can refer the matter to the Magistrates Court to seek an order. But the Magistrate will first need to be convinced that the need for replacement exists.
#3 – Emergency repairs
If a shared fence is suddenly damaged or destroyed by an event, such as a flood, fire, storm or accident, one owner can immediately repair the fence without giving notice to the neighbour.
The owner who repaired the fence can then recover half of the expenses from the other owner, either by mutual agreement or, if necessary, through the Magistrates Court.
However, because there is the potential for disagreements, it is always advisable that neighbours speak to one another before performing any repair work.
#4 – Neighbour at fault
What happens if the fence is damaged due to the fault of your neighbour? Should the neighbour pay for the entire cost of repair?
The Act only recognises a limited set of circumstances where one owner may be forced to repair or replace a shared fence at their sole cost. These are where the damage is caused by fire, or by the falling of a tree or branch. However, there must be evidence of neglect on the part of the owner deemed to be responsible for the damage.
#5 – Should your tenant contribute?
Tenants are not responsible for the cost of repairing a shared fence, except when the term of the lease is for a period of five years or more.
According to the Act, if the term of the lease is between five and seven years, the landlord must pay three quarters of the cost and the tenant one quarter.
The importance of a perfect finance application
It goes without saying that obtaining finance is a critical and often challenging step for any development project. It’s a very different prospect to a typical home loan application.
If you don’t have a strong track-record as a developer, securing finance approval may hinge on the quality and professionalism of your finance application.
The application matters greatly because lenders need to fully understand their potential risks, and the application will help them assess this risk and convince them of your credentials.
What to include?
What should a development finance application include? This, of course, depends on the size and type of the development. While this list is certainly not exhaustive, here are some of the main components that can form part of a professional loan application.
- Summary of the project highlighting the key points • Detailed feasibility showing the profit potential (lenders will want you to use conservative figures and show plenty of breathing room if things don’t go to plan) • Full set of costings • Information about the site and its zoning • Your credentials as a developer • Your financial contribution • Experience and expertise of your team • Project timelines • Exit strategy • Evidence of pre-sales (if required) • Signed builder’s contract • Necessary documents (such as the DA consent and council stamped plans)
Getting help to save time and ensure success
Given the importance of, and the level of detail required for, a development finance application, it certainly pays to have an experienced broker on your side. Your broker needs to understand exactly what lenders look for when lending to a development project.
By keeping the lender’s criteria and expectations front-of-mind when compiling an application, you’ll have a better chance of the processes running smoothly. And this will help you avoid unnecessary delays and hopefully complete your project as quickly and efficiently as possible, which is what every developer wants.
Suburb snapshot: Kallaroo
Relatively unknown compared to its more prominent neighbours, Kallaroo is a small, established beachside suburb that sits in between Hillarys and Mullaloo, with Craigie to its east.
Located 22km from the Perth CBD, Kallaroo was predominantly developed during the 1970s and 1980s, and it is often considered by locals to be a suburb of two distinct halves.
On the ocean side of Dampier Avenue, which bisects the suburb, you will find many multi-million dollar homes on large blocks, especially close to the ocean. This is the part of the suburb locally known as ‘Northshore’, in reference to an earlier estate name.
If you cross to the eastern side of Dampier Avenue, towards Marmion Avenue, you’ll find smaller, less expensive homes, as well as a higher proportion of homes being rented. Many people mistakenly think of this area as an entirely different suburb.
The median house price in Kallaroo currently sits at around $700,000, however, this figure can bounce around dramatically from quarter to quarter due to the diversity of housing in the suburb. It’s not unusual for the suburb to appear either on a list of top-performing suburbs or worst-performing suburbs depending on the composition of sales.
Kallaroo residents have direct access to Marmion Avenue, a major north-south arterial road, and have proximity to the Mitchell Freeway and train network (via Whitfords station).
Some of Kallaroo’s features include Whitfords Beach, substantial parklands along the coast and a small country club. On the suburb’s border with Hillarys sits Whitford City, one of Perth’s major shopping centres.
Developers have taken an interest in Kallaroo in recent years as the south-east corner of the suburb is subject to planned rezoning under the City of Joondalup’s Local Housing Strategy.
Last year, Australian shopping centre group, Westfield, submitted plans for a $190 million expansion of Whitford City, which could provide a boost to Kallaroo. However, the plan was rejected by the City of Joondalup and a development assessment panel but the decision is currently being appealed through the State Administrative Tribunal.
Tax Newsletter – October 2014
Mining tax gone but watch for associated tax changes
The mining tax has been repealed. However, in order to pass the legislation through the Senate, the Government made a deal with the Palmer United Party and Senator Muir to defer the abolition of:
- the Income Support Bonus to 31 December 2016;
- the Schoolkids Bonus to 31 December 2016 (and restrict the Bonus to families earning less than $100,000 per annum); and
- the Low Income Super Contribution to 30 June 2017.
The Government also agreed to freeze the superannuation guarantee rate at 9.5% for seven years. Under the changes, the rate will increase to 10% from 1 July 2021 and by 0.5% per year from 1 July 2022 until it reaches 12% for the year beginning 1 July 2025.
No other changes were made to the legislation, meaning the abolition of the associated measures such as loss carry-back (from 1 July 2013 for 30 June balancing companies), and geothermal expenditure deduction (from 1 July 2014), will proceed.
The reduction of the instant asset write-off threshold for small businesses (from $6,500 to $1,000), and the discontinuation of the accelerated depreciation arrangements for motor vehicles, will also go ahead (from 1 January 2014).
TIP: The abolition of the loss carry-back, the reduction of the instant asset write- off threshold for small businesses and the discontinued accelerated depreciation for cars apply retrospectively. Taxpayers who have made these claims for the 2013–2014 year are now required to amend their returns. The ATO has indicated that it will not impose penalties on those taxpayers who amend their returns if the amendments are lodged within “reasonable time”. Also, in light of the superannuation changes, individuals may want to consider reviewing their retirement savings strategy. Please contact our office for further information.
Professional firms and profit distribution under scrutiny
The ATO is investigating arrangements involving the allocation of profits from a professional firm carried on through a partnership, trust or company, where the income of the firm is not personal services income. Firms which could be affected include, but are not limited to, those that provide architectural, engineering, financial, legal, and medical services.
In particular, the ATO wants to take a closer look at arrangements where practice income is treated as being derived from a business structure, even though the source of that income remains, to a significant extent, from the provision of professional services by one or more individuals. The ATO said it was concerned that the general anti-avoidance rules under the tax law could apply to a scheme which is designed to ensure that the individual practitioner professional is not directly rewarded for the services they provide to the business, or receives a reward which is substantially less than the value of those services. The ATO further indicated that the lower the effective tax rate achieved by the scheme, the higher the risk of attracting the Commissioner’s attention.
Dividend washing compliance still on ATO’s radar
The ATO has been chasing up individuals who did not respond to its initial letter indicating that the individual may have entered into dividend washing transactions. The ATO has reiterated its position that obtaining two sets of franking credits from one dividend event was not allowed. In March 2014, the ATO issued letters to these individuals asking them to amend their returns in order to reverse franking benefits they may have received from dividend washing transactions.
Having obtained new information, the ATO has also issued new letters to more individuals that it believes may have entered into dividend washing transactions. The ATO said it will continue to monitor dividend washing and apply the law to disallow additional franking credits.
Rental property deductions – avoid common errors
The ATO has warned landlords that it is increasing its focus on rental property deductions. The ATO has identified a number of common errors made by rental property owners. Key errors include claiming rental deductions for properties that are not genuinely available for rent, or incorrectly claiming deductions for properties only available for rent part of the year, such as a holiday home.
TIP: If a property is only available for rent for part of a year, a partial deduction reflecting when the property was available for rent could be available. The correct apportionment needs to be made with the relevant documentation to substantiate the claim. Contact our office for further information.
Data-matching offshore bank accounts
The ATO is widening the breadth of data it obtains on individuals from financial institutions, possibly revealing hidden or undisclosed offshore income. The ATO has recently announced a data-matching program targeting offshore bank accounts. Under the program, the ATO will collect account details of bank customers from various financial institutions to identify Australian resident taxpayers with offshore bank accounts which may indicate evidence of undeclared income and/or gains.
TIP: The Tax Commissioner earlier this year announced a tax “amnesty” called Project DO IT which aims to encourage individuals to disclose previously undeclared offshore income or assets. Under the program, individuals could be offered reduced penalties for disclosing their offshore income. The ATO has been warning individuals to come forward before 19 December 2014, which is when the project will end.
Settlement for damages subject to capital gains tax
The Administrative Appeals Tribunal (AAT) has held that an individual was liable to capital gains tax on a settlement payment of $350,000 received in respect of litigation she pursued for damages for breach of contract and negligence. The litigation was in relation to an agreement to facilitate the retirement of a partner of a law firm and to hand over the clients to another solicitor. The AAT was of the view that the taxable assets in question were the various claims made in her statement of claim. It also held the individual had failed to establish any relevant cost base for legal expenses, which meant she could not reduce the amount to be taxed on.
In making its decision, the AAT said it was clear law that damages received by way of settlement of a legal claim could be subject to capital gains tax. It also affirmed the Commissioner’s decision to impose an administrative penalty of 50% of the shortfall amount for “recklessness”. The AAT noted the taxpayer took no steps to seek independent legal advice in relation to whether tax may be payable on the amount, as well as her failure to keep records as required by tax law.
Bitcoin tax guidance from the ATO
The ATO has released its views on the tax treatment of Bitcoins. Users of Bitcoins and businesses transacting with Bitcoins should be aware that the ATO has confirmed that it does not consider Bitcoins to be money or a foreign currency – rather, the ATO considers Bitcoins to be property. This means, the ATO will treat Bitcoin transactions as barter transactions, with similar tax consequences.
Taxpayers will need to keep transaction records such as the date of the transaction, the amount in Australian dollars (taken from a reputable online exchange), what the transaction was for, and who the other party was (eg their Bitcoin address).
TIP: If you are considering transactions involving Bitcoins and other crypto-currencies, it would be prudent to seek advice on how the transaction would be treated for tax purposes. If you have any questions, please contact our office.
Property Newsletter – September 2014
The little tax secret to massively boost your cash flow
Wouldn’t it be great if you didn’t have to wait for your tax refund? With this little-known trick, it’s possible.
Investors who own negatively-geared properties will understand that it can sometimes be an agonising wait for your tax refund. You’ve scrimped and saved all year to invest for your future, and finally the taxman rewards you with a big fat cheque.
While some people like the idea of getting an annual tax refund, it doesn’t really make financial sense. By paying more tax than necessary, the tax office is essentially ‘holding’ your money. Wouldn’t you rather have the money in your pocket from day-one to do as you please? You could pay off your mortgage sooner, or maybe buy another investment property.
Well, it’s possible to get your refund as part of your regular salary payment using a feature of our Pay-as-you-go (PAYG) withholding system.It involves submitting what is called a PAYG variation. This is basically an application telling the Australian Tax Office how much of a loss you expect to make on your investments, so that you only have to pay tax on the adjusted amount.
Once approved, your employer will reduce the amount of tax withheld from your pay to reflect your anticipated deductions (such as interest payments and depreciation), which could easily add a few hundred dollars to your pay packet.
Strangely, many investors don’t know about this strategy, but it can really make a difference to your cash flow.
To find out more about a PAYG variation, it’s best to talk to your accountant.
Expat’s guide to choosing the right Australian investment property
How can you find a high-performing investment property from a distance? Here are a few tips to get you started. Property is a popular investment vehicle for many Australian expats because it appears safe and stable. It’s widely believed that all properties will grow in value, and that the “worst case scenario” is simply a lower rate of capital growth.
Sadly, this is not the case. As property investment specialists, Momentum Wealth is regularly contacted by owners of properties that have significantly dropped in value, severely undermining their investment goals. Some properties have stayed stagnant and are likely to continue in this vein for a number of years to come.
One factor in buying a high-performing investment property is choosing the right location. But what if things have changed while you’ve been working away? Some neighbourhoods improve over time, while others deteriorate or plateau once they have peaked. How can you tell from a distance? Professional property analysts consider a wide range of factors in their research. Here are a few tips to get you started.
- Look for rising demand. Is there something about a suburb that will make it more popular in five years’ time than it is today?
- Look for new infrastructure – new facilities which make a location more convenient or desirable. But don’t sacrifice long-term desirability! Many investors get hooked by the allure of a new school, train station or shopping centre, but if the suburb is still an hour from the main city centre, and lacks job opportunities then these amenities may not be enough to drive significant price growth in the long term.
- Look for signs of gentrification. If you see a large proportion of residents renovating and extending their properties, and new café strips or shops opening in an area, it often means that the demographics of a suburb are changing for the better. Rising household incomes support rising house prices, which is great news for investors who get in early.
So where do you find this information? As expected, there is plenty of information online, some good and some not very good. For many expat investors, the logical choice is to hire a local property specialist to do the research for them.
Choosing “the one”
Even within a high-performing location, the wrong property choice could cost you significantly in lost capital growth, and even prevent you from buying more properties in the future. There are over 46 factors in choosing an individual property such as: the market appeal of the house itself; impact of the neighbouring property; add-value opportunities; rental appeal; future property maintenance and repairs required; features and specifications; structural and building issues; price and scope to negotiate, and more. Extensive research is critical to ensure that you aren’t disappointed with your choice. If you don’t have time to conduct this research yourself, a buyer’s agent can undertake it on your behalf.
When it comes to inspecting the property, it’s critical that you have someone viewing the property on your behalf. Some opportunities (e.g. a great floor plan, or room for a granny flat) or defects (moisture damage, issues with neighbouring properties) are impossible to see from photos alone.
5 things to consider before renovating your rental property
There are many reasons why you might want to undertake a renovation. But before you get stuck in, here are some key points to consider.
It’s often towards the end of a tenancy that rental property owners consider undertaking some minor renovations. It is, of course, easier to do work on an empty property than a tenanted one.
There are many reasons why you might want to renovate. It may be to improve your rental yield, increase the value of your property, attract better quality tenants, or a combination of factors. The renovation needn’t take a lot of time, as there are many little things you can do to rejuvenate a property in a short amount of time. But before you get stuck in, here are some key points to consider.
#1 – Don’t skip the planning stage
Even if you are only considering a small renovation, don’t think you can bypass the planning stage. You should still have a clear budget in place and carefully plan the various activities, so as to avoid a cost blowout and an extended vacancy period. Remember that tradespeople have lead-times and most won’t be able to start a job immediately.
Try to inspect your property before the tenants vacate to give you the most time for planning, and a good tip is to ask the outgoing tenants for feedback on what could be done.
#2 – Consider your return on investment
Don’t get carried away in the renovation whirlwind. Be realistic about what things cost and only replace items when it is absolutely necessary. Always consider your return on investment. Will the increase in rent justify the cost? How long will it take to recoup your investment?
It helps to research the market and talk to your property manager about what is expected in the area and the features that are most sought-after.
#3 – Think before you scrap
Many investors are unaware of the fact that certain plant and equipment, which may seem worthless and ready for replacing (like carpets and hot water systems), can actually be claimed as a tax deduction.
Before you discard or demolish anything, make sure you get a quantity surveyor to put a value on the items you are scrapping. The residual value of these items (i.e. the amount that is yet to be written off) can generally be claimed as a 100% tax deduction in the financial year that they are disposed.
#4 – Concentrate on the right areas
Focus on the upgrades that will be most welcomed by prospective tenants. A lick of paint and new carpets are always popular choices because they make a strong impact. New benchtops and window coverings can also help to transform the look of a property.
But it’s not always about looks. Some of the best upgrades may involve enhancing the security or comfort of your property.
And don’t ignore the outside, as street appeal is very important. You don’t want prospective tenants dismissing your property after a quick drive-past. Little things like painting the fence and tidying the garden can do wonders.
#5 – Suitability
Whichever areas you decide to focus on, remember to always choose tenant-friendly items. Buy things that are durable and hard-wearing as this will save you time and effort over the long term.
Does a sloping block mean money down the drain for a potential development site?
When assessing a potential development site, one of the major considerations should always be the slope of the land. The slope is important because it can significantly impact on the feasibility of a project. Some developers will instantly dismiss a sloping block, but is this strong aversion warranted? Let’s look at some of the potential impacts of developing on a sloping block.
Drainage
Drainage is perhaps the biggest area of concern for developers considering a sloping block. Generally speaking, a block that slopes towards the road, where the sewer line is located, shouldn’t have a problem with drainage. But one that slopes away from the road can cause all sorts of expensive headaches, depending where the sewer line is located. It’s worth noting that, when it comes to drainage, a flat block isn’t always straight-forward either, as it may need to be built up in certain parts.
Excavation
When building on a sloping block, you generally need to do some retaining of the land, which can be rather expensive. There are also likely additional excavation and filling costs to consider.
Building height
Depending on the state residential planning codes and local council policies in regards to the measurement of building height, this can impact the development potential of a block.
An opportunity?
Can a sloping block offer any unique advantages for the astute developer? When developed correctly, some sloping blocks can provide outstanding views, prized by buyers and tenants. By forcing the developer to work with the natural restrictions of the land, a sloping block may also result in a better design and more interesting development. This could potentially improve profitability.
Conclusion
Does a sloping block mean money down the drain? It certainly presents some unique challenges, but it is often possible to work around any potential issues. The fact that it is sloping may deter other developers and leave a potential great opportunity on the table.
The important thing is to always approach a potential development with your eyes fully open, factoring in any additional costs that may result from having a sloping block. But if you do your sums and it all stacks up, there’s no reason why a development couldn’t be a success.
Is the stigma lifting on this underutilised riverside suburb? Ashfield
Ashfield came onto the radar of many investors when talk first emerged about the Ashfield Precinct Plan, which was formally released at the beginning of 2010. Ashfield is located on the Swan River, 9km from the Perth CBD and part of the Town of Bassendean. It’s a very small but well-located suburb serviced by major strategic transport routes, including Guilford Road and Tonkin Highway.
It has its own railway station on the Midland line and the Perth airport is located just on the other side of the river. The suburb was mainly developed in the mid 1900s, but many older homes have now been renovated or replaced by newer ones.
With its high proportion (20%) of state housing and reputation for anti-social behaviour, Ashfield has always carried with it a certain stigma. Though, it’s fair to say that this has been improved over recent years. In real estate terms, the suburb’s median house price is $515,000, below that of Perth, but its growth has generally outperformed the Perth average over the past 10 years.
The Ashfield Precinct Plan, published by the state government, is intended to guide future development within the precinct, which roughly encompasses an 800m walkable catchment of the Ashfield Railway Station. This area actually includes parts of neighbouring Bassendean and Bayswater.
The aim is turn the area into major employment activity centre by utilising large pockets of relatively underutilised but strategically located land. Recommendations include increasing the utilisation of public transport by improving accessibility to the train station, and facilitating higher residential densities. With plenty of demand for affordable housing in Perth, Ashfield could be a promising target for developers looking for residential subdivision opportunities.
Momentum Wealth’s own research has uncovered some potential risk factors and we buy selectively in the suburb. But all in all, there is enough to warrant a look at this changing suburb.
Tax Newsletter – September 2014
Share transfer to family partnership ineffective
A husband and wife have been unsuccessful before the Administrative Appeals Tribunal (AAT) in arguing that they had transferred shares in a family company to a family partnership, and that therefore they should not be assessed on dividends issued by the company to themselves. The AAT examined the partnership agreement and was of the view that, under the terms of the agreement, the couple was not required to actually transfer their shares in the family company to the family partnership. It was also emphasised that the couple remained the full registered owners of the shares. In doing so, the AAT affirmed the Tax Commissioner’s decision that the couple were each assessable on the dividends of some $1.8 million. The taxpayers are seeking to appeal the decision in the Federal Court.
Property developers and use of trusts under scrutiny
The ATO is examining arrangements where property developers use trusts to return the proceeds from property development as capital gains instead of income on revenue account. ATO Deputy Commissioner Tim Dyce said the ATO has “begun auditing property developers who are carrying out activities which conflict with their stated purpose of capital investment”. He said a “growing number of property developers are using trusts to suggest a development is a capital asset to generate rental income and claim the 50% capital gains discount”. Mr Dyce warned that penalties of up to 75% of the tax avoided can apply to those found to be deliberately using special purpose trusts to mischaracterise the proceeds of property developments. The ATO said it has made adjustments to increase the net income of a number of trusts. It said penalties will be significantly reduced if taxpayers make a voluntary disclosure.
Residency depends on facts and circumstances of each case
The ATO has issued a Decision Impact Statement following an individual’s legal win in arguing that he was not a tax resident of Australia during the 2009 to 2010 income years. The taxpayer had moved to Saudi Arabia to work on a project for a number of years before moving back to Australia. Key factors that were taken into account by the AAT in deciding in favour of the taxpayer were the man’s intentions at the relevant time to live and work indefinitely in Saudi Arabia. The ATO said the decision was reasonably open to the AAT. However, it said the decision does not change its approach to residency cases. It said these matters involve questions of fact and degree and different facts may result in different conclusions as to residency. The ATO said it will continue to approach residency cases by weighing all the relevant facts and circumstances and applying the relevant tax law and authorities to those facts.
Billions in lost super waiting to be claimed
According to the ATO, more than $14 billion in lost super is waiting to be claimed. The ATO said $8 billion in super was sitting in accounts that have not received a contribution in five years. A further $6 billion in super was sitting in accounts where funds have not been kept up-to-date with changes to personal details. ATO Assistant Commissioner John Shepherd said it was “easy for this to happen because when people get married or move house, the last thing on their mind is updating their name and address details with a super fund”. However, he said it was important to provide funds with tax file numbers (TFNs) which can help individuals be reunited with their super.
TIP: The ATO’s Superseeker service enables individuals to enter their name, TFN and date of birth to conduct an online search of the Tax Office’s Lost Members’ Register available at www.ato.gov.au/Calculators-and-tools/SuperSeeker.
ASIC eye on SMSF property investment advice
The Australian Securities and Investments Commission (ASIC) has raised concerns about advice being given to self managed superannuation funds (SMSFs) to invest in property. ASIC Commissioner Greg Tanzer said the regulatory body was aware there had been a sharp rise in promoters recommending that investors either set up or use an existing SMSF to invest in property. ASIC is concerned these promoters may not be complying with the law. Mr Tanzer said ASIC was concerned that, with the increased popularity of SMSFs and property investment, real estate agents and property advisers may not realise they may be carrying on a business of providing financial product advice and may need an Australian financial services (AFS) licence, or authorisation under an AFS licence, when making recommendations or statements of opinion to a person to use an SMSF to invest in property. Mr Tanzer said ASIC is now working with individual businesses suspected of engaging in unlicensed conduct to help them understand their obligations.
Bad debt deduction for “unpaid trust entitlements” refused
A taxpayer has been unsuccessful before the AAT in a matter concerning bad debt deduction claims for the 2012 income year in relation to certain trust distributions. The taxpayer, a beneficiary of a trust, had claimed bad debt deductions under the tax law for debts he argued were unpaid trust entitlements. He argued the debt written off had the same character as the trust distributions included in his assessable income in the 2005 and 2007 income years. Following analysis of the distribution transaction and the trust deed, the AAT was of the view the taxpayer’s entitlement was paid in the manner prescribed by the deed, and once paid, lost its character as unpaid entitlement. The AAT concluded the debt written off was different in character to the income included in the taxpayer’s assessable income in the 2005 and 2007 income years.
Family fails to prove assessments excessive
Six members of a family have been unsuccessful before the AAT in arguing that various amended and default tax assessments were excessive. The AAT heard details of unexplained moneys flowing through family bank accounts, sums paid from an overseas business arrangement, as well as the acquisition of various residential properties in the names of family members, despite the taxpayers’ claim they earned very little income. The Tax Commissioner used the “asset betterment” analysis to raise the assessments. Despite acknowledging inherent flaws in the method used by the Commissioner to derive the tax assessments, the AAT found the family members had failed to establish that the assessments were incorrect and that the amount of money for which tax was levied by the assessment exceeded the actual substantive liability of the taxpayers.
TIP: In making a default assessment, the Commissioner is not required to follow the ordinary processes of ascertaining assessable income and allowable deductions and need not make inquiries of the taxpayer (or the taxpayer’s agent). However, the assessment may be invalid if the Commissioner estimates the taxpayer’s assessable income upon no intelligible basis or simply plucks a figure out of the air.
Tax consequences following marriage break-up
The ATO has recently released a taxation ruling on the tax effects of matrimonial money or property transfers. According to some commentators, the game-changing ruling may affect the manner in which property settlements are able to be arranged for family groups under s 79 of the Family Law Act 1975.
In Taxation Ruling TR 2014/5, the ATO confirmed that payments or transfers of property under Family Court orders to a husband or wife from a private company will be considered a distribution of profits from the company. Such transactions will therefore be assessed as dividends either pursuant to the ordinary dividend assessing provisions (s 44 of the Income Tax Assessment Act 1936) or Div 7A in almost every matrimonial property or cash settlement, regardless of whether the parties are shareholders (or associates of the shareholders) in the private company or whether the private company is a party to the Family Court order.
TIP: The rules can be complex and various different taxation consequences could arise depending on the type of Family Court order that has been made. Please contact our office if you have any questions.