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Property Newsletter – October 2014
October 8, 2014 | 
Author 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.
Posted in 
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.
Property Newsletter
Four rules for outperforming the market
The Perth property market seems to have entered a period of cautious stability where any value growth in the short-term is likely to be patchy. This isn’t surprising given the market’s strong performance in 2013 and the current high vacancy rates.
With the heat taken out of the market and many buyers sitting on the sidelines, there is a fantastic opportunity for savvy investors to enter the market and make a cold and calculated purchase.
Forget the days when you could casually make a purchase and rely on the general movement of the market to help you achieve your investment goals.
More than ever you need to acquire properties that have the inherent characteristics for driving growth, regardless of what the wider market does. But this is no easy task, so here are 4 key rules to help you on your way.
Rule #1 – Put greater emphasis on supply
The impact of supply on price growth is a very logical one, but it’s something that many investors somehow overlook. Demand-side factors always seem to garner more attention and focus.
Put simply, when the supply of a particular type of property is insufficient to meet the level of demand, the value of that type property should increase.
You therefore need to pay close attention to the supply of property in the areas you are evaluating and particularly the potential for future supply, given the long-term nature of property investing. This is critical for finding high-performing properties in today’s market.
A property in a location where there is an abundance of developable land will generally underperform as there is an endless conveyer-belt of newer properties competing for buyers and tenants.
Naturally, areas with limited future supply tend to be those that are well-established. If you buy a house in an area that is 30-40 years old and not too far from the CBD, you know that the supply of property is unlikely to increase substantially as there is no more land available to build on.
Assuming people hold a desire to live in that area and, better yet, you predict said desire to increase over years to come, then you can be reasonably confident your property’s value will rise.
Oversupply issues are of particular concern for apartment buyers in some parts of Perth at the moment. If an area has a lot of land ripe for development, or plenty of old buildings ready to be demolished for brand new apartment complexes, supply of apartments in that area could be plentiful. This is bad news for values.
Rule #2 – Think about the value-add potential
One way to outperform the market is to manufacture your own growth. This means finding a property whose value can be improved beyond the cost of making the improvements.
But increasingly, you need to be a little more creative than simply whacking on a fresh coat of paint and installing new carpets. You need to look for opportunities that the average investor will miss, such as the potential for adding a granny flat or developing the property in a clever way.
Even if you plan to buy and hold for the long-term, it makes sense to choose a property that has value-add potential. This way, when the time is right you can manufacture your own growth through renovation or development and ultimately outperform the market.
Rule #3 – Pay close attention to local planning
In the current market, it’s important to take a ‘local’ focus and look out for areas that are changing both physically and in the minds of buyers and renters.
There are many examples of such areas in Perth and these should outperform the rest of the market. The key is identifying which areas are being ‘reassessed’ and investing before the changes are reflected in values.
A good place to start is by closely monitoring relevant plans and policies by local councils, which often set the scene for the gentrification of an area.
But keep in mind that it can take many years (even a decade) for new policies to be introduced and there can often be numerous changes before policies are finally implemented.
Rule #4 – Follow the infrastructure trail
Infrastructure is always a major driver for price growth because it increases the attractiveness and amenities of particular areas. The benefits of infrastructure, however, are generally only recognised after the new infrastructure is in place, which means buying before this happens can generate excellent returns.
Within Perth, there is a vast array of major construction and rejuvenation projects currently in progress, recently completed and planned for the near future. From new hospitals and stadiums to major upgrades of transport infrastructure, these projects will create a number of local real estate hotspots that will outperform the market.
Conclusion
All investors should try to ‘beat’ the market by finding investment opportunities that will generate above-average returns. And this is especially true in the current market when average returns are unlikely to be spectacular.
While these rules will help guide your search, the reality is that finding the right properties requires a great deal of hard work and know-how. This is why more and more investors are relying on professional organisations such as Momentum Wealth that have the expertise and resources to dramatically increase the chances of success.
Five ways a mortgage broker can save you money
We all know that working with a competent mortgage broker can save you a tremendous amount of time that you would otherwise spend tracking down and comparing loans.
But can mortgage brokers really save you money? They certainly can, and in some cases the savings could add up to thousands of dollars. Here are 5 ways it can happen.
#1 – Finding a better interest rate
The obvious way a mortgage broker can save you money is by getting you a cheaper interest rate. Even a small difference can equate to thousands of dollars in interest payments over the course of the loan.
Most brokers will explain however that the interest rate isn’t always everything. For instance, some loans may have features that save you money in the long-term even if the corresponding interest rate isn’t the cheapest one around.
#2 – Avoiding those nasty surprises
Another area where a mortgage broker can save you money is with regard to fees, penalties and any other costly additions that are typically packaged into a loan. Some loans look good on the surface but they can come with a nasty sting. A broker knows about these potential traps and can steer you well away from them.
#3 – Leveraging their inside knowledge
Mortgage brokers understand what goes on within the large, reinforced walls of Australian lenders. They have inside knowledge about quotas and the (sometimes hidden) motivations of bankers, which they can leverage to your advantage. Knowing which lender to use at which time can really pay off financially.
#4 – More negotiating power
With their regular and direct links to key individuals within lending institutions (some are on a first-name basis), a mortgage broker can often negotiate in ways that you cannot. This can mean anything from zero fees to discounted interest rates.
Many borrowers think they can negotiate a good deal with their lender, but the reality is that a broker can generally do it better.
#5 – Promoting healthy competition
Another, albeit far less obvious, way that mortgage brokers save borrowers money is by promoting healthy competition in the loan market. They keep lenders honest by constantly shopping around for the best deals. Given that around half of all loans come from the broking industry, mortgage brokers have probably saved consumers millions of dollars on the whole.
An investor’s take on the renting versus buying discussion
There has been a lot of media coverage lately about the difference, financially speaking, between buying a home and renting one.
It stemmed from a paper released by the Reserve Bank of Australia, which was largely interpreted by journalists as an endorsement for renting.
One of the problems with the paper, a fact rightly acknowledged by the authors, is that it didn’t take into account the non-financial benefits of home ownership, such as pride, security of tenure and the freedom to renovate.
But for those with an investment mindset, there was another gaping hole in the discussion: what it all means in terms of wealth creation.
Sure, it might be cheaper to rent on a week-to-week basis than buying a home. But what are you left with at the end of the day when the time comes to retire? Will you be able to rely on your superannuation or the age pension for an income? Will you have to rent throughout your retirement years?
One can only make an economic argument in favour of renting if the ‘extra’ money that would have been spent buying and owning a home is used to build wealth (ideally through property investment).
And there are plenty of people who have successfully executed the strategy of renting a home and ploughing all their additional income into building a property portfolio.
But ultimately most people aren’t financially disciplined to do this and they value the other benefits of home ownership too much.
This is why for most people, owning a home will always be the preferred choice, not just from a lifestyle point of view but as part of a plan for building wealth.
7 nightmares you can avoid by hiring a professional property manager
Being a property investor certainly has its moments. It can bring spectacular highs as well desperate lows.
Property management is one area that has more than its fair share of challenges, especially when a property is in inexperienced hands.
For those who manage their own property, there are many potential nightmares lurking around the corner. This is why most investors employ a professional property manager to minimise their risk and allow them to focus on what they do best.
Here are some of the common nightmares a professional property manager will help you avoid.
“I can’t find a tenant!”
There’s nothing that worries an owner more than a vacant property, as every day represents lost income.
Professional property managers will actively advertise your property to source a prospective tenant and they typically have a wider variety of options than the average Joe. For instance, private landlords may be unable to advertise on major online portals, which can dramatically reduce the pool of potential tenants.
Property managers will also have a database of potential tenants, which can save you a considerable amount of time.
“I’ve broken the law!”
A real risk of being a private landlord is that you may inadvertently break the law, opening the door to liability and fines of potentially thousands of dollars.
Property managers understand the rights and obligations of owners and tenants under the Residential Tenancies Act and they know how to navigate the minefield of compliance requirements, which are constantly subject to change.
“I’m drowning in a sea of paper!”
Managing a property, like any business, involves dealing with a whole range of paperwork, which can easily overwhelm a private landlord. A property manager will take care of most of the burden and provide you with the necessary income and expense statements at regular intervals.
“My property is falling to pieces!”
No owner wants to see their property being neglected or, worse still, intentionally damaged. A property manager will ensure, though a detailed Property Condition Report and regular inspections, that your property is being adequately maintained. Private landlords often get lazy when it comes to inspections.
“I’ve been scammed!”
Private landlords are prime targets for criminals and unscrupulous operators because they don’t have the skills, systems and procedure in place to identify potential scams.
“I’m bleeding money!”
Private landlords typically don’t have the up-to-date local market knowledge of a professional property manager. This means that they don’t get full market rent for their property, which has a knock-on effect to their overall investment plans. Property managers will regularly conduct market reviews to make sure you are maximising your returns.
“My tenant is a lunatic!”
The importance of tenant screening is not to be underestimated. A bad tenant can really set you back financially and emotionally. Property managers have the tools and systems to put applicants under the microscope before placing them in your property. Private landlords tend to rely on ‘gut instinct’ alone which can be problematic.
Is it worth being green when developing property?
Whether you’re doing a simple multi-unit development or a larger-scale project, you’ll have to decide how much to spend on the build to get the best possible return.
So, financially speaking, is it worthwhile investing in features that will make your property more environmentally friendly?
One thing is for certain, environmental sustainability and eco-friendliness have become far more mainstream issues today than in the past. They are no longer simply the domain of hippies. And while green homes were once seen as visually unappealing (think of those unsightly solar panels), they have now become largely indistinguishable from their non-green counterparts. So it’s fair to say that the market for green properties is a growing one.
Some things just have to be done
It’s important to be aware that there are certain green standards that are mandated under the Residential Design Codes and the Building Code of Australia.
The Building Code, for instance, requires that all new buildings meet a minimum standard for energy-efficiency, measured by a star rating. The current requirement for Western Australia is 6 stars with an additional requirement for water-efficiency called 5-star plus.
Some local councils may also have their own additional energy-efficiency requirements that must be met in order for a developer to secure a particular zoning.
What else can be done?
There is a seemingly endless list of things you can do to make your property greener from the simple, such as installing energy efficient light globes and appliances, to the more expensive options, such as installing solar panels.
In Australia, conserving water is another important issue. Some of the things you can do in this area are installing rain tanks, and insisting on water conserving showers, toilets, washing machines and dishwashers. Establishing a drought tolerant garden is another positive step you can take.
Some people take the issue further and decide to use only sustainable and renewable materials in the construction of their property. Some will also commit to using non-toxic paints to improve air quality.
The point is that are numerous things you can do to make you property more eco-friendly. The added costs can range from a few dollars to tens of thousands of dollars per property.
Will it pay off?
We know that going green will be good for the environment and it could go a long way to reducing the running costs of the property. It may even help improve air quality. But will it pay off financially?
Firstly, there may be government subsidies or tax credits for installing certain features. But this will be of minimal incentive for developers.
In terms of lowering heating and cooling costs, yes, there is often a direct return on investment. If you are an owner occupier, the longer you spend in the property the more chance you have to recoup the additional costs. But more often than not, a developer is not responsible for paying power, water and gas consumption bills.
For those developing properties to hold the inevitable question arises, will a tenant pay more to rent a property that has lower running costs? Generally speaking, it is unlikely. While many tenants would prefer an environmentally friendly property, when it comes down to the crunch most tenants won’t pay a premium. At best I think an investment in green features could perhaps help to minimise vacancy periods by making your property more desirable.
Will a buyer pay more for your property if it has green features? Practically speaking a house that saves the occupants money should be worth more. However, I think it is unlikely you’ll get a huge premium. But it will definitely help your property stand out, especially in an oversupplied market.
The issue of whether a green property will attract a premium from renters or buyers depends on the location. People in some areas may recognise the value more than others. The high end of the market is perhaps a good place to look for buyers who would be willing to pay a premium.
Conclusion
Logic says that if you are going to invest in making your property greener with the explicit goal of generating a financial return, choose the features that are most visible to tenants and buyers. A stylish rain tank may put a tick in the box for many people, but how many will appreciate the fact that the timber floors came from a sustainable forest? Go with the items that will give you the biggest bang for your buck.
Of course, your reason may not be a commercial one and you may simply want to minimise the footprint you leave on the planet. This is of course commendable, even if there is no financial reward at the end of it.
Caution required when investing in this booming suburb
Rivervale is located on the Swan River, 5km from the Perth CBD and part of the City of Belmont.
It is predominantly a residential suburb with a commercial area along Great Eastern Highway, which is the main road linking Rivervale with the City and the airport.
Rivervale was predominantly developed in the post-war years but today its housing stock is a veritable mix of older houses on full blocks and recently developed townhouses and villas. Apartments also dominate the area to the north of Great Eastern Highway.
Currently the median house price is around $600,000 and the median unit price is $380,000.
Rivervale’s main selling point is its proximity to the CBD and the airport, and there are also many amenities surrounding the suburb, including the Burswood Entertainment Zone.
There is a major shopping centre in neighbouring Belmont, which also contains a commercial/industrial district, and plenty of schooling options for local families.
A train station is located a short walk from the very north-western portion of the suburb, and there are frequent bus routes that traverse the suburb, particularly on Great Eastern Highway, Alexander Road and Kooyong Road.
Rivervale will benefit greatly from the ongoing development of the nearby Crown Complex and Perth’s new stadium, which is expected to be completed by 2018.
There is also considerable investment in transport-related infrastructure surrounding the suburb, which should reflect positively on capital values in the area.
Rivervale has been a very strong performer over the past three years, accelerated by rezoning which occurred in 2011, and one could argue that it has become a victim of its own success.
Development in the suburb is currently running strongly, with boutique apartment complexes being advertised in high numbers. Although Rivervale remains a solid investment option over the long-term, the current oversupply in the unit market should certainly be of concern for investors.