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Tax Newsletter – August 2014
July 30, 2014 | 
Author Budget Levy from 1 July 2014
The Government’s Temporary Budget Repair Levy is now law. The levy is be payable at the rate of 2% of each dollar of an individual’s annual taxable income over $180,000. The levy is active for three financial years, starting on 1 July 2014 and ending on 30 June 2017. That means the top marginal tax rate is effectively 49% (including the 2% Temporary Budget Repair Levy plus the 2% Medicare levy).
For example: Individuals with taxable income of $200,000 will pay 2% of $20,000 (ie a levy of $400). Those with taxable income of $300,000 will pay 2% of $120,000 (ie $2,400 of levy).
A number of other taxes are also affected by the levy. According to the Government, these other changes are important to maintain integrity and fairness in the tax system. Notably, the fringe benefits tax (FBT) rate will be increased from 47% to 49%. As the FBT year commences on 1 April and concludes on 31 March, the increase in the FBT rate is to be applied from 1 April 2015. The increase in the FBT rate will cease on 31 March 2017.
TIP: High-income earners may want to review salary sacrificing arrangements and the possible effect of the levy. Please contact our office for further information.
PAYG instalment threshold changes
The ATO has confirmed the Government’s recent announcement that the pay-as-you-go (PAYG) instalment thresholds will change with effect from 1 July 2014. Following the Minister’s announcement, the ATO advised the following instalment threshold changes:
- the business or investment income threshold is increased from $2,000 to $4,000;
- the balance of assessment threshold is increased from $500 to $1,000;
- the notional tax threshold is increased from $250 to $500; and
- the requirement for entities registered for GST to remain in the system even if they have a zero instalment rate is removed.
As a result, many taxpayers will no longer have to pay PAYG instalments. According to the Minister of Small Business, around 32,500 small businesses that have no GST reporting requirements will no longer have to lodge a business activity statement (BAS) where to date lodgements have been made only to report PAYG instalments. In addition, around 340,000 small businesses with modest or negative income which are required to lodge a BAS, will no longer have to interact with the PAYG instalment system.
TIP: If taxpayers still wish to pay instalments towards their end-of-year tax liability, they may voluntarily re-enter PAYG instalments by contacting the ATO. Please contact our office for further information.
ATO mining data to find offshore tax evaders
The ATO says it is mining data to identify individuals with undisclosed offshore income and assets. “The net is closing for people who have undeclared offshore income – we’re looking at all our data and will be in touch with financial institutions, advisers and thousands of people over the coming months,” said Deputy Commissioner Michael Cranston. As at 30 June 2014, the ATO’s Project DO IT initiative to encourage voluntary disclosure has received 166 disclosures, raising an additional $13 million in tax liabilities. The ATO has also obtained more than 250 expressions of interests from taxpayers indicating that they will be making a disclosure.
TIP: The last day to make a disclosure under Project DO IT is 19 December 2014. The ATO had previously warned that, until it receives a disclosure, its normal compliance activities will continue. Individual taxpayers detected first by the ATO will not be able to participate in Project DO IT.
Deductions for employee welfare fund denied
The Administrative Appeals Tribunal (AAT) has refused a taxpayer’s claim for deductions for contributions made to an offshore “employee welfare fund”. The taxpayer and a number of related companies carried on an automotive repair and spare parts business. The fund was set up in 1998 and its beneficiaries were the two employee-operators of the business and a spouse. In 1998 the taxpayer contributed $400,000 to the fund. In 1999 the taxpayer contributed a further $25,000 and also claimed carried-forward losses resulting from the contribution from the previous year.
The AAT rejected the taxpayer’s claim that the contributions to the fund were deductible. It also highlighted a number of concerns in the way the fund was set up and how it operated. Among other things, the AAT noted there were no documents to show that the trustee ever admitted anyone as a member of the fund and, furthermore, there was doubt and confusion about the identity of the trustee. However, the AAT found that while the Commissioner could issue amended assessments for the1998 and 1999 income years in 2012, an amended assessment issued for the 2002 income year was out of time to deny a deduction for further carried-forward losses.
Hunger relief organisation wins FBT exemption case
Hunger Project Australia (HPA) has been successful before the Full Federal Court in seeking endorsement as a “public benevolent institution” (PBI) for fringe benefit tax (FBT) purposes. This was despite the organisation being predominantly engaged in fundraising, and not providing aid or relief directly. As a result, the provision of benefits to one of its employees is to be taken to be exempt benefits for FBT purposes.
HPA is a member of a worldwide collaboration of organisations operating under the name “The Hunger Project” whose principal aim is the relief of hunger. The activities of HPA are to raise funds, which are then disseminated to Hunger Project members in the developing world.
The Commissioner argued that an entity that merely engages in fundraising activities and does not materially perform charitable works directly for the benefit of the public is not a PBI. The Full Court rejected the Commissioner’s arguments requiring a PBI to directly dispense relief. The fact that such an institution does not itself directly give or provide that relief, but does so via related or associated entities, is no bar to it being a PBI, the Court said.
Damages assessable to director personally
The High Court has affirmed that damages received by an individual following a failed joint venture project were assessable to him personally. Broadly, the individual and others had sought for the company of which they were the directors to become an equity participant in the project and become the ultimate purchaser of the golf course. However, the other joint venturers in the project disputed this and made other arrangements to purchase the golf course.
The individual then successfully sued the other joint venturers and was awarded damages by the Victorian Supreme Court for the loss of a business opportunity. The Commissioner then assessed the individual on this amount (around $860,000). The individual argued that he had received the money as trustee of the company and it was therefore assessable to the company.
The High Court held the individual was liable to income tax on the damages received in satisfaction of the Supreme Court judgment. It was of the view the individual did not receive the amount as a constructive trustee of the company.
Winemaker not taxable on property sale
The Administrative Appeals Tribunal (AAT) has held that an individual taxpayer who was the controller of several trusts through which he operated a winemaking business, and who was also a beneficiary of the trusts, was not presently entitled to an amount of over $480,000 in profit that one of the trusts made from the sale of business premises.
The profit had been deposited into accounts which the taxpayer controlled for his personal benefit. The Commissioner had issued an assessment to include the profit in the taxpayer’s assessable income on the basis that the amount represented revenue profit of the trust and that, as a beneficiary of the trust, the individual was presently entitled to the amount under certain rules concerning the tax treatment of trust income.
However, the AAT did not agree with the Commissioner’s decision. It concluded that another of the trusts (of which the taxpayer was trustee) was beneficially entitled to the profit as a beneficiary of the trust that made the profit from the sale, and not the taxpayer in his personal capacity.
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Finance Newsletter – August 2014
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Property Newsletter – July 2014
Should people be opposed to higher density?
Under the planning framework, Directions 2031 and Beyond, the WA government has set a target for almost half of new residential development to occur in established urban areas.
If Perth is going to accommodate a rapidly growing population, which increasingly wants to live near work and amenities, we simply can’t afford for the urban sprawl to extend indefinitely. We need to embrace infill development regardless of the challenges it might bring about.
Perhaps the biggest of those challenges relates to planning and rezoning, specifically, the opposition from local residents who don’t want to see housing density increased in their suburb.
This is not just a challenge for Perth but for cities around the world. In fact, this type of opposition has become so prevalent that there are a number of acronyms used to label its proponents.
The most well-known of these is NIMBY (Not In My Back Yard). There is also the broader CAVE (Citizens Against Virtually Everything), and the extreme BANANA (Build Absolutely Nothing Anywhere Near Anything).
Understanding the opposition
Every citizen has the right to protest against change, especially if they believe it will adversely affect their personal situation.
In the case of those who are against development in their area, protests are generally sparked when residents of a particular area believe their normal suburban lifestyle is under attack by plans to increase housing density.
The cause is typically fronted by resident groups, who can garner significant suburban media attention and put significant pressure on the local council to protect the status quo.
Interestingly, it is the residents in wealthy suburbs that tend to be most vocal and most persuasive on this matter. They have the financial means, political influence and the organisational ability to go about protecting their cherished lifestyle.
What are the groups afraid of? One of the major areas of concern is the fear that infill development will disrupt the cohesion of their neighbourhood. They don’t want to see beautiful, tree-lined streets ruined by unsightly apartment complexes or other developments that are out of character with existing properties.
Clearly, it’s not just about how developments will change the look of streets, but how they will impact on things like privacy, traffic, parking, access to sun and even the environment. While some might not admit it, there is probably also a fear that ‘the wrong’ type of people will move into their suburb.
Impact on property values
While it can be a complex issue, ultimately it boils down to one thing: the fear that proposed changes will negatively affect local amenity by making the area less desirable.
You can’t criticise people for wanting to protect their financial security and way of life, but I’m unaware of any evidence that shows properly planned infill development causes property values to decline.
In fact, there are many suburbs in Perth that have recently seen property values increase considerably on the back of zoning changes. In some cases, individual properties have gone up by more than $100,000 after being rezoned for higher density.
Affordability, choice and the fringes
One of the impacts of people and councils limiting development in their area is that it merely moves development elsewhere – generally to the fringes of the city.
Fringe development might be good for car manufacturers, but it often requires enormous taxpayer-funded expenses for the roll-out of necessary infrastructure.
There is also the impact on affordability. Locking up land reduces the opportunity for affordable housing in established suburbs. And ironically, it is the children of those opposed to development that often suffer when, like other first-home buyers, they are forced to move to distant areas where essential services are inadequate.
By opposing infill development, advocates are also limiting housing diversity and this can reduce their own opportunities to downsize within their current suburb.
The traffic conundrum
Often a major concern for groups is the fear that higher density housing will increase local road traffic and there is some validity to this argument.
However, ‘protecting’ suburbs can sometimes have unforeseen consequences. By pushing people to the fringes, this can actually create local traffic problems as desperate commuters try to find ‘local routes’ to beat the peak-hour traffic. We’ve all seen how normally quiet residential streets can become major thoroughfares at certain times of the day.
The traffic argument also fails to consider the fact that infill development can actually take cars off the road when it is concentrated around public transport nodes and jobs.
Conclusion
The views of groups opposed to development can’t and shouldn’t be ignored. The worry, however, is that overly fierce ‘protection’ of our suburbs will ultimately undermine any chance of delivering the affordable and diverse housing we desperately need. As is often the case, what makes sense on an individual level can be a recipe for disaster on the larger scale.
Is Lenders Mortgage Insurance a friend or foe?
Lenders Mortgage Insurance (LMI) is generally seen by investors as a costly expense to be avoided. But this view isn’t entirely accurate. Sophisticated borrowers understand that LMI can, in fact, be a valuable tool.
If you’re not familiar with LMI, it essentially involves a one-off insurance premium paid by the borrower to protect the lender’s interests in case the borrower defaults and the sale of the property does not cover the loan balance.
The premium varies depending on the size of the loan, the loan type and the level of deposit, but it can add up to thousands of dollars. Luckily, the amount can often be capitalised (added to the loan).
So how can such a thing be advantageous to an investor?
Firstly, with LMI you can borrow a higher percentage of the property value, beyond the normal 80 percent limit. So, if you haven’t accumulated enough of a deposit, LMI will help you to get into the market sooner than you otherwise could.
In a growing market, getting in early can be a real advantage. Capital growth can quickly cover the expense of LMI and put you thousands of dollars ahead.
LMI could also help you to buy a better quality property than you otherwise could or allow you to buy additional properties with the same amount of equity.
Instead of paying a 20 percent deposit on the purchase of one property, you could potentially buy two properties paying a 10 percent deposit for each.
Whether or not LMI provides an advantage depends on your plans, circumstances and how quickly you want to build a portfolio. But in the right hands, it’s certainly not the ‘evil’ it’s often portrayed to be.
Bear in mind that the mortgage insurers regularly change their policies, so it’s best to check with your mortgage broker about current requirements and lending criteria.
Seven reasons you should aim low when investing in an apartment
It’s easy to understand why some investors are attracted to apartments, with their low maintenance appeal, strong rental returns, and relatively affordable entry price.
When it comes to apartments, as with any investment, numbers matter. And one of the numbers that can play a major role in determining investment success is the number of apartments in the complex.
High-rise complexes, which often contain hundreds of apartments, can sometimes provide good investment opportunities, especially when there are scarce views on offer. But as a general rule, investors are better off investing in low-rise or boutique complexes. Let’s look at why.
1. Scarcity and future supply
Low-rise complexes are typically in areas with strict height planning controls, reducing the likelihood of any significant future supply that could dampen capital growth. High-rise towers, on the other hand, are typically built on converted land in and around the CBD and can quickly shoot up in clusters.
2. Competition
If you own an apartment in a complex with hundreds of almost identical properties, you will always be in competition for tenants and buyers. This will increase the chance of vacancy and restrain value growth.
3. Land value
Apartments in a low-rise complex typically have a higher land-to-value ratio than their high-rise counterparts. This means they generally have a better likelihood of achieving capital growth, as it’s the land that appreciates.
4. Owner-occupier appeal
Low-rise complexes are typically targeted to owner-occupiers, which ironically makes them a better proposition for investors. Owner-occupiers tend to take pride in their home and are less likely to sell up when times are tough.
5. Unfavourable comparisons
In high-rise complexes, which are mostly investor-owned, distressed sales happen more frequently. This is bad news for the value of comparable properties, as it’s easy for valuers and buyers to make comparisons.
6. Strata Fees
High-rise complexes typically have more amenities and facilities, such as lifts, pools, and gyms. This is great if you are a tenant, but it often means higher strata fees for the owner, which can quickly erode rental returns.
7. Control
Property investors like to be able to control their investment as much as possible. As the owner of an apartment in a low-rise complex, you have greater control over the actions of the strata company as your ‘voting share’ is greater than with owners in a high-rise.
Eight tips on managing the pain of a rent reduction
The Perth rental market isn’t particularly strong at the moment and, for landlords whose property has recently become vacant, securing a tenant may involve accepting a rent reduction.
This may seem like a backward step, particularly if you have experienced rents moving in only one direction. But don’t despair. Here are eight tips to help manage the situation.
- Remember to consider the drop in context of all the gains you’ve had in recent years.
- Focus on the bigger picture. Is the drop going to make much difference over the long term? Rental income is certainly an important part of property investment but the ultimate prize is capital growth.
- Vacancies can be expensive. You are generally better off reducing the rent to attract a tenant quickly rather than holding out for more money. Consider how a $10 per week drop compares to an extra few weeks of vacancy.
- When a property is first listed on an online real estate portal, it tends to go out as an email alert to a database of potential tenants. You don’t want to miss this initial burst of activity by pricing your property too high.
- When setting a new price for your rental property, consider the price brackets that potential tenants will search within. Your property manager should be able to help with this.
- You don’t want to play ‘catch the market’. If you price your property too high at the beginning of a campaign and the market drops, you’ll need to make a disproportionally large drop to catch the market.
- The rental market can be quite seasonal, with some seasons better than others, so try to time your leases accordingly, which may allow you to later increase the rent.
If you’ve followed the real estate market over many years you’ll know that a turnaround is always around the corner. All you have to do is be patient.
Should you build on your subdivided lot or just sell the land?
Small subdivision projects have become a popular wealth-creation strategy for many everyday investors. The impetus has no doubt been the various planning changes occurring throughout Perth’s suburbs allowing for higher density housing.
One of the questions commonly asked by these developers is whether, following the subdivision process, they are better off selling the lots or building on them before selling.
Every situation is unique and so it’s impossible to make a blanket statement one way or another. However, a good start is to understand the major pros and cons of each option.
Selling the land
For the developer, selling the subdivided lots means an immediate cash injection and the potential to quickly move on to another project. This is assuming, of course, that the lots can be sold without too much difficulty, which certainly isn’t a given.
It’s possible to make a reasonable profit using this strategy, however, most success stories involve the developer holding the property for some time before developing.
Anyone who has sold land knows that it can be difficult to get top-dollar because it’s relatively easy to compare one lot with another and buyers will probably be looking to make a profit themselves.
Selling the subdivided lots works better in areas where there is a scarcity of land and higher density living is common.
Creative strategies may involve selling the land with approved plans and permits in place, or by working with a builder to advertise the property as a home-and-land package.
Building and then selling
On the surface, building is a riskier option in the sense that the developer must fund the cost of construction. There is also the added hassle and longer time-frames to consider.
The profit, however, will generally be greater than when selling the land on its own, partly because the building process often adds value beyond the cost of construction. Plus, it’s easier to achieve a strong price when selling a beautiful brand-new home to an emotional buyer.
Building also creates additional opportunities. If, for instance, it becomes difficult to sell the completed homes, there is the potential to hold the properties and benefit from the strong rental income and depreciation allowances.
Conclusion
Determining which option might suit your particular circumstances involves detailed calculations involving the likely end values and various costs involved, while also taking into account the risk and effort involved.
Critically, there are also many tax implications which may dramatically affect the decision. Therefore, you should talk to your accountant and other professionals before doing anything.
Accessibility is the key for this small suburb
Bedford is a Perth suburb located six kilometres from the Central Business District and part of the City of Bayswater. It is bordered by Inglewood to the south, Dianella to the north-west, Morley to the north-east and Bayswater to the east.
Bedford is a relatively small suburb, less well-known than its neighbours, which is why its residents consider it a little suburban secret.
Homes in the area have plenty of character with many being built in the 1940s and 1950s and sitting on large blocks. However, there is also a spattering of newer duplex and triplex developments.
The median house price is around $650,000, almost $200,000 less than neighbouring Inglewood, and the median rent is $460 per week.
With its central location and largely suburban nature, Bedford is all about accessibility. It has direct access to Beaufort Street, with its many shops and cafes, and is just a short drive to one of Perth’s largest shopping centres in Morley.
It contains few major amenities itself, consisting mostly of tree-lined residential streets, but Bedford’s proximity to Mount Lawley, Inglewood, Bayswater, Maylands, Dianella and Morley provides for a host of options, making it popular with couples and families.
While there are no significant developments or improvements planned for the suburb, there is plenty of redevelopment and rejuvenation activity happening all around the suburb, including the nearby Morley Activity Centre. This will, over time, be of benefit to Bedford.
Thank you – we won!
Thanks to all our clients who voted for us at the Business News Rising Stars awards.
Momentum Wealth was voted by the judges as one of the top 10 Rising Star businesses in WA and voted the number 1 Rising Star business by the public!
To be recognised by the judges as one of the top 10 fast-growing businesses in WA was a great honour but to be voted by the public as the number 1 business was thrilling.
Thanks to all our clients who supported us and thanks to our fantastic team at Momentum Wealth who work hard to build your property wealth.
View the full list of winners here
RBA leaves interest rate at 2.5%
The reserve bank has kept the cash rate unchanged, stating dwelling prices have increased significantly over the past year, though there have been some signs of a moderation in the pace of increase recently.
“Monetary policy remains accommodative. Interest rates are very low and for some borrowers have edged lower over recent months. Savers continue to look for higher returns in response to low rates on safe instruments. Credit growth has picked up a little, including most recently to businesses”, governor Glenn Stevens said in a statement after the July board meeting.
AMP Capital’s Chief Economist, Shane Oliver, stated one of the reasons that the RBA decided to keep the interest rates the same was due to the most recent budget “that had a negative impact on confidence, and that’s thrown a bit of a spanner in the works, and we’ve got relatively low inflation. So on the one hand the economy hasn’t picked up enough to justify a rate hike, and inflation isn’t a problem either, on the other hand the economy isn’t collapsing – justifying rate cuts – so we’re literally in a holding pattern.”
So what does this mean for you? Another month of lower interest rates for your investment portfolio but keep in mind that this may not be the case the long term.
This newsletter is provided by Momentum Wealth.
Tax Newsletter – July 2014
Tax debt release on serious hardship grounds refused
In a recent case, the Administrative Appeals Tribunal (AAT) refused an individual’s application to be released from his tax debt of $58,000 on the grounds of serious hardship.
The AAT noted that no explanation was offered for the taxpayer’s failure to meet his tax liabilities as they arose. The AAT said that instead of paying what it considered to be manageable tax assessments, the taxpayer “largely ignored his tax liabilities over the last five or six years, and has allowed the amounts due to accumulate with interest”.
TIP: The Tax Commissioner has a discretion to release individuals from eligible tax debts. However, even if the Commissioner is satisfied that serious hardship would result from payment of the tax debt, he is not obliged to exercise the discretion in the taxpayer’s favour.
Broadly, serious hardship is said to exist when payment of a tax debt would leave an individual unable to provide basic living necessities for themselves and their dependants. Ultimately, it is a question of fact whether payment of an eligible tax liability would result in serious hardship – and the onus is on the taxpayer to prove their case before a tribunal.
GST credits for property development project managers denied
Two taxpayers have been denied GST input tax credits they had claimed in respect of purported acquisitions made in relation to property developments. The Commissioner had refused the taxpayers’ claims for input tax credits on the basis that neither taxpayer carried on an enterprise.
The AAT heard from the taxpayers that they were “principal contractors” in relation to the property developments. However, the AAT said that exactly what the “principal contractors” did in respect of the properties remained the subject of “quite profound mystery”.
It said that an entity is not a “project manager” simply because someone says it is. Further, the AAT said that to carry on an enterprise, an entity must “do” something, and that in this case, the AAT was unable to identify the activity that the taxpayers were doing in respect of the properties.
TIP: This case demonstrates the need for multiple parties, and in particular related parties, who are involved in large property development projects to clearly articulate and document the role of each party and the agreements they have with each other, particularly if one party intends to seek GST input tax credits.
Individual working overseas not a tax resident
An individual has been successful before the AAT in arguing that he was not a “resident” of Australia for tax purposes for the 2009 and 2010 income years. This was despite being an Australian citizen, maintaining an Australian bank account for his salary, and retaining his house in Queensland.
During the years in question, the taxpayer had signed up with a company to work on a project in Saudi Arabia. The project was expected to last three years and the taxpayer had an expectation that upon completion of the project, he would move on to another project located in Saudi Arabia.
In making various findings of fact, the AAT largely accepted the taxpayer’s evidence. It said that the taxpayer’s presence in Saudi Arabia “was hardly casual or passing”. The AAT accepted that the taxpayer had formed an intention to make Saudi Arabia his home for the duration of the project and beyond.
TIP: This case demonstrates that proving tax residency requires a detailed examination of various facts, and the weighing up of those facts, to come to a conclusion that an individual is (or is not) a tax resident. It also demonstrates the importance of having corroborating evidence to prove the taxpayer’s case.
ATO debt collection approach under review
The Inspector-General of Taxation, Mr Ali Noroozi, has announced that he will review the ATO’s approach to debt collection. To facilitate his review, Mr Noroozi has called for interested parties to submit comments. Public consultation closes on 18 July 2014.
“Despite the ATO’s debt assistance programs, its approach to collecting taxes has been a persistent source of taxpayer complaint”, Mr Noroozi said. He noted that the ATO’s approach to collecting debts accounted for 23% of all ATO-related complaints received by the Commonwealth Ombudsman in 2012–2013.
Furthermore, Mr Noroozi said some stakeholders believe that the ATO has recently taken a firmer approach to debt collection despite continuing economic pressures, while others are of the view that the ATO allows debts to accumulate for too long before taking action.
New ATO approach to identifying SMSF risks
Trustees of self managed superannuation funds (SMSFs) need to be aware of how the ATO gathers information about them in order for the ATO to assess whether their SMSF poses a tax compliance risk, and how the ATO may respond if it perceives a risk.
The ATO has recently announced that it will take a new risk-based approach to how it treats auditor contravention reports (ACRs). This approach will be based on the overall risk posed by the SMSF. Using new risk models, the ATO will analyse multiple indicators of possible non-compliance, including regulatory and income tax matters, information from the SMSF annual return, ACRs and other data such as trustee and member records. The ATO will then use this information to determine appropriate actions to take regarding each SMSF.
The ATO has also reminded SMSF trustees that from 1 July 2014 it will have more flexibility in how it deals with SMSFs that breach the super law – including new powers to issue penalties. The ATO says that SMSF trustees should therefore rectify any contraventions of the law as soon as possible, or have plans in place by 1 July 2014 to do so.
TIP: While the new SMSF trustee penalties start from 1 July 2014, the ATO has noted that contraventions of the law (such as loans to members or relatives) that exist on 1 July 2014 will come under the new penalty regime.
New integrity rule targeting dividend washing
The government has proposed to amend the law to introduce an integrity rule that will curtail taxpayers’ ability to obtain a tax benefit from “dividend washing”.
Broadly, “dividend washing” is a scheme that allows a taxpayer to obtain multiple franking credits in respect of a single economic interest by selling the interest after an entitlement to a franked dividend has accrued and then immediately purchasing an equivalent interest with a further entitlement to a corresponding franked dividend. The amendments, once formally enacted, are proposed to apply with effect from 1 July 2013.
Administrator of deceased estate breached duty
The Supreme Court of Queensland has ruled that an administrator of a deceased estate breached her fiduciary duty by applying for her deceased son’s superannuation benefits to be paid to her personally, rather than on behalf of his estate.
The Court had granted the woman Letters of Administration over her son’s estate after he died, aged 40, intestate and without a spouse or children. However, she applied to her deceased son’s superannuation funds for any death benefits to be paid to her personally.
The deceased’s father (the woman’s ex-husband) submitted that she had allowed a conflict of interest to occur by seeking the superannuation death benefits for herself personally. In finding against the woman, the Court ordered that she transfer all of the superannuation death benefits in dispute (approximately $450,000) to the son’s estate, where it would be shared equally with her former spouse under the rules of intestacy.
Property Newsletter – June 2014
Who really cares about your retirement?
One of the hotly-debated initiatives announced in the recent federal budget is the plan to lift the pension age to 70 by 2035. Under this plan, Australians born after 1965 will have to work until they are 70 before they are eligible for the age pension.
Regardless of your specific views on the matter, the discussions should serve as a wake-up call that ultimately you can’t rely on the government to support you in retirement.
Why is this happening?
It is a well-publicised fact that our population is ageing, just as it is in most modern western economies. Currently 13% of Australians are aged over 65, but this figure will grow to 25% by 2047.
By some estimates, one in three of those aged 65 today will live past 90 and half of those could live beyond 100.
With more people on the pension and a declining tax base, it’s easy to see why the government is looking to reduce expenditure in this area. Whether the details are correct is for the politicians to debate.
The reality of retirement
While few people aspire to live on the pension, most retirees don’t have a choice. Almost 80 per cent of Australians over the age of 65 receive some sort of income support and life for many of them can be tough.
The single aged pension, including supplements, is currently only around $827 per fortnight or just over $21,000 per annum.
There is also the fact that many people will simply be unable to work until they are 70 due to the physical nature of their employment.
Even many of those who are lucky enough to have a sizable superannuation nest egg at retirement may struggle to afford their desired lifestyle in the decades following retirement.
Clearly, if you want something other than the norm, you need to take personal responsibility and actively plan for a better retirement future.
Time to get serious about property investment
I believe a growing number of people will look to property investment for the answer, hoping that a combination of capital growth and rental income will provide adequate financial support in retirement.
But casually owning one or two investment properties probably won’t be enough. More than ever you need to take a professional approach to investing. You need to choose the right type of properties, set up the right financial and ownership structures, manage your investment diligently and maximise your tax benefits along the way.
Unless you have the time and knowledge to do it properly, you should turn to the experts. Momentum Wealth was specifically established to guide people through all the stages involved in building wealth through property investment to provide long-term support through to retirement.
You also need to start as early as possible. If you start at the age of 30 and just buy just one property worth $500,000 and it grows at 8% per annum that will be worth around $5m at age 60. If you wait until 40 that same property will be worth around $2.3m at age 60. If you wait until 50 it will only be worth around $1.1m.
If you set realistic goals, employ time-tested strategies, and make informed decisions, you can enjoy the retirement you desire at a time of your choosing.
Having access to money is an advantage in itself
The Perth real estate market has performed well over the past 18 months, with many suburbs recording double-digit growth in values.
From a finance point of view, this creates an interesting opportunity for investors but one that is rarely exploited to its fullest.
The opportunity involves gaining access to – but not necessarily using – your equity until a future date when the market cools and good buying opportunities present themselves.
You basically want to guarantee that you’ll have access to money when the right opportunities come along, ideally when the market favours buyers more than sellers.
Now is a good time to execute this strategy because it’s often easier to gain access to your equity immediately following a period of growth than when the market is weak. This is because lenders are generally more willing to lend and valuers have the sales evidence to justify strong valuations.
There are always stages in the property cycle when finance dries up a bit, making it more difficult to obtain a loan. When this happens, it severely dampens the demand for property and therefore provides those with access to finance a significant advantage.
Equity can be a powerful tool for building wealth but only if you can use it.
How do you go about gaining access to your equity without necessarily using it? There are a number of options.
Through refinancing you might be able to get a ‘top-up’ or ‘cash-out’ on an existing loan and either put the money in an offset account or deposit it directly into the loan account for future redraw.
The beauty is that you only pay interest on whatever portion of the loan you use, so it can sit there waiting for your next investment opportunity.
Access to credit can be a powerful tool for property investors, but it can also be an unhealthy temptation for some. Just like a credit card, you can essentially use the money for anything, so you need to remain disciplined. If you are, then having the funds available may give you the inside edge on your next investment.
Why first-timers are choosing to invest rather than buy
There is always a lot of media coverage devoted to highlighting the struggles of first-home buyers.
But while some aspiring home owners complain about rising property values and dwindling government assistance, others are taking the bull by the horns and turning conventional thinking on its head.
Rather than trying to buy their first home, many young Australians are wisely choosing to become landlords, while either renting with friends or living with their parents. This goes against what we are regularly told is ‘the normal’ way of doing things.
Why this strategy makes a lot of sense
This strategy clearly works on a number of levels. Firstly, it allows the individuals to get a foot in the door of the property market in a much more affordable manner. This is because rental income and tax benefits can go a long way toward paying the mortgage.
It also allows this lifestyle-conscious demographic to live where they want, even when they can’t afford to buy there, while also providing the flexibility to travel on a whim.
In the long term, the goal for these innovative first-timers is to use rising equity to either expand their property portfolio or get into their dream home sooner.
Interestingly, buyers can still later qualify for the first-home owner’s grant, even if they own several investment properties.
A common trap for first-time investors
The biggest mistake made by first-timers is to invest in the same type of property that first-home buyers are typically buying – namely house and land packages on the outskirts of the city.
This type of property often has a low proportion of value in the land and is located in areas with abundant future supply. This result is that these properties just don’t perform in terms of capital growth.
Investors should always choose ‘investment-grade’ properties, which are more likely to be older and in well-established suburbs.
Dealing with a break up: what to do when your tenant decides to leave
So, you’ve just found out that your tenant wants to leave and you’re only a few months into the relationship. Now what?
Firstly, don’t take it personally. There are many reasons why a tenant might need to break their lease and prematurely end the tenancy. Usual reasons include work relocations and changes in family circumstances.
In fact, when the rental market is soft (as it is now) and rents start dropping, some tenants may decide to break their lease simply to move to a better or more affordable property.
Can your tenant just terminate automatically? No, they need your permission first and any agreement to terminate must be in writing, typically in the form of break-lease agreement that details all the costs and responsibilities involved.
Of course, you can agree to let them out of the lease with no cost, but that would usually be unwise.
A residential tenancy agreement is a legal contract and so you are entitled to ensure your financial position is no worse off as a result of the tenant breaking the tenancy agreement.
What costs are involved? The laws differ from state to state but as a general rule the tenant is responsible for a number of costs. For starters, the tenant will typically have to pay rent until a new tenancy agreement commences or the original tenancy expires (whichever comes first).
But it doesn’t stop there. The tenant will also have to compensate you for reasonable costs, including a proportion of the advertising and letting fees, which you will incur as a result of the break lease. Even maintenance costs (e.g. for lawn mowing) may be included.
The tenant has the option of advertising the property themselves to help find a new tenant, but this doesn’t remove their obligation to compensate you for advertising fees.
What’s your role in all this? Well, both you and your property manager will need to take all reasonable steps to re-let the premises as soon as possible. Otherwise, your tenant could make a claim to reduce their costs by arguing that you haven’t mitigated their risk.
Why the WA government wants small developers to succeed
Governments at all levels, but particularly the state government, recognise that WA needs to produce more housing to keep up with our booming population.
This means that when it comes to buying real estate, they want people to build or buy new homes, as this generally adds to the overall stock of housing.
There’s another reason the government wants us to build homes. It’s because construction activity is good for the economy as it creates jobs and demand for a whole variety of goods and services.
In the recent WA state budget, the government decided to reduce the threshold at which first home buyers pay stamp duty from $500,000 to $430,000, which will come into play from 1 July 2014.
This change will clearly make it harder for some first-home buyers to get into the market. But interestingly, the government didn’t change the stamp-duty-free threshold for the purchase of vacant land. Buyers will pay no stamp duty for land up to $300,000 in value, and the exemption phases out at $400,000.
This move will clearly encourage many first-home buyers to build a new home rather than buy an established one.
Last September the government again reoriented the first-home buyer market by slashing the First Home Owner Grant for people wanting to buy established properties to a meagre $3,000, while increasing the grant to $10,000 for new homes.
Put these two recent “tweaks” together and you get a fairly clear picture of the government’s priorities. They want to encourage first-home buyers to buy, or better yet, build a new home, which is good news if you’re a developer targeting first-home buyers.
With local councils urged by the state government to increase infill development throughout Perth’s established suburbs, there are many excellent sites waiting to be developed.
And thanks to government incentives (and disincentives) for first-home buyers, if you hit the right price point you could easily have buyers lining up at the door.
A quiet achiever destined to keep kicking goals
Lathlain is an established, largely residential suburb located 7km south-east of Perth’s CBD and part of the Town of Victoria Park.
It’s the type of suburb that many people would have heard of but is probably difficult to find on a map. Victoria Park sits to the west, Burswood to north, Rivervale to the east, and Carlisle to the south-east.
Lathlain was first developed in the 1890s (when quarter-acre blocks were on sale for £25–30), but significant residential development didn’t occur until the post-war years. In 1959 Lathlain Park, the most prominent natural feature of the suburb, became the home the Perth Football Club, which it remains today.
The suburb has a primary school and a growing number of local shops, but most commercial and other services are provided by nearby Victoria Park and Belmont.
The suburb has great access to the entertainment facilities of Burswood (and the site of the future stadium), and it’s just a quick trip to the airport for the suburb’s many fly-in, fly-out workers.
Lathlain has the convenience of Victoria Park train station on its south-western edge, and is serviced by various bus routes.
The median house price in Lathlain is $710,000, with a median rent of $500 per week. The real estate market has consistently outperformed the Perth average over 1 year, 5 years and 10 years.
Data released at the start of 2014 by RP Data reveal that units in Lathlain had a bigger annual growth in value than anywhere in the city.
The suburb is predominantly zoned R20, making it of lower density than neighbouring suburbs, but there are still lots of post-war houses on big blocks being demolished and the land subdivided.
The future looks bright for Lathlain. The West Coast Eagles and the Town of Victoria Park recently signed a Heads of Agreement which proposes that the club’s new training, administration and community facility be built at Lathlain Park.
Construction on the project is likely to commence in late 2014 or early 2015, with an expected completion date in early 2017.
The development, which will include a museum, café and sports medicine clinic, is part of a wider plan to transform the area around Lathlain Park and ensure the long-term desirability of the suburb.
RBA Update June 2014
The RBA Board has decided to leave the cash rate unchanged at 2.5 per cent again!
This is great news for property investors in Australia as this means that official interest rates have remained on hold at some of the lowest levels for 60 years. Many economic analysts in Australia believe that the federal budget cuts would prompt the RBA to delay a change in the cash rate.
Glenn Stevens, Governor of the RBA stated “In Australia, the economy grew at a below-trend pace in 2013 overall, but growth looks to have been somewhat firmer around the turn of the year. This has resulted partly from very strong increases in resource exports as new capacity has come on stream, but smaller increases in such exports are likely in coming quarters.
Moderate growth has been occurring in consumer demand and a strong expansion in housing construction is now under way. At the same time, resources sector investment spending is set to decline significantly. Signs of improvement in investment intentions in some other sectors are emerging, but these plans remain tentative, as firms wait for more evidence of improved conditions before committing to significant expansion. Public spending is scheduled to be subdued.”
It seems like the RBA are playing it safe at the moment and taking a wait-and-see approach to recent mixed economic data from overseas and are waiting to see how the federal budget is received in the long term.