Author Archive
Property Newsletter – November 2013
October 28, 2013 | 
Author Property Management: Is Being Anti-Pet Costing You Money?
The decision of whether or not to allow your tenants to keep pets in your property is a personal one. For most landlords, the decision is ‘no’. Surveys have shown that only 1 in 4 landlords allow pets, and WA landlords are among the least pet-friendly in the country.
So why are so many landlords anti-pet and could they be putting themselves at a financial disadvantage?
The general concern for anti-pet landlords is about the potential property damage that a pet can cause. Animals, particularly those of the four-legged variety, can certainly cause damage to carpets, floor boards, paint work, and not to mention the garden.
Animals can also affect the ‘aroma’ of a property. How many times have you walked into a home and knew instantly that a dog lived there. And there are noise issues as well. Barking dogs and fighting cats can often create issues between neighbours and put a landlord in a difficult position.
There are, however, plenty of positives to allowing pets in your investment property. For those landlords concerned about vacancies (and who isn’t?), being open to pets can dramatically increase your pool of potential tenants. This can mean shorter vacancies and better quality tenants. Around 60 percent of Australian households have pets and with so few pet-friendly rental properties, it’s easy to see why allowing pets could put you at a competitive advantage.
Some people argue that tenants who own pets are more likely to stay in a property for longer than those without pets. The reason is two-fold. Firstly, pets help tenants feel more ‘at home’ in a property. And secondly, tenants with pets are less likely to want to move for fear of disrupting the pet/family-member..
Clearly, some properties are just not suitable for pets including some strata properties or those with no suitable outdoor areas. But in many cases, it is simply the preference of the landlord not to allow pets. Landlords who are themselves pet owners seem to better understand the relationship people have with their pets and are more open to the issue.
Being too quick to close the door on pets could mean longer vacancies and missing out on quality long-term tenants. This is especially true for owners of property in pet friendly areas such as near dog beaches and parks. And it’s not just families who own pets but also many couples and singles, a growing segment in society.
When making the pet/no-pet decision, it’s perhaps human nature to think of the worst case scenario. There are ways to minimising the risks associated with pets by requiring a pet bond (this only covers fumigation costs), putting restrictions on the number or size of animals and by asking for ‘pet references’ that demonstrates previous good pet behaviour.
Property Acquisitions: How Buyers Can Tell the Difference Between a Salesperson and an Advisor
One of the things all property investors need to understand relates to who you should trust for advice and, specifically, the difference between a salesperson and an advisor.
For anyone considering investing in property, there can be a lot of information to take in, and it’s not just about property. One of the things all property investors need to understand relates to who you should trust for advice and, specifically, the difference between a salesperson and an advisor.
You would think that this is an easy distinction to make, but not so. Many salespeople wrongly present themselves as “advisors” and go to great lengths to convince you of this. They do this to build trust, knowing that you would probably rather buy from someone you trust. So how do you tell the difference? Here are some key things to look out for.
The ready-made solution
There are many skilled and honest salespeople out there, and many of them may genuinely want to help you. The problem lies in the fact that salespeople often have a solution already in mind before they even know what you might need.
Salespeople may appear as though they are representing you, the buyer, but in fact they are working for a seller or property developer. How many times have you heard a salesperson recommend a competitor’s product or steer you towards an option that doesn’t result in a sale? And you can’t really expect any different because it’s their job to sell.
Advisors will generally provide a consultation before recommending any course of action, carefully listening to your needs before considering a variety of options. A true advisor won’t be swayed one way or another but rather focus on what is best for you.
It’s their duty
Salespeople are trained to overcome objections, win trust and ultimately get the deal done. Advisors, on the other hand, are trained to asses a client’s circumstances and offer the best alternatives in the area of their expertise, whether it is property investment or taxation.
Advisors generally have a legal duty to do what is best for their clients. But it’s important you always know whether or not you are actually ‘the client’. Many buyers take the advice of selling agents, for instance, even though these agents must represent the interests of their sellers.
Follow the money trail
If you’re unsure whether someone is a salesperson or an advisor, just ask them how they get paid. Generally, people who are paid by the seller are sales people, whereas those who charge a fee for their service are more likely to be advisors.
Buyers’ agents typically get paid when you buy, but their fee is fully disclosed at the start in a very transparent manner, which can’t be said for many salespeople cloaking themselves as advisors.
Conclusion
Whenever seeking advice or guidance on buying property, it’s important to be acutely aware of the differences between an advisor and a salesperson. While you are free to hear anyone’s advice, you should always put the advice into the correct context and consider whether the advice has been tainted by any specific motivations. Your ‘advisor’ may end up just being a salesperson in disguise.
Suburb Snapshot: Inglewood
Inglewood is sometimes noted for being ‘where you buy when you can’t afford Mount Lawley’ but this is probably an unfair description as the suburb has a lot to offer beyond its proximity to its “fashionable” neighbour.
Inglewood is located 5km from the Perth CBD and part of the City of Stirling. It borders Mount Lawley to the south, Dianella and Yokine to the North/East, Bedford to the North/West and Maylands to the West.
Inglewood is a relatively small but affluent suburb that is popular amongst families and professionals. It is sometimes noted for being ‘where you buy when you can’t afford Mount Lawley’ but this is probably an unfair description as the suburb has a lot to offer beyond its proximity to its “fashionable” neighbour.
It is admired by its residents for its safety, strong community feel, cafe culture, wonderful mix of character and modern homes, and attractive tree-lined streets.
Dwellings in the area are predominantly of pre-war vintage, including many Federation and Californian Bungalow style homes sitting on green title lots. There are also a number of unit developments and flats, mainly constructed after 1960, as well as many modern homes scattered throughout the suburb.
Like Mount Lawley, Inglewood is designated a Heritage Precinct by the Council, ensuring streetscapes are protected and the demolition of older dwellings is all but impossible.
The main commercial area and cafe/restaurant precinct within Inglewood is concentrated on Beaufort Street, which contains retail services, fantastic eateries, a library and a recreation centre.
Young families in the area are well catered to with Inglewood having two very popular local primary schools. However, secondary school students typically attend either Mt Lawley Senior High School or John Forrest Senior High School in Morley.
There are plenty of parks and recreational facilities for residents in Inglewood including the popular MacAuley Park, Mount Lawley Tennis and Golf Clubs (both located in Inglewood) and the Terry Tyzack Leisure Centre.
With its location so near to the city, public transport options are in good supply. There are numerous bus services passing through the suburb, especially on Beaufort Street, and there is a train station in nearby Maylands.
According to REIWA, the median price in Inglewood currently sits at $792,500. In terms of price growth, the suburb has outperformed the Perth metropolitan area over the past 1 year and 5 years, but not over 10 years. The proportion of renters in the suburb is higher than the Perth average.
Recently, Inglewood received prominent attention when it was identified in Australian Property Investor magazine as one of only a few WA suburbs considered to be “immune” to drops in home prices. This is based on data that showed it ended each year in the past decade in positive property price territory.
There seems to be nothing significant on the horizon that could change the landscape of the Inglewood property market. The proposed MAX light rail system will have a stop adjacent to Terry Tyzack Aquatic Centre, which will benefit the northern end of suburb, but this project is certainly not set in concrete.
With its mix of ‘suburbia’ and inner-city living, which many people crave, Inglewood will always be a popular choice for owners and renters. As a destination for property investors, it should remain a reliable if not an extraordinary performer.
| Growth rate (1 year average) | 8.6% |
| Growth rate (5 year average) | 2.7% |
| Growth rate (10 year average) | 8.9% |
| Population | 5,503 |
| Median age of residents | 37 |
| Median weekly household income | $1,573 |
| Percentage of rentals | 37% |
Source: REIWA.com.au, September 2013
Finance: Two Ways to Fund a Renovation
Planning a renovation? One of the difficult decisions you will face is how to pay for it. You have 2 main options when it comes to getting a loan for a renovation.
In Australia, renovating is one of the most popular reasons for refinancing, whether it is for lifestyle purposes or to add value to a property. But one of the many difficult decisions facing would-be renovators is how to pay for the renovation.
Some people may have savings or the ability to redraw funds from their home loan. Others may use a credit card or personal loan as a quick way of getting the money they need. But most renovators, especially those planning large renovations, will need to organise financing.
You have 2 main options when it comes to getting a loan for a renovation.
The first is to borrow against your equity, which either involves increasing or refinancing an existing loan or taking out a new loan on an existing property. This is probably the most common method because it’s relatively easy.
The amount you can borrow is determined by the amount of equity available and the lender’s servicing criteria. Typically, you can borrow up to 80 percent of the value of the property without paying Lender’s Mortgage Insurance (LMI), but every lender has different policies.
With an equity loan, interest only starts accumulating when equity is drawn down. This is why these loans require discipline because the money can essentially be used for anything.
The key thing to remember about this type of renovation financing is that the lender won’t take into account the post-renovation value of your property, which could limit the amount you can borrow.
If you don’t have enough equity to fund your renovation, you could consider another option: the construction loan.
This sort of loan is similar to an equity loan but in this case the lender will take into account the finished value of the property when determining how much to lend you. This means you could potentially borrow a larger amount, making the loan a good option for more substantial renovations.
Like an equity loan, interest on a construction loan is only charged when money is drawn. But the lender won’t give you all the money upfront because a construction loan is a riskier prospect for the lender. The money is generally released in stages as the renovation progresses, just as if you were building an entirely new home. This gives the lender more control and ensures the money is not used for other purposes.
Getting approval for a construction loan may require you to have council-approved building plans and a fixed-price building contract in place. Plus, the lender will not only organise a valuation pre-renovation but also assess the project at each stage before an instalment is paid. When the project is completed the loan will generally revert to a standard variable loan or you may be able to refinance to a loan of your choice.
Beware the Lure of the ‘Sexy’ Investments
In Greek mythology, there lived a beautiful but dangerous creature known as the Siren. This femme fatale would supposedly lure nearby sailors with an enchanting song, causing them to shipwreck and ultimately perish.
For property investors, there are modern day equivalents of the Siren that need to be resisted at all costs. I am talking about the types of property that look unbelievably good – sexy even – but that don’t particularly make good investments. For those without the right knowledge or cool head, the consequences can be disastrous.
Here are some of the common culprits…
Culprit #1: Brand new house and land packages
Let’s face it, we all love shiny new things, which is why it’s easy to see the appeal of investing in a new home and land package. Not only does this type of property look amazing in the brochures, but it is loved by tenants and can even be tailored to suit your specific needs.
The tax benefits of new property, with its depreciation, are well-documented, plus there should be no maintenance, at least for the first few years. Clearly, investing in a beautiful house and land package is an easy option.
Like so many things, however, what looks good isn’t necessarily good for you. And when it comes to house and land packages, there are a few reasons why they often let investors down.
Firstly, when you buy new property, you’re not just paying for the building and land. Factored into the price are also the developer’s profit margin and a proportion of the marketing costs that come with selling this type of property. These hidden ‘costs’ could be the equivalent of a few years of capital growth, putting you behind the eight ball from day one.
Secondly, the superficial appeal of these properties is often enough to distract investors from the fact that the location of the property is less than ideal. The majority of house and land packages are located on the outskirts of the city in areas with abundant potential supply.
The bottom line is that while investing in new property can seem appealing, it often proves unsatisfying over the long term due to poor capital growth.
Culprit #2: Off the plan apartments
Like a brand new house and land package, a stylish off the plan apartment can seem an attractive option. The innovative architecture, modern interiors and funky inner-city location can make any investor weak at the knees. Add into the mix potentially strong rental yields and great tax benefits and you have one pretty package.
Sadly, however, the reality rarely lives up to the fantasy. Low valuations and finishes that don’t meet expectations are common outcomes after settlement. Worse still, investors later realise that their property is one of hundreds of similar properties all competing for tenants and buyers, driving values down.
When it comes to off the plan apartments, you must not be distracted by the glossy brochures, incentives and promised rent returns. In the cold light of day, these investments just don’t deliver the capital growth on offer with other types of investments.
Culprit #3: Holiday homes
Who hasn’t been on holiday, fallen in love with a place and thought to themselves ‘I should buy an investment property here so I can enjoy it while also earning an income’.
Holidays have a wonderful way of distorting reality – making everything seem better – and this can lead a normally astute investor to make extraordinarily bad decisions.
There are certain types of holiday investments, such as short stay apartments, that are particularly risky. But even a regular type of property in a holiday location can seem a far better investment than it actually is.
Holiday destinations typically have a very transient population, which means that demand for property can fluctuate immensely. Property investors often have to put up with massive vacancy periods, putting a major dent in their wallet. Also, a holiday home investment can require many additional costs to furnish, maintain and manage the property, which investors fail to take into account.
Selling a holiday home investment can often be tricky and take far longer than an equivalent property in the city. Property values in holiday destinations are notoriously vulnerable to changes in the economy. It’s an asset that quickly gets offloaded when times are bad, which drags down prices. Holiday destinations were some of the hardest hit during the GFC and many have yet to recover.
Competition with your future self
Why are so many investors lured in by these seemingly attractive investment options? I think it comes down to the fact that when faced with certain decisions, especially involving your future, it can be hard to put the needs of your future self ahead of your present impulses.
Some investments look good and might even seem satisfying at first, but they are ultimately not good for your future self. And making the wrong investment decision can cost you.
Ugly is often the way to go
If you care about building wealth and retiring wealthier or sooner, you need to beware of the types of investments I have mentioned. This advice applies not only to investors but also to home buyers who want to build equity and upgrade their home down the track.
There is always a compromise with ‘sexy’ investments. You’re paying for all the ‘gloss’ and in most cases sacrificing important aspects such as location, which inevitabley leads to poor growth. They may offer short term benefits because they are ‘easy’ and immediately gratifying, but the lure quickly fades.
Sometimes the best property investment option is the ‘ugly’ one. Picture an old house needing renovation, sitting on a large block in an established suburb. It might not look that great to the eye, but it could offer an exceptional opportunity for the investor who can see its true beauty – potential for strong capital growth.
Unglamorous properties don’t attract a lot of attention, which means you can often secure them at a great price. Plus, they allow you to manufacture growth by making them a little sexier.
The bottom line is that before entering the market as an investor, you need to be absolutely clear on why you are investing. Is it to show-off to your friends and family? Is it to pay less tax? Or is it to build serious wealth that provides you with a financially secure future? Keeping your eye on the prize will help you stay on course for the long term, even if you encounter many distractions along the way.
Perth Offers Above Average Yields Despite Being Growth Leader
The big story for property investors in Perth is that despite very strong growth in values, the city’s rental yield remains above the average for all capital cities.
Perth currently has the strongest housing market of all the capital cities, according to RP Data’s Australian Housing Market Update for September.
House values are up 9.7 percent over the past year, while the growth in unit values was lower but still significant at 6.1 percent.
Accompanying the lift in values has been a monumental jump in the number of properties sold. In the 3 months to June 2013, there were 23.2 more sales than over the same period last year.
Rents in Perth have also increased, with house rents growing by 5.6 percent over the past year and unit rents growing by 6.5 percent.
However, with many renters taking advantage of cheap credit to buy their first home, the pressure on the rental market has now eased and the vacancy rate has increased.
Properties in Perth are selling much quicker than they were last year with the average time on the market falling from 64 days to just 34 days.
The big story for investors is that despite very strong growth in values, the rental yield remains above the average for all capital cities. The average rental yield for a house is 4.4 percent and 5.0 percent for a unit
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Tax Newsletter – November 2013
Residency requirement for CGT home exemption failed
The Administrative Appeals Tribunal (AAT) has denied an individual’s claim that an exemption from capital gains tax (CGT) should apply to a property that he and his ex-de facto partner had sold. The individual had purchased land in 2002 with his then partner, and construction of a house on the land commenced in April 2004. However, the couple ended their relationship in September 2004.
Despite this, the individual argued that they had moved into the house in around May or June 2005 to meet the requirements under the law to sell the property without being subject to CGT. The AAT found that the evidence before it failed to establish that the house became the individual’s main residence “as soon as practicable” after construction was completed, and failed to establish that the house continued to be his main residence for at least three months after that. In this case, both requirements had to be met in order for the exemption to apply.
Parent liable to CGT on half-share of townhouse
An individual has been unsuccessful before the AAT in arguing that he should not have to pay CGT on the sale of a townhouse he owned jointly with his son because, he argued, he was only holding his interest in the property to protect his inexperienced son from selling it on a whim.
The individual had purchased the property for his adult son to live in and transferred the property to himself and his son as joint tenants. After living in the townhouse for a few years, the son moved out to another property. The townhouse was then sold and all of the funds were used to pay down the mortgage on a new property. The individual argued that he received no proceeds from the sale and that he held his interest in the property in trust for his son, or alternatively, that an exemption under the CGT law should apply. The AAT did not accept the arguments and held that as a joint tenant, the individual was liable to CGT on 50 per cent of the net capital gain on the sale.
Penalty for unsubstantiated work-related deduction claims
The AAT has recently affirmed a decision of the Tax Commissioner to impose a penalty on an individual equal to 50 per cent of the tax shortfall amount arising from deduction claims for work-related expenses that were unsubstantiated.
The individual worked as a cars salesman and in his 2011–2012 tax return made various claims for work-related expenses amounting to around $34,300. The Tax Commissioner determined that most of the claims were unsubstantiated and imposed a penalty of around $6,100, representing 50 per cent of the tax shortfall. The Commissioner also told the AAT that the individual had made similar claims in previous years.
The individual did not dispute that the claims were unsubstantiated, but argued that the penalty was severe and that he was unable to pay an outstanding portion of the penalty of $1,400. The AAT noted, among other things, that the individual did not retain invoices or receipts, or provide satisfactory evidence to substantiate the claims. The AAT was of the view that the individual’s conduct was more serious than mere failure to take reasonable care, and held that the penalty imposed was appropriate.
No enterprise, so GST credits refused
The AAT has refused an individual’s claim for input tax credits as it found no evidence that the individual was carrying on an “enterprise”. The individual claimed that before she was required to serve a term of imprisonment, she had tried to start a “services business”. She claimed that she had purchased, among other things, two motor vehicles, various office equipment, and business promotional materials. The individual made claims for input tax credits totalling almost $74,000 in respect of the various purchases over four years. However, the individual said the attempts to start the business did not succeed and straddled her term of imprisonment. The individual also claimed that any records she had of the purchases were lost or destroyed, or that she had not been asked to produce documentation by the Tax Commissioner.
The AAT said the individual was given various opportunities to produce documents to back her claims before the hearing; however, it noted that her evidence, being mostly personal testimony, did not satisfy the burden of proof that the Commissioner’s assessment denying the input tax credits was excessive. The AAT found that there was no “enterprise” for the purposes of the GST law and that the decision to deny the input tax credits was correct.
Special GST clause in contract unclear
A company (a trustee of a family trust) that had sold a property to an individual has been unsuccessful before the Victorian Supreme Court in a matter concerning whether the individual was required to pay GST in addition to the purchase price on the property.
The purchase price was set out in the Particulars of Sale in the contract as $2,250,000. The Supreme Court reviewed the contract, and in particular, a “special condition” dealing with GST. While the Court accepted that the commercial aim of the special clause may have been to allocate responsibility for any GST liability attached to the sale of the property, it considered that the contract said nothing about whether the purchase price in the Particulars of Sale was actually intended to include GST. Further, it could not discern from the special clause any particular contractual intention of the parties. In conclusion, the Court held that the special clause should be removed from the contract. As a result, it said the $2,250,000 amount in the Particulars of Sale should be understood to be inclusive of any GST payable on the sale.
TIP: This case highlights the importance of ensuring that a contract for the sale of property clearly specifies whether the sale is subject to GST and whether the price is GST-inclusive or GST-exclusive.
Plumbers were full-time casuals, not contractors
The AAT has found that individuals working for a plumbing business were employees of the business and that the business was required to provide superannuation contributions for them. The business argued that the workers were independent contractors and that there was no superannuation requirement.
After reviewing the individuals’ relationship with the business, the AAT was of the view that, effectively, the workers were full-time casuals paid on an hourly rate and not eligible for holiday or sick leave. The AAT considered various factors, including that the individuals all had the same contract (with the same terms) with the business. The AAT said one would expect independent contractors to have differing terms, but the fact that their contracts were the same was “extraordinary”. Another key factor was that the hourly rates charged by the workers to customers were largely set by the business. Overall, the AAT concluded that the workers were employees and affirmed the requirement to pay superannuation.
ATO warns of schemes to access additional franking credits
The ATO has cautioned taxpayers against trading shares on a special market operated by the Australian Securities Exchange (ASX) with the sole purpose of obtaining additional franking credits. The ATO says these arrangements involve a taxpayer selling shares in a company on the ordinary market after a franked dividend has been announced, and retaining the franked dividends. Then, within days, the taxpayer buys back a similar parcel of shares in the same company on the special market, which also has franked dividends. The ATO says the transactions could constitute “dividend washing” and that the taxpayer could face penalties under the law.
TIP: Dividend washing occurs where shareholders seek to claim two sets of franking credits on what is effectively the same parcel of shares. Taxpayers who are unsure about their own circumstances should seek independent advice or apply for an ATO private ruling.
ATO focuses on dodgy financial products
The ATO has highlighted areas of concern in relation to certain financial products, particularly a small number of financial products that may offer the promise of tax benefits that may not actually be available to some or all investors who invest in the product.
Key factors that draw the ATO’s attention include suggestions that the investor could obtain tax advantages (that most taxpayers would not in fact receive in their individual circumstances), or that the tax law’s anti-avoidance provisions may not apply.
Finance Newsletter October 2013
Mercia’s Mortgage Brokers
Where are Interest rates going?
Reading the business press and thinking of fixing your home or investment loan?
There are some great variable and fixed rates available.
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If you are not sure if you have the best loan, we can help you look at your options and may be able to help you get a better rate.
Remember that Mercia finance brokers can assist you with car loans, home loans, Lo-Doc home loans for the self employed, construction loans and any other type of mortgage or loan. Our service is free of charge to you the borrower and we have access to all the major lenders in WA.
A Mercia Mortgage broker can give you advice and comparisons between all the major lenders.
All these services are provided by our friendly and professional mortgage brokers at no cost to you – so you have nothing to lose and everything to gain.
If you would like to speak to a broker, call Dan Goodridge on 0414 423 340 or e-mail dg@iinet.net.au .
Tax Newsletter – October 2013
Beware of artificial trust arrangements to avoid tax
The ATO has issued an alert to warn taxpayers that it is aware of arrangements where a discretionary trust is used to effectively funnel large capital gains to a newly incorporated company that is then wound up to avoid paying taxes.
The ATO says these arrangements concern situations where a trust has generated a small amount of income and a large capital gain during the year. The trust then distributes funds generated by the capital gain, tax free, to one beneficiary, while the newly incorporated company receives the tax liability, but does not have the funds to pay the tax. A liquidator is then appointed to wind up the company.
The ATO says such arrangements may be shams and those involved could face serious consequences under the tax law.
Extra 15% super contributions tax for high income earners
The superannuation law has recently been amended so that the effective contributions tax for certain concessional contributions (up to the concessional cap) has been doubled from 15% to 30% for “very high income earners”, ie those with income (plus relevant concessional contributions) above a $300,000 threshold.
The ATO has recently advised that it will start issuing the first assessments for the new tax in January 2014 for individuals who were above the $300,000 high income threshold for the 2012–2013 income year.
TIP: Taxpayers who exceed the $300,000 high income threshold should consider reviewing their superannuation contributions and salary sacrificing arrangements to take into account any impact of the additional 15% tax.
Individual found to be an Australian tax resident
An individual has been unsuccessful before the Administrative Appeals Tribunal (AAT) in arguing that he was not a resident of Australia for tax purposes during the relevant years. The individual was a mechanical engineer and worked overseas in the 2007 and 2008 income years. The taxpayer argued that in mid-2006 he had formed an intention to live in the United Kingdom, but was ultimately unable to do so due to the failing health of his mother-in-law. The taxpayer eventually returned to Australia in 2009.
The AAT held that the taxpayer had maintained a strong and continuing residency connection with Australia. The AAT noted, among other things, that the taxpayer had maintained an Australian bank account. He had also identified himself as a resident in official immigration arrival and departure cards.
A share investor, not a share trader
The AAT has held that an individual was a share investor, and not a share trader as claimed, during the relevant years. The individual was a full-time council employee and claimed that he had an arrangement with his employer where he could trade during business hours and then make up the time after hours. The Tax Commissioner argued that the individual was not carrying on a business of share trading and therefore was not entitled to deductions he had claimed on the premise that a business existed.
The AAT held that, overall, the factors pointing against the existence of a share trading business outweighed the factors that were in the taxpayer’s favour. Among various things, the AAT found there was a lack of a regular routine with buying and selling shares in the individual’s case, which pointed towards the transactions being made on a speculative basis. The AAT was also of the view that full-time employment went against the conduct of a share trading business.
TIP: If a taxpayer is a share trader, losses may be deductible against other income. If the taxpayer is not a share trader, indexation or the capital gains tax (CGT) 50% discount may apply to reduce the capital gain.
GST bill following hotel apartment purchases
The AAT has confirmed a decision of the Tax Commissioner that a husband and wife partnership (which was registered for GST) had an increasing adjustment resulting in a GST payable amount following the purchase of two apartments in a hotel complex.
The original owner of the apartments had previously granted leases in respect of each apartment to a hotel management company that was obliged to operate a serviced apartment business. The partnership had also elected to participate in a scheme that allowed the hotel management company to let the apartments as part of its serviced apartment business in return for income generated by the business. The supply of each apartment was treated as GST-free under the “going concern” concessions in the GST law. Since their purchase, the apartments were operated as part of the serviced apartment business.
The AAT essentially agreed with the Commissioner that the partnership had an increasing adjustment because of continuing input taxed supplies made in relation to the apartments.
No relief from excess super contributions tax bill
The AAT has affirmed the Tax Commissioner’s decision to impose excess non-concessional contributions tax on an individual in relation to excess super contributions he had made in September 2009.
Essentially, the taxpayer had withdrawn and redeposited his superannuation monies in an attempt to mitigate the effects of the global financial crisis. The Commissioner claimed the individual had breached the so-called “bring forward rule”, which provides a $450,000 cap on non-concessional contributions for every three-year period for people under age 65.
The AAT did not accept the individual’s argument that his super fund should have warned him of the danger of breaching the $450,000 limit. The AAT also did not expect the individual to necessarily understand the law himself; however, it did expect that the individual “might have asked for some advice”.
Departure from private ruling results in FBT assessments
The AAT has held that the Tax Commissioner was no longer bound by a private binding ruling that he had issued to a taxpayer company, because the taxpayer had implemented the scheme differently to the private ruling. As a result that the Commissioner was authorised to issue the taxpayer with fringe benefits tax (FBT) assessments for the relevant years.
Broadly, the private ruling provided that there would be no housing fringe benefit in relation to a home that was half-owned by the company (with the other half owned by a couple, who were also the directors of the company) on the basis that the business use of the home was 50%. However, the AAT considered that, in fact, less than 50% of the home had a “business use”, and therefore the private ruling was not longer binding.
Tax man’s refusal of tax debt compromise deal
An individual has been unsuccessful before the Federal Circuit Court in seeking a review of the Tax Commissioner’s decision to refuse a tax compromise deal. The individual had taken over his father’s jewellery business, but said he was not aware of the financial mismanagement of the business until unpaid creditors began calling. The taxpayer argued that the Commissioner had not taken into account the ill-health of his father and the effect the global financial crisis had on the business.
However, Court said there was no reason to believe that they were not taken into account by the Commissioner. Further, it held it could not review the Commissioner’s decision as it was not a decision made “under an enactment”.
GST and adjustment notes
The ATO has issued a GST ruling that sets out the requirements for adjustment notes under the GST law. An adjustment note reflects the adjustment to the amount of GST charged on a taxable supply as a result of an adjustment event. An adjustment event will result in the original tax invoice issued by the supplier being incorrect. A supplier is required to issue an adjustment note for a taxable supply unless the supply was issued under a recipient created tax invoice. In that case, the recipient of the supply must issue the adjustment note.
The GST ruling outlines when a document is in the approved form for an adjustment note, the information requirements determined by the Tax Commissioner, and when the Commissioner will treat a particular document as an adjustment note even though that document does not meet all of the requirements.
Property Newsletter – October 2013
A Tale of Two Investors
It’s not often in life you get such a stark demonstration of how different decisions can lead to vastly different outcomes. But this was definitely one of those times, involving two property investors.
A client – let’s call him Andy – had entrusted Momentum Wealth to assist in the purchase of an investment property around two years ago. All up he paid $458,000 for the property, which was located in an established area of Perth. I was very pleased to discover that a bank had just recently ordered a valuation on this property and it came in at $585,000.
What made that moment particularly memorable, however, wasn’t learning about a client’s success but rather a sad email that I received. The email was from a financial advisor who was seeking some property-related advice regarding an investor – let’s call him Paul – who found himself in a rather difficult financial position.
Paul was sold an investment property by a well known ‘investment group’. The property, located in an outer-Brisbane suburb, was purchased sight unseen for $428,000 around the same time that Andy had purchased his property.
The shock came when I read the email further, which explained that based on recent sales evidence the property was now worth around $300,000. Paul was now in a difficult predicament, unsure whether to hang on to the property in the hope it will recover its value or cut his losses and sell.
While I hate to see anyone suffer such a loss (albeit on paper), it’s made worse when you think about the success Paul could of had if he had sought proper advice. In fact, if Paul had achieved similar returns to Andy, he would be somewhere in the region of $250,000 better off.
These companies typically operate with a very slick sales process with the ultimate goal of you buying a new property off the plan, sometimes in a distant location which you have been told is a “good investment”. The consultations and service is “free” as a hefty commission is loaded into the purchase price.
These companies spend a lot of time talking to builders and developers from around the country, trying to negotiate deals that involve high rates of commissions in exchange for providing an effective channel for flogging hard-to-sell property.
Investment groups only get paid when they sell you a property, so it’s not uncommon to experience high pressure sales tactics.
Many investors fall for this firstly because there is an assumption the purchase is free. Plus, it is very easy to get caught up in the excitement of buying a new property because it looks so good and offers benefits such as depreciation, low maintenance, and strong demand from tenants.
There are a few reasons why investments made through these companies often don’t live up to the promises that were made, particularly in terms of capital growth.
As with Paul’s case, not only did the property fail to increase in value but worryingly it is now worth around $130,000 less.
The poor capital growth performance of these investments is primarily due to the fact the properties are not what I would call ‘investment-grade’. They are in areas with massive supply potential, typically on the outskirts of major cities or in speculative locations. Additionally, the properties, which are almost always new or off-the-plan, have a high proportion of their value in the building which depreciates over time, limiting the opportunity for growth.
Making the situation even worse, properties sold through investment groups typically have inflated prices to cover the commission that will be paid by the developer or builder.
Clearly, the cost of ‘free advice’ offered by investment groups can end up with a rather hefty price tag. Consultants who represent these companies may say they are helping you but they are just helping themselves.
Any business of course needs to make money but there is a monumental difference between what an advisor does and what these investment groups do. A property investment advisor should offer simply that; advice on where and what to invest in and remain independent from any property sellers. There should be no financial incentive to push you towards one property over another and a buyer’s agent or advisor that you engage ensures this by charging you a fee for service plus there is a legal obligation to act within the best interests of their clients.
The other major difference is to do with transparency. Although employing a buyer’s agent involves a fee for the service clients are completely aware of this fee when they engage the service. Plus, when you consider the scale of the returns that a great investment can generate, as it did with Andy, it certainly highlights the true value of employing a professional who is working within your interests and providing sound property advice.
Finance: Exiting a Loan Can Still Be Extremely Costly
You’re probably aware of the fact that since the first of July 2011, lenders cannot charge “early exit fees” on variable rate home loans. But what some borrowers have forgotten is that the legislation doesn’t apply to fixed rate loans, which are growing in popularity due to the extremely low interest rates being offered.
Taking out a fixed rate loan can be a relatively easy process and deliver significant benefits to certain borrowers. However, breaking such a loan can still be very expensive.
How do you ‘break’ a loan?
There are a few scenarios that could trigger the hefty break costs associated with fixed rate loans. Repaying the loan before the end of the fixed rate period or switching to a different product within this time are the more obvious ones.
But even just making extra repayments on a fixed rate loan can cause some lenders to charge you penalties. While most lenders will allow you to pay a small amount off your loan each year without being charged, going above the accepted tolerance could prove costly.
Why are lenders allowed to charge for this?
A fixed rate loan is a legal contract guaranteeing that you’ll pay a fixed amount of interest on a loan for a certain period of time. Breaking this contract means your lender is entitled to be compensated for any losses incurred.
How much will you pay?
Calculating the costs involved with breaking a fixed rate loan can be quite complex. A key factor is how the interest rate on the fixed loan compares to current interest rates being offered. If interest rates are currently lower that the rate on your fixed rate loan, then the costs could be significant as the lender won’t be able to make as much money from re-lending the money.
On the other hand, if interest rates are higher, then there may be no costs involved with breaking the fixed rate loan. But borrowers don’t often exit a loan if they are paying lower than the prevailing rate.
The amount owing on the loan will also impact on the calculation of break costs, generally the more owed the higher the costs. Similarly, more time there is left in the fixed term of the loan the bigger the costs. Breaking a 10-year fixed rate loan therefore could be extremely expensive, which is why most borrowers typically choose terms of 2-5 years.
Here’s what to do
If you currently have a fixed rate loan and need to break it, before you do anything ask your finance broker to obtain a quote from the relevant lender regarding all break costs. From there you can make an informed decision about whether the benefits outweigh the costs.
If you are considering choosing a fixed rate loan for a new purchase or to refinance, think sensibly about the flexibility you’ll need in future and the potential costs you could face by locking in a fixed interest rate. Again, your finance broker will prove invaluable in helping you to make this important assessment.
Property Management: Is Now a Good Or Bad Time to Increase the Rent?
The rental market in Perth has changed considerably over the past 12 months. An extremely tight market, where rents increased more than 10 percent annually, has now been replaced by a far more balanced one.
One of the biggest changes has been the fact that the number of properties available for rent has been steadily increasing, with the Perth vacancy rate sitting just over 3 percent.
Why the slowdown? There are a few reasons. With historically low interest rates, many renters have decided to buy rather than rent, reducing the pool of potential tenants. The slowdown in mining investment has also had a flow-on effect on the rental market, but predominately at the upper end.
With more properties available for rent, tenants now have a greater choice than before and landlords must react accordingly. If you have a vacant property, you must be careful not to make your property uncompetitive in the marketplace. Your Property Manager should provide you with a plan outlining what the competition is, what the market rent is and what improvements and or lease conditions can be offered to minimise the vacancy period.
What about if you are renegotiating a new lease with an existing tenant? Again, if you price the property too much above the market rate then you risk the tenant deciding to leave. A vacant property can be costly, so you’ll need to consider the current market conditions to see if an increase is warranted.
The market is constantly changing and conditions can vary dramatically from area to area, so it’s best to rely on the advice of your property manager to set the correct market rent. A good property manager will always be able to show you evidence of whether or not an increase is supported by the market and what can be done to the property to make it competitive and appealing to tenants.
Understanding Motivation is the Key
It’s often said that most of the profit in property is made when a purchaser buys the property. While that isn’t always the case, being able to negotiate property deals is crucial to making a lot of money in property investment.
Most people go wrong in property negotiations by not understanding that the person you are dealing with on the other side is human just like you, who has needs and emotions. You will be a far more successful property negotiator if you understand the underlying positions of the other party.
To understand the other parties’ position, you have to ask questions. If the seller is using a real estate agent then you can ask the agent those questions.
There are 7 important questions you must ask a seller. One of those questions is simply “why are they selling”. You want to ask this question for two reasons. Firstly you want to find out the other parties’ level of motivation. How desperately do they need to sell their property? Secondly you ask this question because you want to see if you can structure a deal that meets their needs and at the same time gets you a great deal as well.
Next time you go to a home open, ask the agent this question. Often you will get lots of information that can greatly help you get the best property deal.
An important area to property success is using contract clauses to protect your interests when buying. In some states, a standard contract is used in most property purchases. In other states, the contract is drawn up by the seller’s solicitor. Usually these contracts have one thing in common. They aren’t particularly friendly to buyers.
You need to insert your own clauses to protect yourself when placing offers. They are what I call are “get-out” clauses.
You also should be very wary of accepting real estate agents clauses for building inspections and other contract clauses. Don’t forget the real estate agent is representing the seller, not the buyer. Only a Buyer’s Agent truly represents you.
Property Tax Tips: Types of Investment Structures – Individual / Joint Names
Continuing on from our July edition regarding the factors to consider when choosing an investment structure, this month we’ll focus on the first type of structure – investing in your own name or in a joint name with a spouse or partner.
For most people the easiest way to acquire property is to purchase it in your own name or joint name with a spouse or partner. This is one of the most common structures and also one of the most simple.
Advantages
One of the biggest advantages is its simplicity and thus low cost. There is no actual structure to set up and no fees or compliance costs that other structures incur. You don’t need to take any specific action in order to purchase a property in this manner, you are ready to act immediately.
If you choose to sell your property, you are also able to utilise the full 50% capital gains tax discount (if you hold the property for more than 12 months). When you invest in your own name, you can take advantage of negative gearing by offsetting any losses against income such as salary or wages. Depreciation on your property also acts as a tax free ‘cash back’ each year. And lastly, you can pre-pay interest for up to 12 months and get an interest deduction.
Disadvantages
This type of structure has two main disadvantages, both of which can have long-term effects on your wealth. The first is that there is no asset protection. If you or your spouse or partner were to be successfully sued, your property may be taken to pay off your debts.
Secondly, it is quite an inflexible structure when it comes to distribution of income or capital gains which can have big tax implications. To minimise your tax, if a property was producing an income even after interest expenses on the loan, you would ideally distribute income to the person with the lowest taxable income. Likewise when you sell a property, you would also want the capital gains distributed to the lowest income earner as they will pay the lowest amount of tax. If you are making an income loss each year on your property, then you would want that loss to be in the name of the highest income earner to offset their income.
Unfortunately investing using this structure can only allocate the gain or loss to the named individual (or shared equally amongst the joint owners). It does not provide the flexibility to make any decisions about income allocation as your circumstances change with time (such as when a negatively geared property becomes positive or a partner leaves work to raise children).
With all structures there are always positives and negatives that need to be considered when assessing the right structure for you.