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Tax Newsletter – February 2014
January 29, 2014 | 
Author Business sale earnout arrangements back in spotlight
The Coalition government has decided that it will proceed with a long-standing proposal to improve the current tax treatment of earnout arrangements.
Earnout arrangements are a common way of structuring the sale of a business. Under a standard earnout arrangement, business assets are sold for a lump sum plus a right to further payments that are contingent on the performance of the business for a specified period following the sale.
The earnout right typically reflects the uncertainty surrounding profitability, the value of goodwill and cash flow projections. Under the current rules, the calculation of the tax on the sale is based on the lump sum as well as the estimated value of the earnout right, which means the seller could end up paying tax on an amount not yet received. The proposed changes aim to resolve this, as well as other tax issues.
The government has indicated that it intends to pass legislation to implement this proposal during 2014.
TIP: Although the tax changes would not apply until changes to the law are formally passed, the ATO has released details of administrative treatment that allows a transitional approach for certain cases. Contact our office for further details.
ATO administration of valuations under review
The Inspector-General of Taxation, Mr Ali Noroozi, is reviewing the ATO’s administration of valuation matters.
“Australia’s tax and superannuation laws are increasingly relying on concepts such as market value”, Mr Noroozi said. Valuations may be required for a variety of assets, transactions, businesses and liabilities for taxation purposes. For example, market valuations may be required in order to access the capital gains tax concessions for small businesses.
“Whilst there may be sound economic reasons for using such concepts, their use has resulted in a growing need for taxpayers to undertake significant valuation work”, Mr Noroozi said. The Inspector-General said the main source of taxpayer concern is the compliance burden associated with valuations. He said that, “critically, valuations are inherently subjective and can be a source of significant uncertainty leading to ATO disputes which can be frustrating, time-consuming and costly”.
ATO data-matching targets bank card sales
The ATO has announced that it will request and collect data relating to credit and debit card sales of merchants for the periods from 1 July 2012 to 30 June 2014 from various financial institutions, including the four major banks in Australia: Australia and New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation.
The ATO says the data acquired will be matched with certain sections of its data holdings to identify non-compliance with various tax obligations, including under-reporting or omitting business income. Records relating to 900,000 merchants are expected to be matched under the program.
Motel business refused GST tax credits
A motel business has been mostly unsuccessful before the Administrative Appeals Tribunal (AAT) in a dispute with the ATO concerning claims for input tax credits.
Following a tax audit, the Tax Commissioner refused the taxpayer’s input tax credit claims of around $88,500 for the quarterly tax periods from 1 January 2007 to September 2010. This was on the basis that there was a lack of documentation to substantiate the claims. The Commissioner had sought documentation from the taxpayer on various occasions, including sampling documentation for the June 2010 quarter.
However, the representative of the motel business was unable to produce all of the relevant documentation. He argued that a substantial amount of the records sought were lost due to flooding of the motel office in December 2008 and that he had been unable to respond to the requests for information as he was overseas.
Based on information provided before the proceedings, the Commissioner accepted that the taxpayer was entitled to some $16,000 of the original claim. The AAT found that this was acceptable in the circumstances. However, it affirmed the Commissioner’s stance on the balance of the claim. The AAT also rejected the taxpayer’s additional input tax credit claim of around $28,000. The AAT said the taxpayer had been given “every opportunity to produce documentation or other evidence to support his claims for imputation credits”. It further noted that the taxpayer was unable to produce documents or other evidence that demonstrated that the credits that the Commissioner had allowed were insufficient.
TIP: It is essential for small businesses to have adequate record-keeping practices. A key consideration is to make sure that records can be understood by more than one person. Another consideration is to document how records are kept (ie paper records or electronically), what records are maintained and where they are located, and how back-up records are managed.
Director penalty notices valid
A director of a company has been unsuccessful before the New South Wales Court of Appeal in arguing that director penalty notices issued to him for some $1 million (including interest) were invalid.
The Court of Appeal heard that the company had failed to pay withheld tax amounts to the Commissioner. The Commissioner then issued notices to the director, which sought to recover penalties alleged to be owing by the director in respect of the company’s failure to pay the withheld tax amounts to the Commissioner.
The director essentially argued that the notices were invalid as they did not state expressly that his liability arose “because of an obligation that he has or had under” the provision in the Taxation Administration Act that deals with directors’ obligations, and that the Commissioner was therefore not entitled to prosecute the proceedings against him. It was argued that because the notice did not make that specific reference, it did not meet all the requirements to be a valid notice under the law. The notices only referred to a specific legislative section concerning director penalty notices.
The Court of Appeal found that while the notices failed to refer expressly to the fact that the obligation arose under the relevant provision, as contended by the director, the notices clearly informed him that he was liable because of statutory provisions associated with the section concerning director penalty notices.
Tax changes following mining tax repeal
The Coalition government late last year introduced a Bill into Parliament to repeal the mining tax. A number of other tax measures and concessions associated with the mining tax are also proposed to be repealed or revised.
Under the changes, the small business instant asset write-off threshold will be reduced from $6,500 to $1,000. This means that, with effect from 1 January 2014, small business entities (ie generally, those with an aggregated turnover of less than $2 million) will be able to claim a deduction for a value of an eligible depreciating asset that costs less than $1,000 (rather than $6,500) in the income year in which the asset is first used or installed ready for use. If implemented, this proposed change will return the threshold to the level it was prior to changes made by the previous Labor government. The special rules allowing accelerated depreciation for motor vehicles will also be discontinued with effect from 1 January 2014.
The Coalition government also proposes to delay the phased-in increased in the superannuation guarantee charge percentage to 12% by two years. This means that the superannuation guarantee rate would:
- pause at 9.25% for the years starting on 1 July 2014 and 1 July 2015;
- increase to 9.5% for the year starting on 1 July 2016; and
- gradually increase by half a percentage point each year until it reaches 12% for years starting on or after 1 July 2021.
Posted in 
Property Newsletter December 2013/January 2014
Decade of Growth Ahead for WA
The Western Australian economy has been given a massive vote of confidence in a recent report from Deloitte Access Economics.
The state is expected to remain the fastest growing economy in the country over the next decade and the positive long term outlook hasn’t been dampened by the Governments’ credit rating downgrade.
Astonishingly, there is a quarter of a trillion dollars being invested in the state, primarily on major gas projects that more than half of which are currently underway or committed.
As mining construction subsides, housing construction is expected to step up driven by strong population growth.
“In terms of population growth rates, the west has long been a national leader, but now the state is growing so rapidly it is seeing absolute population growth levels running close to those in the three eastern states,” Deloitte said.
“Construction sector employment – even beyond the heavy engineering sector – remains a strong growth area, suggesting there is capacity to expand the state’s housing stock to meet current demands.
“So despite the doom and gloom in some quarters, our analysis indicates the medium term outlook for Western Australia is broadly positive.”
The Changes That Could Make or Break the Fortunes of Property Developers
The market is throwing up some magnificent opportunities thanks to a number of important changes. But it’s not all good news. Some of these changes could significantly devalue existing development sites and impact on the fortunes of developers.
If you like the idea of substantially increasing your wealth in a relatively short space of time, property development could be a viable option. Depending on your goals and how well the process is managed, a development project can increase your equity, boost rental returns or make you a very healthy profit.
Changes to R-Codes
Earlier this year, the West Australian Planning Commission (WAPC) released a new edition of the Residential Design Codes, otherwise known as the R-Codes. The R-Codes essentially provide a framework for controlling development and population density in residential areas and are therefore of critical concern to property developers.
The new codes outline a series of changes that property developers should know about. One of these, which we have spoken about previously, is the fact that granny flats (ancillary dwellings) can now be occupied by a non-family member, opening the door to new income streams.
However, perhaps the most significant changes relate to the reduction in the average and minimum lot sizes that are permitted under some of the R-Codes. For instance, under the new R20 code the average lot size has been lowered from 500sqm to 450sqm, and under the R60 code it has been lowered from 180sqm to 150sqm.
Minimum lot sizes have also changed. Lots with a minimum site area of 350sqm are now permissible under the R20 code, 300sqm under the R25 code and 260sqm under the R30 code. Bear in mind that although minimum lot sizes have been lowered for many of the codes, lots must still comply with average size regulations. So unless the average lot size requirement has also changed (as with R20 and R60), the reduction in minimum size simply allows for greater flexibility in lot design rather than necessarily increasing densities.
Let’s take a look at a simplistic example to demonstrate how changes to the R-Codes could create opportunities for developers. Under the new R20 zoning, given that the average lot area has been lowered to 450sqm, it means the minimum lot area for subdivision is 900sqm (2 x 450sqm). Previously, you would need at least 1000sqm to subdivide. Under the current rules, a 5 per cent variation may also be allowed, meaning it could be possible to subdivide a lot as small as 855sqm.
But it gets even better because of the reduction in the minimum lot area. Let’s say a landowner wanted to subdivide their 900sqm lot while keeping the existing house. This could have been quite difficult under the old rules unless the house was positioned just right on the lot to allow enough clear land for the second lot.
With the minimum lot area now decreased to 350sqm, the land could potentially be subdivided into a 350sqm lot and a 550sqm lot (average remains 450sqm), allowing for greater flexibility to keep the existing house and potentially make for a more profitable development.
The changes to the R-Codes provide a great opportunity for savvy investors. Those who understand the codes (or employ someone who does) may be able to find a property with a land area large enough to be subdivided but whose price doesn’t factor in the property’s true development potential. Given the right circumstances, an investor could make a nice profit instantly.
Changes to local housing strategies
When a local council introduces a new local housing strategy, the changes have enormous potential to benefit property developers, especially those who are ahead of the knowledge curve. The overriding purpose of these strategies is to increase housing density through rezoning. More specifically, they generally aim to increase density around certain activity centres, transport nodes and corridors in order to provide an opportunity for increased diversity of housing.
There are a number of these new strategies at various stages of progress throughout Perth’s 32 local councils. Some are currently out for public comment or awaiting approval by WAPC. If and when these new strategies are eventually implemented, properties in the designated zones will have their zoning increased (to a higher R number), which means some will instantly gain subdivision potential or greater potential than they had.
Remember that having the right zoning doesn’t automatically ensure that a property has development potential as there are many requirements that need to be met to obtain development approval.
Keeping abreast of what is proposed under these draft policies and tracking their progress can produce enormous opportunities. It does however require considerable time and effort, not to mention a clear understanding of planning regulations. Momentum Wealth employs a team of specialists to research and track these changes in order to identify opportunities for our clients.
Before you rush out and buy a property because it is located in an area marked for rezoning, keep in mind that it can take many years (even a decade) for the policies to be introduced. Also, there can often be numerous changes to the policies before they are finally implemented.
A major worry for developers
You may recall that Directions 2031 and Beyond, the framework for managing the growth of the Perth metropolitan area, sensibly calls for 47 per cent of new housing to come from infill development.
Despite this fact, however, some of the councils in Perth, including the City of Stirling, are taking a backward step. They are trying to introduce amendments to local planning laws that effectively ban multiple dwellings being built in areas already zoned for development at less than R60. This move, if it gets approved, will remove or substantially limit the development potential of some lots.
What could happen if these changes go ahead? It spells disaster for some property owners. Here’s an example. If the City of Stirling gets what it wants, multi-residential sites within the City that currently allow up to 6 apartments or 3 units to be built could be downgraded to have only duplex potential. This equals a significant financial loss for people with those sites. The value of these sites will drop instantly if this down-coding takes place, which could severely impact the financial plans and retirement nest egg of owners.
Worse still, even before these proposed changes are implemented (while they are out for public comment), the council can take them into account when assessing new development applications. This is likely to result in the rejection of previously sound development applications.
I don’t agree with the council’s move and strongly encourage anyone who thinks they may be affected to speak to our Planning and Development team to get advice and see what can be done. One option, for instance, may be to lodge a development application right away, which would provide up to 2 years to develop even if the zoning changes take place.
Conclusion
Clearly, knowledge is a powerful weapon when it comes to property development, especially in regard to the changes that are taking place in our city. If you can identify opportunities (or threats) before others, you may be in a position to profit handsomely.
However, identifying the opportunities and turning them into reality are two very different things. Property development is a significant undertaking requiring both broad-based and specialist skills. It comes with significant challenges and often involves large sums of money, which is why it’s almost always best to get expert help along the way to ensure a successful outcome.
Property Acquisition: The Location Within the Location
Choosing the right suburb is critical, but to get the best returns, it’s just as important to invest in the right areas within a suburb.
When looking for an investment property in Perth that will achieve strong capital growth, it makes sense to spend considerable time researching the suburbs that will outperform the wider market. But this is only a part of the process.
Choosing the right suburb or macro-location is of course critical, but to get the best returns, it’s just as important to invest in the right areas within a suburb. This is the location within the location, or the micro-location.
Statistics show that not all properties in a suburb perform at the same rate when it comes to capital growth and the differences can be quite significant. Commonly, some pockets of a suburb or certain streets will always perform better than others. Even one side of the street may prove to be a better investment than the opposite side.
But why is this so? What are the features that cause a part of a suburb to be a strong or weak performer? Firstly, let’s look at the negative features that may cause a micro-location to underperform.
Some parts of a suburb will always be closer to a main road than others and the resulting noise and traffic problems can easily drag down values. Similarly, some parts may have closer proximity to undesirable landmarks, such as industrial complexes, petrol stations, cemeteries, or certain types of shops or venues. The existence of hi-rise apartments and concentrations of state housing can also adversely affect certain parts of a suburb.
You might argue that a property’s poor location (within a suburb) is factored into its value and doesn’t necessarily cause it to underperform in terms of capital growth. While there is some truth to this argument, in many cases the negative features of a micro-location consistently dampen buyer demand making growth far more difficult to achieve. And these negatives are often permanent issues that can even worsen over time, such as with noise and traffic levels.
While these negatives can adversely affect the demand for housing, they can also offer opportunities if you believe the negatives will diminish in the future. For instance, you might notice that a shabby part of the suburb is being improved through public and private investment. Or maybe an ugly commercial area or old school is being knocked down and transformed into an attractive residential estate. In some cases, the uglier parts of a suburb may actually end up outperforming the rest of the suburb because of this gentrification.
What are some of the features that can make one part of a suburb more appealing than others? Clearly, the parts that are closer to the city, coast or river will typically attract more attention from buyers. Many suburbs also have an ‘expensive’ side, which might border a more prestigious suburb. Views, attractive streets, low levels of traffic, and good access to amenities can also raise the desirability of a micro-location, as is being within the zoning for a sought-after school.
Remember, the better parts of a suburb won’t necessarily achieve higher rates of growth than the cheaper parts. It depends on whether the demand for properties in these parts will increase at a greater rate relative to the supply. Determining this requires careful analysis and can involve looking at demographic changes, local area planning and the potential for future supply.
Even once you’ve identified the areas within a suburb that have the best potential for capital growth, individual property differences can also play an important role. But this is for another discussion.
Finance: Why Every Borrower Needs to Know About “Comprehensive” Credit Reporting
Australia’s credit reporting system is in for a major shakeup and it has the potential to affect your ability to get a loan. The change involves the introduction of “comprehensive” credit reporting and it will be here in March 2014.
The new regulations will give lenders far more information about your credit history, allowing them to more closely scrutinise your credit worthiness and calculate the risk of you defaulting on a loan.
What sort of information will be available to lenders? They will be able to view the last 24 months of your credit repayment history on all open credit accounts in your name. This could include your mortgage payments and credit cards.
Lenders will also be able to see all of your past and current credit accounts and enquiries, meaning they will know how many credit accounts you have and when each account was opened and closed. This information will clearly be useful when determining your ability to take on additional debt.
How do the new regulations compare to the current arrangement? At the moment, lenders can only access a limited amount of information about your credit history, such as your recent credit applications, any major credit infringements or whether you wrote any cheques for $100 or more that have been dishonoured twice.
Lenders currently can’t find out whether your previous applications were approved or declined or whether you actually pay your loans on time, just that the applications were submitted.
An inevitable outcome of lenders having more information about credit applicants is that it may become harder for some people to obtain a loan. If you have black spots in your credit history, it’s going to be nearly impossible to hide them.
But are there any potential benefits to borrowers? Theoretically, yes. Firstly, if the new regulations allow lenders to better assess risk and minimise defaults, it could drive down the overall cost of credit. Secondly, lenders may start to offer discounts and incentives to borrowers with good credit histories.
All this extra information will give lenders a more comprehensive picture of people’s overall financial position, which could perhaps lead to the development of more tailored products.
Only time will tell how the new regulations will impact the marketplace. But clearly everyone needs to be more conscientious about keeping a clean credit history. It’s never been more important to make sure you pay your bills on time because a bit of carelessness could easily end up affecting your ability to get a loan in the future.
Also, it makes sense to regularly check your credit report, so you can resolve any issue before they become a serious problem.
Property Management: Is Property Management a Team Sport?
Property management companies differ in the way they structure their human resources and this can affect the experience of owners and tenants.
For most property investors, the decision of whether or not to appoint a property manager is a relatively easy one. If you want to protect your valuable property asset and don’t have the time and expertise to do it properly, then it makes sense to rely on a professional.
Property managers perform a wide variety of vital tasks, from finding and screening tenants to conducting inspections and organising maintenance. Plus, all of this must be done within strict legal guidelines, which is why the majority of investors appoint a property management company.
The decision of which property management company to appoint, however, is a more difficult one. While on the surface many companies appear quite similar, dig a little deeper and the differences soon become apparent.
One of the differences, which is rarely spoken about, relates to the amount of human resources available to the company. While some property management companies operate a team, with multiple property managers and assistants, others prefer the one-man-band model.
What are the advantages of a team? Firstly, a team can better accommodate temporary absences, such as when a property manager is unwell or attending court. There’s nothing more frustrating for tenants and owners than not being able to get in contact with someone who has the right information at hand.
Similarly, a team is better positioned to manage staff turnover, which unfortunately can be a frequent reality in the property management industry due to the high stress levels involved. If a company relies too heavily on one staff member, you can image the massive upheaval when that person leaves.
Another significant advantage of having your property managed by a team is the opportunity for greater specialisation of tasks. Different individuals can focus on different tasks, honing their skills and increasing efficiency. For instance, some teams include a dedicated trust accountant or new business consultant.
Although there are differences in the way that property management teams are structured, commonly each property manager is allocated a particular portfolio of properties. This means that property owners have a dedicated property manager, just as with a one-man-band operation. The difference is that property managers within a team will have access to far greater resources and better processes.
The “does it all” property manager is often extremely busy trying to perform a catalogue of different tasks. While these individuals can be highly skilled and excellent at their job, the limitations of time and space eventually get the better of them and slow turnaround times result.
Everyone likes a personal touch, but a one-man-band will inevitably struggle to keep “in touch” as much as many owners and tenants would like.
Property Development: Should you Sell or Hold Your Development?
For many property investors, the appeal of property development is the promise of creating enormous capital gain in a short space of time. Most people assume that to make money out of property development you need to sell the properties you develop. Is this a common misconception?
The decision of whether you should sell or hold the properties you develop depends on a number of things, including your financial position, the market conditions and the type of development you are undertaking. But primarily it comes down to your objective in doing the development in the first place. Some property developers aim to increase rental returns, while others seek to make a cash profit or simply increase and unleash their equity. Developing property can also be a way of obtaining new property at wholesale prices. It’s important that you are clear on your objective prior to starting a development as it can influence many aspects of the development.
People often sell properties they have developed because they think they have to sell to make money or “realise the profit”. However, by refinancing you can still access the equity you have created. Why might this be a better option than selling? It comes down to the risks and costs associated with developing to sell. Developing to sell requires expert market timing to get the property cycle right. Plus, if you sell properties that you have developed you will likely have to pay Sales Agents Fees and Marketing (3-4%), GST on the Profit Margin (2% if a 20% margin), and Income Tax (as much as 9% if a 20% profit margin).
It’s clear that if you develop and sell, transaction costs will eat away at your profit. For that reason, I believe developing to sell should not be the first choice in every instance. You could be far better off by hundreds of thousands of dollars by holding the properties. Many of the most successful property developers, such as Frank Lowy (developer worth $6 billion who has built a worldwide shopping centre empire) rarely sell.
So when should you develop and hold? The simple answer is when it is feasible. Depending on the type of development you do, you will generate either additional rental income over and above the interest costs OR you will generate additional equity. But preferably you will do both.
So when is the best time to develop & sell? Being a successful property trader requires focus, commitment and a lot of time. You need to do much more market analysis and it is inherently more risky as you are timing the market. To justify continual buying and selling, you need to generate high returns to warrant the transaction costs (agent fees, stamp duty, income taxes). You also have to be prepared to “landbank”, which is common amongst developers, who may hold land for 10 or more years.
Depending on the project there may be an opportunity to develop and hold some of the project (e.g. 3 units of 6) and sell the rest to pay down some debt. Professional developers can make a lot of money developing and selling, but it is a full time profession. Most developers still hold some part of their portfolios for long term investment.
Finance Newsletter December 2013/January 2014
With house prices moving it’s even tougher for first home buyers to enter the market. If you want to assist a family member to buy their first home there are a number of thing you can do:
- Provide a gift or loan
- Offer equity in your own home as security
- Use Commonwealth Bank or other banks Family Equity products.
Family Equity is a home buying solution unlike any other, designed to help first home buyers enter the property market. It’s a range of financing options that can help customers secure a home loan, repay a home loan, or a combination of both. The main customer benefit is the ability to enter the property market by relying on guarantors for security and/or servicing support.
A family member has always been able to assist with providing equity or funds for a deposit. What’s good about family equity is it also allows servicing support. This means that if an applicant’s income is not sufficient to service the loan required, a family member (or anyone for that matter) can assist by paying some of the repayments on an ongoing basis. The person providing the equity or servicing support is not required to be on the title of the property being financed. Remember there is a grant and stamp duty incentives from the State Government for first home buyers too.
Do you have the most suitable loan for your circumstances?
Do you have the best rate available?
If your interest rate is over 4.79% that you may be able to save thousands per year by changing loans and or banks. Citibank is currently offering customers 4.79% variable for loans over $500 000. So if you are interested in saving thousands per year call Mercia finance to see if we can show you how benefit from a better rate.
If you have any questions about Family Equity, Reverse Mortgages or any other type of loan, call Dan Goodridge on 04144 233 40. Our service is free of charge to you the borrower and we have access to all the major lenders in WA.
Tax Newsletter December 2013/January 2014
Tax changes following carbon tax and mining tax repeal
The Abbott government has introduced into Parliament proposed legislation to repeal the carbon tax and the mining tax.
Importantly, the Bill to remove the mining tax also proposes to repeal or revise a number of tax and superannuation measures. Key changes include:
- capital allowances for small business entities – the instant asset write-off threshold will be reduced to $1,000 and the accelerated depreciation arrangements for motor vehicles will be discontinued;
- company loss carry-back – the repeal of the loss carry-back measure will apply from the start of the 2013–2014 income year;
- superannuation guarantee (SG) charge – the SG charge percentage will be paused at 9.25% for the years starting on 1 July 2014 and 1 July 2015, increase to 9.5% for the year starting on 1 July 2016, and then gradually increase by half a percentage point each year until it reaches 12% for years starting on or after 1 July 2021; and
- low income superannuation contribution (LISC) – the LISC will not be payable in respect of concessional contributions made from 1 July 2013.
No GST following purchase of leased apartments
A taxpayer has been successful before the Full Federal Court in a matter concerning a GST assessment following the purchase of three residential apartments. The taxpayer (a company) had purchased the apartments in a hotel complex from the vendor on a GST-free basis as supply of a going concern. The apartments were subject to leases that the vendor had previously granted to a hotel management company, which was obliged to let the apartments as part of its serviced apartment business. The taxpayer had also elected to participate in a “management rights scheme”, which provided the taxpayer a right to income in exchange for allowing its apartments to be used in the serviced apartment business.
The Commissioner assessed the taxpayer as having a GST liability of $215,000 (ie an increasing adjustment), which represented 10% of the total purchase price paid by the taxpayer for the apartments. On appeal, the Full Court found that the primary judge had made an error in concluding that, following the sale of the reversion from the vendor to the taxpayer, there was a continuing supply, being the supply of residential premises by lease, by the vendor to the hotel management company. The Full Court said there was no continuing supply in relation to the lease; rather, the supply was the grant of the lease, which did not continue for the term of the lease. As a result, the taxpayer’s objection to the GST assessment was allowed.
TIP: At the time of writing it remained unclear whether the Commissioner would apply to the High Court for special leave to appeal against the decision. Assuming that the Full Court’s decision will not be appealed or overturned, purchasers who have previously acquired residential premises as a going concern and then included an increasing adjustment in a subsequent GST return may want to consider whether there is potential for a refund.
Note that there are time limits that can restrict entitlement to refunds. Purchasers who are contemplating acquiring residential premises as a going concern should exercise caution until it is clear whether the decision will be appealed, or whether the government may look into introducing amending legislation.
Individual not a tax resident of Australia
An individual taxpayer has been successful before the Administrative Appeals Tribunal (AAT) in arguing that he was not an Australian resident for tax purposes for the relevant years.
In June 2006, after his release from jail for drug offences, the man decided he had no future in Australia and moved to Thailand. In 2008, he moved to Bali and obtained the right to live in Indonesia as a retired person. During 2008 and 2010, the man made regular trips back to Australia, but during his last visit he was arrested and charged with possession of a precursor to a dangerous drug. The man was convicted and sentenced to 18 months’ imprisonment.
While in prison, the Commissioner commenced an audit of the taxpayer’s affairs and decided that he was an Australian resident with unexplained income, and issued assessments for the 2009 to 2011 income years. The Commissioner also assessed penalties in excess of $350,000. The Commissioner based his decision on documents showing bank interest payments to the taxpayer as well as payments he had made towards the cost of building a boat.
However, the AAT was satisfied that the man was not a resident of Australia in the years in question. It said the man had not been residing in Australia since mid-2006 and that he had established a home in Bali from early 2008.
Legal expense deductions to fight ASIC charges refused
A stockbroker has been unsuccessful before the AAT in arguing that legal expenses he had incurred in the 2011 income year were deductible.
The taxpayer had incurred legal expenses challenging an ASIC banning order in proceedings before the Federal Court and the Full Federal Court. Both courts dismissed his appeals. The banning order, which became operative from 7 May 2010, prohibited the man from providing financial services for five years. The taxpayer had also incurred legal expenses in defending 20 criminal charges for alleged insider trading; he was eventually acquitted on 17 of the charges, with the remaining three withdrawn by ASIC.
The AAT was of view that the legal expenses were not incurred by the taxpayer “in the course” of gaining or producing assessable income. The AAT found that when the taxpayer had incurred the expenses, his position as an authorised representative at the company he worked for had ceased. Accordingly, the AAT held that the expenses incurred in the 2011 income year were not deductible.
Tax debt release based on serious hardship refused
The AAT has affirmed the Commissioner’s decision to refuse to release an individual from his tax liability based on serious hardship grounds. Under the Taxation Administration Act, the Commissioner has a discretion to release an individual from paying a tax liability (in whole or in part) if satisfying the liability would cause that person serious hardship.
The man argued that due to his wife’s illness, he had been increasingly required to care for her and their children and that this has reduced his capacity to earn income. The AAT was satisfied that the individual was facing serious hardship in the immediate future in the sense of lacking the means to purchase food, clothing and medical supplies for his family, and other basic requirements such as accommodation. However, it said the serious hardship was not caused by him being required to meet the tax liability. Rather, the serious hardship was due to the taxpayer’s liabilities, of which tax debt was just one, exceeding his assets, and the outgoings required to service those liabilities exceeding his income. As he had not met the relevant criterion, the AAT said it did not have the power to release him from his tax debts.
TIP: Even if the Commissioner is satisfied that serious hardship will result from payment of a tax liability, the Commissioner is not obliged to exercise his discretion in favour of the individual taxpayer. Nevertheless, it is clear that the ATO is obliged to act reasonably and responsibly, and should not act arbitrarily or capriciously. An application for release from an eligible tax liability must be in the approved form.
GST refund request made too late
An individual taxpayer has been unsuccessful before the AAT in seeking a review of the Commissioner’s decision to refuse a GST refund in relation to the June 2004 quarter. The Commissioner had refused the refund on the basis that the taxpayer’s application was made after the four-year cut-off date for the June 2004 quarter (that is, 28 July 2008).
The taxpayer explained that due to his ill health and troubles with his then business, he did not get around to lodging tax returns until 2011. The Commissioner acknowledged that the man was owed a refund and had recommended that he approach the Department of Finance and Deregulation to obtain an act of grace payment, but said that because more than four years had elapsed since the time the taxpayer could have claimed the money, there was no discretion that could be exercised in the taxpayer’s favour. The AAT agreed with the Commissioner. It also refused the taxpayer’s request for an extension of time to apply to the AAT for review of the Commissioner’s objection decision (dated 31 October 2011) refusing the GST refund for the June 2004 quarter.
Property Newsletter – November 2013
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