Every year we come across new clients that are in the property market, however, have never received the appropriate taxation advice to properly plan their investment strategy. It leads to common errors related to both their property and tax that could have been avoided if they sought out professional advice before buying a house.
Unfortunately in some cases, this turns out to be too little, too late when we are asked by these clients, ‘I’ve bought something, is it good or not?’
Alternatively , consider contacting us for pre-¬purchase guidance and investment strategy, so we can get a better understanding of your individual needs which will go a long way in avoiding some common mistakes.
When it comes to property tax advice, there are certain things that clients routinely get wrong. Given the long-term nature of property investment, this lack of knowledge in clients’ planning and strategies represent an opportunity for us to discuss their circumstances to ensure everyone is on the same page at the appropriate time.
A closer look at negative gearing
Among the tax breaks available for property buyers, negative gearing is a commonly used, but often misunderstood, area of taxation.
A uniquely Australian rule regarding property, negative gearing has been around for a long time and property buyers have become accustomed to utilising negative gearing as an investor entitlement.
While negative gearing can deliver a tax benefit in terms of deductions, recent taxation laws have changed to calculate negative gearing losses as part of adjustable income.
What becomes important now is that not only do we have to manage taxable incomes to pay less tax, but now we also need to manage our clients adjusted taxable income.
The incorporation of negative gearing losses into income testing means that calculations for adjusted taxable income may be higher than expected.
With the increase in adjusted taxable income, people may lose rebates such as health insurance benefits or they may incur higher rates for payments like child support. This is problematic when clients are basing their expectations on negative gearing as a pure tax deduction and subsequently missing out on the assumed benefits of the losses.
What also needs to be recognised is that while negative gearing does reduce your tax, clients need to realise that before depreciation comes into it, when you make a loss on a property, that’s real cash out of your pocket.
Investors need to look for the best quality investment as a first priority, with any tax benefits they get as a bonus, but they shouldn’t be the driving force in your reason to buy an investment property. Tax should be secondary. It’s the wealth you’re going to create first.
Naunces of capital gains tax
Common problems around capital gains tax (CGT) arise from the nuances of the calculations including date of the financial year it falls under. Capital gains tax is based on the contract date, not the settlement date.
There is also the importance of ‘calendar technicality’ and the need to own a property for 12 months to be eligible for the 50 per cent CGT discount. Again, this is calculated from contract date as opposed to settlement date.
Another common CGT error occurs when individuals or couples misunderstand the tax implications of their purchase intention. The importance of distinguishing between ‘ordinary’ assessable income and capital gains, and the confusion about property purchase for development and property purchase for rental.
What’s in a name?
A common mistake that regularly occurs is when the buyer, under pressure to sign on the dotted line, overlooks the importance of the name that goes on the property title.
Some property buyers, especially those who do not seek professional guidance, often give little thought to the entity in which the purchase is made. The decision on entity is a crucial factor prior to settlement for considerations such as CGT, negative gearing and stamp duty.
Should you have any queries in regards to the above article, please do not hesitate to contact our office on
02 4958 1829 or email our Client Support Manager on firstname.lastname@example.org