Property Investors Quick Guide 2011/12
The following income tax rates apply to taxable income.
Flood Levy: Applies generally to individual taxpayers, including non-residents.
Low income rebate: $1,500. Full entitlement where income is less than $30,000 and then reducing by 4 cents in every dollar, ceasing where income reaches $67,500. Effective tax-free threshold for low income earners is $16,000.
Medicare levy: 1.5%. 2011 rates: Low income threshold: $18,839 for individuals and $31,789 for families.
Medicare levy surcharge: Additional 1% surcharge may apply to those without adequate hospital insurance. Thresholds $80,000 for individuals and $160,000 for families.
Your main residence is exempt from land tax and is excluded from the thresholds below.
Note: Higher rates apply to land held by a trust
Note: Stamp duty concessions are available for first home buyers, subject to eligibility
A rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after expenses, is less than the interest paid.
Negative gearing results in an annual net cash cost to hold the property. You can offset this loss for tax purposes against your other income such as salary, wages or business income.
Investors are often willing to accept a net rental loss due to the expectant capital growth of the underlying asset. You are only ahead if the capital growth over the holding period exceeds the net rental loss over that period.
If the property is held for more than one year you may be able to take advantage of the 50% Capital Gains Tax discount. This means that only 50% of any capital gain is taxable.
If your rental property is negatively geared it may be possible for you to apply for an Income Tax Withholding Variation. This will allow you to access the gearing benefits through a reduction in the withholding tax on your salary throughout the year, rather than when your income tax return is lodged. We can assist with this application.
Contact Simon Dinér to obtain a fixed price quote for our property tax services.
Cost base: These costs include purchase price, stamp duty, legal fees and initial repairs. These amounts cannot be claimed as a tax deduction, but form the cost base of the property for Capital Gains Tax purposes. Any fixtures and fittings included with the purchase can be deducted from the cost base and depreciated.
Borrowing costs: Broker’s fees, loan establishment fees and similar costs. If the total is less than $100 these costs are claimed outright, otherwise they are claimed over the lesser of 5 years or the term on the loan.
Initial repairs & renovations: These are part of the cost of establishing your rental property and will form part of the cost base, however some items may be able to be depreciated.
Each person has the same interest in the income and expenses of the property (50/50 for two owners). For ownership to be in any other split (for example 90% owned by one person and 10% by the other) a separate legal agreement is required at the time the contract is signed – this is known as tenants in common.
There are varying implications for Estate planning. Jointly held assets transfer automatically to the other owner rather than forming part of your Estate.
Our specialists can provide specific advice for you.
Rental expenses can only be claimed while a property is available for rent. This is a complex area and careful consideration must be given to each situation.
Excluding initial repairs, ongoing maintenance items such as painting can be claimed as a deduction. Improvements such as replacing carpets or curtains will be depreciated. Renovations and structural improvements such as new kitchens and bathrooms are claimed under the building write-off provisions.
Interest on funds borrowed to acquire a rental property can be claimed as a deduction (including borrowing to fund purchase costs such as stamp duty) regardless of the security used for the loan.
Where a loan is used for both private and rental purposes the interest will be apportioned.
Interest on funds borrowed for private use, but secured against an investment property will not be deductible.
Depreciation can be claimed on construction costs of capital works including buildings and structural improvements. A quantity surveyor’s report is required if actual construction costs are unknown. Generally the rate of claim is 2.5%.
Commencement : Charged on gains made on assets acquired after 19 September 1985.
Rate of Tax : The gain is added to taxable income and taxed at marginal rates.
Purchase / sale date : Date contract for sale/purchase signed, not date of settlement.
This is an area of particular complexities. Property development may be seen as a business and therefore normal rules may not apply. Before proceeding, seek our specialist advice for your individual circumstances.
Residential properties: GST is not charged on residential rent. GST cannot be claimed back on expenses relating to residential properties. GST may be paid on the purchase of a new residential property.
Commercial/industrial: GST may apply. For those registered for GST, GST will be added to rent and GST can be claimed on related expenses. Income threshold is $75,000.
Property development: GST may apply.
Disclaimer: This publication has been prepared on the basis of information available at the date of preparation. The information is general in nature and is not to be taken as substitute for specific professional advice. We recommend that our advice be sought on specific issues prior to acting on transactions affected.