The Queensland State Government has recently announced a potentially significant stamp duty exemption for small business restructures.

Often, people going into business for the first time may set up as a sole trader, partnership or family trust. As the business grows this structure may no longer be the best option, particularly with small business company tax rates reducing to 25% from next financial year. In the past, it has been a potentially costly and complicated process to transfer business assets out of these structures and into a company.

The above concessions significantly simplify this process and remove the potentially costly stamp duty impost. Here is a summary of the new concessions:

Eligibility

  • The business assets being transferred must have a value of less than $10m.
  • The transferring entity must have a turnover of less than $5m.
  • The concession applies to all business asset including commercial property, but not residential property.
  • The transferee entity must be a company that has not traded before (i.e. a newly incorporated company).
  • Underlying ownership of the recipient company immediately after the transfer must be the same as the previous ownership.

The above concessions now provide significant flexibility for businesses currently operating as a sole trader, partnership or trust structure to “rollover” into a company structure. This can have a number of benefits including:

  • Potentially lower tax rate.
  • Enabling outside investor shareholders.
  • Ability to retain profits in order to fund growth.
  • Provide asset protection.
  • Simplify the business structure.

It is important to note that the legislation to implement these changes have not yet been passed by the Queensland Parliament, however will have retrospective effect from 7th September 2020. It is possible that there may be some minor changes to the above eligibility requirements so we recommend that you contact us before proceeding with any restructure.

Further Information

Please contact the team at MGI South Queensland if you wish to discuss your personal circumstances.

The government has announced that the $150,000 instant asset write-off for businesses will be extended to 31 December 2020. It was previously set to finish by 30 June 2020, when the threshold was going to revert back to $1,000.

The threshold will now apply from 12 March 2020 to 31 December 2020 with eligible businesses being those with an aggregated turnover of less than $500 million. There is no limit to the number of assets a business can claim under this threshold. Both new and second-hand assets are eligible.

Should you wish to take advantage of this incentive, please contact your MGI South Queensland advisor.

A large number of Australian businesses now require most, if not all of their employees to work from home. As a result, the Australian Taxation Office (ATO) has given workers a simpler way to claim tax deductions working from home. The new announcement allows individuals to claim a rate of 80 cents per hour for all running expenses while working from home, instead of needing to calculate costs for specific running expenses. This is up from 52 cents previously.

This claim is for heating, cooling, lighting, cleaning and so on. The usual substantiation requirements are still in place – for example, you need to have evidence (e.g. a diary) of the hours you worked from home.

Currently, one needs to have a dedicated “work from home area” at home (e.g. a home office) to make working from home claims. This requirement is also removed. The ATO also said multiple people living in the same home can all make individual claims using the 80 cents per hour rate.

The new arrangement only applies to expenses incurred after March 1, 2020, and individuals can still choose to make a working from home claim under existing arrangements that involve calculating all or part of their running expenses. Please contact us if you would like to know more about this method as it may still result in a higher claim depending on your personal circumstances.

There is not yet an end date on the new arrangement but the ATO says it will review it in the next (2021) financial year.

Don’t forget also there are other expenses that can still be claimed in addition to the above, such as decline in value of office equipment, Internet connection, cost of software purchased for work and mobile phone usage. Mobile phone usage is also subject to some administrative short-cuts with a standard $50 fixed deduction per year being allowed. Otherwise, an apportioned deduction based on actual expenses is required – and that can be quite rigorous, requiring a diary to be kept for a representative 4-week period.

Please contact your MGI advisor if you are unsure what you may be entitled to claim.

You may have heard the term flipping but what is property flipping and why is it likely to become a focus for the Australian Taxation Office? Property flipping is a real estate investment strategy that involves purchasing a property not for your own use and selling them on in a short time frame for a profit. However, you should be aware that the tax law does not allow you to ‘flip’ a property tax-free even if you are living in it.

Most people think that they can move in to a property, renovate it, and then sell it without paying tax. The main residence exemption – the exemption that protects your family home from tax – does not apply if your primary purpose is to ‘flip’ the property for a profit. The fact that you are living in the property does not mean it’s exempt from tax.

Some people reading this are probably thinking, but who is going to know? How can the Australian Taxation Office (ATO) really know what my intention is when I buy a property to live in? Generally, the ATO is looking for a pattern of behaviour or a declaration of intention. For example:

  • You are not employed and earn your income moving in, renovating then selling
  • You have a pattern of renovating and selling properties
  • Your loan documents on your mortgage suggest the property is for flipping and not for the long term
  • You go on national television stating that you are looking to move in, renovate and flip the property (hello The Block contestants).

The ATO’s guide on property is clear: “If you’re carrying out a profit-making activity of property renovations also known as ‘property flipping’, you report in your income tax return your net profit or loss from the renovation (proceeds from the sale of the property less the purchase and other costs associated with buying, holding, renovating and selling it).”

People often make the assumption that any gain made from property flipping will be exempt from tax as long as the property is their main residence for the entire ownership period. However, this is only the case where the property is held on capital account. A property would generally be held on capital account if it is bought with the genuine intention of using it as a private residence or rental property for the foreseeable future and there is evidence to back this up.

The ATO indicates that someone who is renovating a property with the intention of selling the property again at a profit could be taxed on revenue account in which case the main residence exemption does not apply.

The guide identifies three main scenarios and the general tax implications:

  • Personal property investor – this is someone who purchases a property with the primary intention of using it as a long-term rental property or private residence. If this person undertakes renovations and then sells the property earlier than originally planned, then they should still generally be able to argue that the sale is dealt with on capital account, which means that the main residence exemption and/or Capital Gains Tax (CGT) discount could apply.
  • Isolated profit making undertaking – this is someone who buys a property with the primary intention of carrying out renovations and then selling the property when the work is completed. Someone in this category is likely to be taxed on revenue account with no access to the main residence exemption or CGT discount.
  • Business of renovating properties – this is someone who undertakes property-flipping activities on a regular or repetitive basis and where the activities are organised in a business-like manner. As with the category above, there is generally no access to the main residence exemption or CGT discount.

Just because you live in the property for all or part of the ownership period does not automatically mean that the profits from sale are exempt from tax. The main residence exemption can only reduce capital gains; it cannot reduce amounts that are taxed on revenue account.

MGI South Queensland have a team of specialist tax accountants in Brisbane and on the Gold Coast who are able to offer tax advice on all matters relating to property. In addition if you are looking at wealth management strategies, we can help you to build your wealth portfolio and protect your assets. Contact us today to ensure you don’t attract the unwanted attention of the tax office.

When it comes to purchasing an investment property, a big decision you’ll need to make is whether to purchase the property inside or outside of super.

Unfortunately there is no one size fits all answer. It depends on what you are trying to achieve and the resources you have at hand.When it comes to purchasing an investment property, a big decision you’ll need to make is whether to purchase the property inside or outside of super.  Unfortunately there is no one size fits all answer. It depends on what you are trying to achieve and the resources you have at hand.


Do you have what it takes to purchase a property through an SMSF?

There are much higher set up costs associated with purchasing a property through a self-managed super fund. As an example, you may need to have a combined superannuation balance of at least $200,000 to purchase a property worth approximately $600,000 to cover:

  • the cost of setting up an SMSF
  • high bank fees
  • and the required deposit (lenders are requiring 30% deposit or more when purchasing through your SMSF).

If you can only just scrape together this balance it may not be in your best interest to tie up most of your super in an illiquid asset. Let me explain.  Typically a property loan goes for 30 years, so unless you have many working years ahead of you, you’ll need to consider whether you have enough cash left in superannuation to cover pension payments. Secondly superannuation balances can be used to provide a much needed payout should you be diagnosed with a terminal illness.  If all your superannuation is tied up in property you will not be able to access this quickly in the event of a terminal illness.


Is superannuation the best option?

If superannuation is a viable option, the next step is to consider why you are purchasing an investment property and whether purchasing through superannuation will allow you to achieve your objectives. To determine this let’s look at the benefits of using superannuation to purchase property.


Benefit of purchasing an investment property inside superannuation

  1. Using your superannuation balance to get a deposit

    For most of us, superannuation is one of our biggest long-term investments. You may well need to access this to be able to afford the deposit for your investment property. In this case purchasing through super is your only option. However if you have enough cash inside and outside of super then it pays to keep considering the benefits under each.

  2. Minimise tax paid on investment earnings

    Especially if you have a high yield property it may be appealing to purchase the property through your superannuation where any income earned will be taxed at 15% rather than your personal tax rate which is generally much higher.

    If you plan to hold the asset until your superannuation is in pension phase, you may pay no tax on capital gains if your balance is under the $1.6M transfer balance cap. This can be a significant saving compared to an asset owned outside of superannuation, where you’ll pay tax at your marginal tax rate on the taxable capital gain.

    If you don’t hold the asset until retirement you will pay 15% tax on two thirds of the capital gain on a property held for more than 12 months.

  3. Asset protection

    If you are looking for additional asset protection superannuation can be a great way to go. Assets held in superannuation are generally protected in a lawsuit and are not at risk of creditors.

  4. Purchasing your business premises (rather than renting)

    If you are a business owner who is looking to purchase your business premises superannuation can be a very appealing option. Business premises are generally high yield rental properties. By purchasing the premises in an SMSF business owners can minimise tax paid on rental income and can secure an asset for their retirement without changing their business cash flow.


Benefits in purchasing outside of super

  1. Greater negative gearing opportunities

    You can claim interest on a loan to acquire a property in a SMSF, however, the tax benefits here are less because:- Generally the banks will only loan you 50 – 70% of the purchase price so you will have a smaller loan- You are only paying 15% tax on superannuation earnings where as you are paying anywhere up to 47% on personal income tax.

    Therefore if a property will be significantly negatively geared, and if you have a high personal tax rate, then it is likely that you will achieve a better tax outcome purchasing outside of superannuation.  But to make an educated assessment, you would need to “do your numbers” using some assumptions.

  2. Flexibility in how you use the property

    There are a number of additional restrictions on how you can use properties held by SMSFs. Firstly you or any fund member’s related parties cannot live in or rent the property. The exception to this is a commercial property which can be used to house a fund member’s business. Also there are restrictions on improving a property that has been acquired by a SMSF using a loan.

  3. Less complicated

    Purchasing a property through your SMSF, particularly if it is a commercial property, requires time-consuming paperwork and regular valuations. If ease of investment is a top priority you should think carefully before purchasing property through an SMSF.

    At the end of the day whether you should use superannuation to purchase an investment property will come down to what you want to achieve. Superannuation may well present an opportunity to purchase a property that you could not do otherwise. It can also provide tax savings and better asset protection. It is definitely worth having a conversation with an experienced MGI adviser, particularly if you are a business owner, to explore whether you should be looking to at super to fund your next property investment.

Give the team of SMSF Accountants at MGI South Queensland a call or book an appointment for a review of your super strategy today.

Disclaimer

The content above has been prepared by Accountable Financial Solutions Pty Ltd (“Accountable”), ABN 36 146 520 390. The above information is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice. Although every effort has been made to verify the accuracy of the information contained above, Accountable, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained on this website or any loss or damage suffered by any person directly or indirectly through relying on this information.

Last week marked the biggest change to depreciation legislation in 15 years.

As part of the government’s efforts to claw back negative gearing parliament passed the Treasury Laws Amendment (Housing Tax Integrity bill) into legislation.

This legislation means that you can no longer claim income tax depreciation for plant and equipment assets in second-hand properties unless you have personally made the outlay.


What does this mean for property investors?

This legislation is grandfathered which means if you exchanged contracts prior to 7.30pm on the 9th of May and have previously been claiming tax deductions on the assets you will not be affected.

However for those second-hand properties purchased after 7:30pm on the 9th May you will no longer be eligible to claim these deductions.


What are plant and equipment assets?

Plant and equipment assets are items considered to be easily removable from the property such as air-conditioning, solar panels, blinds and curtains, and carpet.


What can be depreciated?

The good news is there are still a number of opportunities to claim income tax depreciation for investment properties.

New houses are still eligible for deductions on plant and equipment as are properties considered to be substantially renovated by the previous owner.

Plant and equipment assets that have been installed and paid for by you personally will also continue to be income tax depreciable.

Other examples where you will still be able to claim deductions for plant and equipment include:

  • Deduction that arise in the course of carrying out a business
  • Deductions for a property held by public unit trusts and managed investment trusts
  • Where the property is held by a corporate tax entity.

Investment property owners will also continue to be able to claim for qualifying capital works depreciations. These are considered to be the building’s structure and permanently fixed assets.


Still unsure what these changes will look like for you?

If you would like further information on how these changes might impact you contact your MGI advisor. BMT has a helpful tax depreciation calculator if you are considering purchasing a residential investment property in the future and would like to know what tax deductions you might be able to achieve.

A common question that we often get asked by our clients is “How can I protect assets left to my children from in-laws if their marriage breaks down?”

The best way to achieve greater control over the distribution of the assets in your will is to establish a testamentary trust.

A testamentary trust is also highly beneficial when splitting income with young children or where asset protection strategies are required (for instance if a beneficiary is in a high risk occupation).


What is a testamentary trust?

A testamentary trust is a trust established in a will that comes into effect upon the death of the person making the will. The assets are held in the trust with income or assets distributed to the individual later. The trust can be fixed or as flexible as you like with discretion given to the nominated trustee over what and when is distributed.


Protect inheritances from in-laws

A lineal descent trust is designed to keep your inheritance for your lineal descendants and out of the reach of the Family Court.

How this works

Person A dies and leaves their child $700,000 in inheritance.

No trust

  • The $700,000 is passed on immediately to the child and is likely invested in their mortgage and other assets
  • A few years later child and husband separate
  • The Family Court takes into consideration all matrimonial assets which total to $1M after deduction of mortgages and distribute $500,000 to husband and $500,000 to child.

Lineal descent trust

  • The $700,000 is distributed to the LTD
  • A few years later child and husband separate
  • Child and husband’s assets amount to $400,000 after deduction of mortgages
  • The court takes into account child’s inheritance however because of the terms of the LDT these funds were not available for distribution to husband.
  • Husband is distributed $200,000  and wife is left with $700,000 in LTD and $200,000 from matrimonial assets.

It is important that the LDT has been properly drafted otherwise the Family Court may find that its assets are available for distribution.


Inheritance to young children

In the case of families with young children a testamentary trust can help generate extra income to support the surviving family and minimise tax.

This can also provide additional protection if the surviving partner remarries and that marriage subsequently breaks down.

How this works

Person A dies and leaves their wife and children $700,000 and 25% shares in husband’s business.

No trust

  • The $700,000 is passed on immediately to the wife
  • Business generates $100,000 income a year for the wife which is taxed at her personal tax rate
  • Wife remarried and subsequently gets divorced
  • Original inheritance is then split between wife and new husband with wife receiving $350,000 plus 12.5% share in the business

Testamentary trust

  • Husband dies and his wealth is distributed to the testamentary discretionary trust in his will
  • Wife is trustee
  • Wife uses the trust to distribute income to herself and their three children
  • Wife is able to receive $82,168 tax free each year for herself and her children

Asset protection strategy

If your children are in high risk professions and have put in place asset protection strategies receiving a direct inheritance can present unanticipated problems.

How this works

Person A dies and leaves child $700,000 property

No trust

  • $700,000 property is distributed to child
  • Child operates her own business
  • Child can continue to keep the property in her own name and have the property at risk of creditors if anything goes wrong in her business
  • Child can decide to protect the property by transferring it into a trust but has to pay $23,000 in stamp duty

Testamentary Trust

  • $700,000 property is distributed to trust
  • No additional effort is required by child to protect the property from the risks of her business

Disadvantages to beneficiary trusts

There are additional costs associated with establishing a testamentary trust and management of the trust upon the death of the testator. These are minimal however in comparison to the benefits the trust provides, particularly in the case where there is significant wealth involved.


What a trust doesn’t protect against

Family members can still contest your will so if the distribution of assets amongst the family is not equal it can still be altered.


Am I better off under a testamentary trust?

Every circumstance is different and there is no one-size fits all solution to estate planning. It is important that you discuss estate planning with your accountant and lawyer to come up with the best option for your family. If you haven’t reviewed your estate planning recently, or if you are interested in knowing more about testamentary trusts, please speak to your MGI advisor.

Corporate beneficiaries are a popular and effective strategy for delaying tax. However if you use a corporate beneficiary it’s important that you remember just that; it is a delaying strategy.

Recently I have noticed a number of new clients telling me that their previous accountant saved them a fortune through the use of a corporate beneficiary. What is evident in these conversations is that they are not aware of, or have forgotten that this is not the “end story”. If they plan on spending the profits, then they will be required to start paying back some (maybe all) of the tax saved, over a period of time. And in the context of this law, the government makes no concession if you have reinvested the profits back into legitimate business working capital. The danger here is that you might think you are “all done” in terms of tax, and then spend all remainding cash. When it comes time to pay the deferred tax all your funds are gone! What’s worse, you have been deferring the tax on multiple years’ profits, so that you end up with an unmanageable tax debt to pay. It’s a trap that we see happening all the time. With so much confusion around corporate beneficiaries, let’s revisit what a corporate beneficiary is and why you might chose to use them.

What is a corporate beneficiary?

The individual tax rate can be as high as 47% including the Medicare levy. This compares to the company tax rate of 30%. If you generate profits through a trust, you might form and use a corporate beneficiary, to distribute profits to, and be taxed at the lower 30% tax rate. Obviously it is better to have 70 cents to reinvest in your business, rather than 53 cents, and therefore it is a strategy many have employed. But, as mentioned before, this is not the end of the story. Usually this arrangement means there is still an unrealised tax debt to be managed over a period of time. (Generally up to seven years).

Where issues arise

It’s important to understand that the arrangement requires the trust “promising to pay” profits, to that corporate beneficiary. The issues start to arise because often the funds are not actually paid over to the company, (usually because they have already been spent). This means that there are accounting entries and loan documents required to record the declared profits as an “unpaid present entitlement” (UPE) to the company, and also a loan back to the trust.  
Bucket Company Image

The law says, if you engage in this arrangement then you must either;

  • Transfer real cash to the company to invest, or;
  • Enter into a loan agreement from the company to the trust, charge interest, and make yearly minimum repayments calculated by a particular formula defined in the law.

If this does not happen, then the funds must be declared as a dividend and you must pay tax on that immediately.   And worst of all, unlike normal franked dividends, it will likely be treated as unfranked dividend, on which tax is paid at your full marginal rate, receiving no benefit for the 30 cents in the dollar already paid at the company level.

In other words, if you don’t follow the law then you must pay back all of the tax saving you thought you had, plus more.


What most do

Our experience is that often businesses do not often have spare cash to transfer over to the corporate beneficiary, nor even to make annual minimum payments.

Or alternatively they simply choose not to pay cash across to the corporate beneficiary (or to pay the tax) because they believe can use the funds to generate a higher return in their business.   Why borrow from the bank when you have these funds to invest?

Most end up entering into an unsecured loan agreement over the permitted maximum term of seven years, offsetting the annual required minimum repayments and interest by declaring “on paper” fully franked dividends.

But, the dividends are not paid in real cash.  They are an accounting and tax entry only, to serve the purpose of reducing the value of the loan within the required period.

Even though no cash has changed hands, the business owner is then required to pay additional “top up” tax on those dividends, being, the difference between the corporate tax rate of 30% and their marginal rate.

As no cash is actually paid, there is a cash flow timing issue.  The “top up” tax must be funded either with future income, selling assets, or drawing on savings if there is any.

In some situations, no top up tax is required to be paid.  In fact a tax refund is issued because the year in question, has not been as good as prior years and so the business owners now have access to marginal rate that is lower than 30%. A credit is obtained for the tax already paid at the company level, and a refund is issued.

It’s worth mentioning also that the loan payback period can extend from 7 to 25 years if there is any spare equity in property, over which the loan might be secured. Extending the loan payback period means a much longer time period over which to manage the required dividends, and possibly providing the opportunity to manage the dividends to access lower tax brackets.

But our experience is that most entrepreneurs have their equity fully expended on other projects, and therefore this is not generally a practical option.


How to use a corporate beneficiary to your advantage

The following situations present an opportunity to use a corporate beneficiary to your advantage.

1. If you have an unusual year or couple of years.

A corporate beneficiary provides the benefit of smoothing out the tax over years of lumpy income.
For example, when you sell a property or have an unusually good business year, you might otherwise be pushed into a higher than normal tax bracket.

2. You are near retirement

If you are near retirement, or any other planned break in employment, this might allow you to declare dividends to you over the periods are in a lower tax bracket.

For some this could even mean a refund of tax previously paid by the corporate beneficiary.

 3. You have spare cash that you want to quarantine from the risks attached to the business operation and can’t (or don’t want to) put any funds into super.

Superannuation is one of the best investment vehicles there is for lots of reasons, including taxation, asset protection and generally quarantining your savings.

However for many reasons, it’s not always a suitable place to park funds, particularly if you intend on using that money for your business later, wish to highly gear, or you wish to invest in assets, which super law doesn’t allow.

As an alternative, your corporate entity could invest your funds in a much larger range of assets, with higher gearing ratios. Also this would provide another barrier to business risk, and provide the flexibility of being able to access funds for future business ventures.

And if your company is investing in shares that pay fully franked dividends, the tax is already paid before it gets deposited into your company bank account.  There is no more tax to pay.

At this point it is appropriate to mention that the 50% general Capital Gains Tax (CGT) discount is not available to a company.  Whereas it is to individuals and trusts. But, many high net wealth individuals are happy to forgo this in consideration of the following:

  • Declaring distributions to invest outside the company would mean too much tax comes off the top
    initially from the investing capital.
  • The complexity and cost of otherwise accounting for statutory loans as described above
  • Financial Institutions, find the alternative use of statutory loan arrangements lack transparency, and
    therefore obtaining debt finance is impeded, or more costly.
  • The additional protection a company structure provides in comparison with investing in personal
    names.
  • In consideration of all the disadvantages, the margin between a company tax rate 30% is not that much
    higher than 23.5% (being the effective rate after the 50% general discount is applied to the top
    marginal rate of tax of 47% including Medicare)
  • And anyway, some assets are otherwise eligible to obtain a small business concessions of between 75%
    and 100% of the gain made. So the 50% general discount isn’t needed.

4. You know the deal, but where else would you put the funds for better use for the next seven years?

As long as you are not worried about carrying a future tax liability (and keep this in mind in your plans) using a corporate beneficiary can be  tax efficient.

BUT, and here is the big but, you need to keep in mind that you are complicating your affairs and eventually you will need to deal with the tax at your personal marginal rates.

If you decide a corporate beneficiary would be advantageous, make sure you discuss this strategy with an experienced accountant and run through what you will need to pay back, and when.
Our experienced tax consultants can advise you further on this.


Restructure from a Trust to a Company?

It’s also worth pointing out that there are legitimate tax concessions which permit the roll over of a business’ tax free from a trust to a company structure.  Having the business in a company permits the business to reinvest that 70c in each dollar into working capital without the complications mentioned above of a corporate beneficiary.

The catch of course is that stamp duty concessions are not available in most states (and in particular Queensland).

A cost benefit analysis would be required.

Finally the Enterprise Tax Bill that was announced in the last Federal Budget has passed through parliament. Here’s a quick summary of what the negotiated bill enables:

  • Increase the aggregated turnover threshold to $10 million for access to small business tax concessions from 2016-17.
    This means that any businesses with an aggregated turnover of under $10 million can now access a raft of concessions previously only accessible to small businesses under $2 million. The main concession left out is access to the small business CGT concessions, which still requires the entity to pass a $2 million turnover test or a $6 million net asset value test.
  • Progressive reductions in the corporate tax rate for businesses with a turnover under $50 million.
    Businesses with an aggregated turnover of less than $10 million will benefit from a company tax reduction to 27.5% this financial year.
  • For unincorporated businesses such as sole traders, partnerships and trusts:
    • An increase to the aggregated turnover threshold to $5 million (up from $2 million) for access to the small business income tax offset from 2016-17, and
    • An increase to the unincorporated small business tax discount to 8% from 2016-17. The offset will be capped at $1,000.

This article originally appeared in Your Knowledge by Knowledge Shop.

Disclaimer
MGI refers to one or more of the independent member firms of the MGI international alliance of independent auditing, accounting and consulting firms. Each MGI firm in Australasia is a separate legal entity and has no liability for another Australasian or international member’s acts or omissions. MGI is a brand name for the MGI Australasian network and for each of the MGI member firms worldwide. Liability limited by a scheme approved under Professional Standards Legislation.

There are a number of recent changes in how you can use your investment property for tax deductions. Below is an overview of what you can and cannot do post June 30.

No more deductions for travelling to and from your investment property

The days of writing-off the costs of travel to and from your residential investment property are about to end. From 1 July 2017, the Government intends to abolish deductions for travel expenses related to inspecting, maintaining, or collecting rent for a residential rental property.


Depreciation changes and how to maximise your deductions now

Investors who purchase residential rental property from Budget night (9 May 2017, 7:30pm) may not be able to claim the same tax deductions as investors who purchased property prior to this date. In the recent Federal Budget, the Government announced its intention to limit the depreciation deductions available.

Investors who directly purchase plant and equipment – such as ovens, air conditioning units, swimming pools, carpets etc., – for their residential investment property after 9 May 2017 will be able to claim depreciation deductions over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property. If you are not the original purchaser of the item, you will not be able to use the depreciation rules to your advantage. This is very different to how the rules work now with successive owners being able to claim depreciation deductions.

Investors will still be able to claim capital works deductions including any additional capital works carried out by a previous owner. This is based on the original cost of the construction work rather than what a subsequent owner paid to purchase the property.

There are very limited details about how this Budget announcement will work but we will bring you more as soon as we know.


Business as usual for pre 9 May investment property owners

If you bought an investment property recently, are about to renovate, or have not had a depreciation schedule completed previously, you should consider having one completed.

As a property gets older the building and items within it wear out. Property owners of income producing buildings are able to claim a deduction for this wear and tear. Depreciation schedules are completed by quantity surveyors and itemise the depreciation deductions you can claim.


Higher immediate deductions for co-owners

It’s not uncommon to have multiple owners of an investment property. Co-ownership can, in some circumstances, quicken the rate depreciation deductions can be claimed for the same asset. This is because depreciation is claimed on each owner’s interest. If an owner’s interest in an asset is less than $300, they can claim an immediate deduction. In a situation where there are two owners split 50:50, both owners could potentially claim the immediate deduction, bringing the total immediate deduction available up to $600 for a single asset.

The same method can be used when applying low-value pooling. Where an owner’s interest in an asset is less than $1,000, these items will qualify to be placed in a low-value pool. This means they can be claimed at an increased rate of 18.75% in the first year regardless of the number of days owned and 37.5% from the second year onwards.

In a situation where ownership is split 50:50, by calculating an owner’s interest in each asset first, the owners will qualify to pool assets which cost less than $2,000 in total to the low-value pool.


The value of renovations

It’s best to get a depreciation schedule completed before you start renovations so the scrap value of any items you remove can be recognised and written-off as a 100% tax deduction in the year of removal. This is available for both plant and equipment depreciation and capital works deductions. When new work is completed as part of the renovations (i.e., a new roof, walls, or ceiling), this can also be depreciated going forward.

In some circumstances, there may be depreciation deductions available for renovations completed by a previous owner.


Deductions for older properties

Investors in older properties may still be able to claim depreciation costs. This is because a lot of the items in the house will not be the same age as the house or apartment. Hot water systems, ovens, carpets, curtains etc., have probably all been replaced over time. Additional works, extensions or internal refurbishments may also be deductible.


Further restrictions on foreign property investors

We have seen a number of measures over the years restricting access to tax concessions for foreign investors, particularly for residential property investments. The recent Federal Budget goes one step further, restricting access to tax concessions, increasing taxes, and penalising investors who leave property vacant. Measures include:

  • Charge for leaving properties vacant – Foreign owners of residential Australian property will incur a charge if their property is not occupied or genuinely available on the rental market for at least 6 months each year. The charge, which is expected to be at least $5,000, does not appear to apply to existing investments but those made on or after Budget night, 7:30pm on 9 May 2017.
  • Excluded from main residence exemption – Foreign and temporary residents will be excluded from the main residence exemption. The main residence exemption excludes private homes from capital gains tax (CGT). Existing properties held prior to 9 May will be grandfathered until 30 June 2019. However, it remains to be seen whether partial relief will be available to those who have been residents of Australia for part of the period they owned the property and whether this change will apply to Australian residents who were classified as a foreign resident for part of the ownership period.
  • Increase in CGT withholding tax – When someone buys Australian real property (i.e., land and buildings) they are currently required to remit 10% of the purchase price directly to the ATO as part of the settlement process unless the vendor provides a certificate from the ATO indicating that they are an Australian resident. These rules do not currently apply if the property is worth less than $2 million. From 1 July 2017, the CGT withholding rate under these rules will increase by 2.5% to 12.5%. Also, the CGT withholding threshold for foreign tax residents will reduce from $2 million to $750,000, capturing a much wider pool of taxpayers and property transactions.
  • Rules tighten for property purchased through companies or trusts – Australian property held through companies or trusts by non-residents or temporary residents is also being targeted by expanding the principal assets test to include associates. The move is to prevent foreign residents avoiding Australian CGT liability by splitting indirect interests in Australian realestate property.
  • Level of foreign investment in developments capped – a 50% cap is being placed on foreign ownership in new developments.

The push for affordable housing

The Government is very keen to ensure that investment is directed into ‘affordable housing.’

The 2017-18 Budget announced an increase in the CGT discount for individuals who choose to invest in affordable housing. The current 50% discount will increase by 10% to 60% for Australian resident individuals who elect to invest in qualifying affordable housing.

In addition, the Government is creating investment opportunities for Managed Investment Trusts (MIT) to set up to acquire, construct or redevelop property to hold as affordable housing. In order for investors to receive concessional taxation treatment through an MIT, the affordable housing must be available for rent for at least 10 years. For foreign investors, MITs are one area where the Government is actively encouraging participation rather than restricting it.

This article originally appeared in Your Knowledge by Knowledge Shop.


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