Currently, at least one-third of Australians live in rental homes. The statistic continues to grow in our capital cities, with at least 70% of Sydney residents renting their homes.
Most rental houses are owned by individual investors. So, unfortunately, this means that rental contracts are generally short term and under most contracts, landlords have the power to cancel the rental agreement and evict the tenant on 60 days’ notice.
The lack of rental security has resulted in at least 10% of all renters have had to move more than ten times.
But is there a solution? There could be!
Have you heard of “Build to Rent?”
Build to rent has become a highly discussed topic in the institutional investment space with private real estate funds, developers and industry super funds all showing interest.
So, what is build to rent, and how does it work?
We’ve got the essential guide to help you better understand this new way to invest in property!
In simple terms, build to rent refers to a residential development in which all apartments are owned by the developer and leased out to various tenants.
So, instead of building to sell to multiple individual owners, there is only one party that owns and leases out the residential development.
The benefit goes both ways: the developer owns and manages the units as long-term income-generating assets, and the average renter has much more rental security than they currently do, renting from an individual property investor.
This is because, as an asset class, build to rent has similar resilience as commercial office spaces and commercial retail spaces.
As with any property investment, there are both pros and cons to the build to rent investment strategy.
Because the build to rent model is particularly attractive in the institutional investment space, especially with private real estate funds and superannuation funds, there’s a whole new opportunity for beginner investors to invest in cities that would otherwise be too expensive.
So, instead of buying a property in the city, investors can invest in the trusts and funds that are developing the build to rent residential property.
As a beginner investor, this could help provide a stable income to finance future investments.
Build to rent is all about keeping the tenants happy. So, the buildings are well maintained, they have various amenities, and they’re very much community-driven.
Build-to-sell projects are often developed as quickly and cheaply as possible. Building to rent properties, on the other hand, are built with adaptability and durability in mind because the developers are the ones retaining the premises.
All these qualities are attractive features for tenants looking for rental security. So, you’re likely to secure tenants a lot easier and for a more extended period of time, ensuring that investors are receiving a steady income.
While build to rent projects certainly have many attractive features like gyms and communal social spaces, there is always that possibility that finding and retaining tenants doesn’t always work out in your favour.
Being predominantly built in larger cities, it’s likely that these developments will attract younger tenants who enjoy the flexibility of renting. So, you should definitely consider the possibility of short-term occupancy and covering the cost of vacancy periods.
According to the Australian Tax Office (ATO), build to rent developments primarily provide residential rental accommodation. Renting out residential accommodation is input taxed. This means that:
Typically, a build to rent development is owned by a large institution such as a superannuation fund or a management investment trust. The institution then partners with a developer who specialises in build to rent developments.
For example, Australia’s biggest super fund, AustralianSuper, has recently invested in the build to rent sector. They partnered with a Melbourne-based developer, Assemble Communities.
Funding for the development comes from investors keen to take advantage of reliable rental returns and long term growth.
So, if you’re an individual investor looking to get involved in a build to rent development, you can do so through an institutional investor such as AustralianSuper.
Many investors and developers believe that the current tax policies governing build to rent developments are the main reason why Australia hasn’t seen significant growth as with countries like the UK and the USA.
In most Australian States and Territories, the stamp duty and land tax investors have to pay on their build to rent projects (and residential land in general) are generally higher than what commercial developers pay.
For example, in NSW, it could be as high as 15% of the land’s gross market value. That’s almost three times more than commercial rates that are around 5.5%.
However, in August 2020, the NSW government has recognised the high tax rates with the State Revenue Legislation Amendment (COVID-19 Housing Response) Bill 2020 (NSW) currently proposing to reduce land tax by 50% the next 20 years for new build to rent developments.
Hopefully, the other States and Territories will follow suit as well.
Managed investment trusts (MIT) are commonly used in the commercial sector by foreign investors. For example, an industry superannuation fund may buy an office building through an Australian MIT. The superannuation fund then has access to a share of an income stream, such as tenants’ rent.
Generally, the tax withheld rate for foreign investors is 15%. However, currently, the withholding tax rate on residential real estate, including build to rent, is double that. So foreign investors have to pay 30% withholding tax on build to rent income if they wish to invest in developments in Australia.
Build to rent developments are likely to offer substantial tax benefits for the property investor. While all property investors qualify to claim tax depreciation deductions if their real estate generates an income, brand new properties typically bring in higher deductions.
So, you’ll want to make sure that you claim all your property tax deductions - especially depreciation.
As a building gets older, its structure and the assets within the building are subject to general wear and tear. In other words, each year, the value decreases and thus, depreciates. These deductions can be claimed under two categories:
To claim your property’s depreciation deductions, you’ll have to identify the value of the property and all its fittings and fixtures.
To have your property evaluated, you’ll have to consult with a quantity surveyor, who specialises in tax depreciation schedules.
A tax depreciation schedule is the assets' value report compiled by the quantity surveyor that details the value of both your Division 40 and Division 43 assets and how much it has depreciated and will depreciate in the future.
To find out more, make sure to check out the reasons why a tax depreciation schedule is essential for EVERY property investor - including build to rent investors.
With long-term investments in mind, the build to rent strategy has become a commonly discussed strategy among many different institutions, including developers and industry superannuation funds.
However, the 30% withholding tax rate, high land taxes and GST concerns remain a common hurdle that many interested investors face.
Suppose you have already ventured into the build to rent sector, or are looking to do so in the future. In that case, you’ll definitely want to consider maximising on the tax benefits that are available to you - like depreciation.
The Duo Tax team has helped thousands of property investors maximise their deductions and save thousands of dollars through the power of investment property depreciation schedules.
While the tax burden for build to rent may be high in some areas, our objective is to help you take advantage of the available benefits and get the most value out of their investments.
To receive a free estimate on your build to rent depreciation, or to request a sample report, get in touch with us today!
If you are looking to renovate your investment property, you will want to consider assessing the scrap value of any assets you plan on demolishing or throwing away.
Did you know that assets that are going to be thrown away or “scrapped” can be claimed for 100% of their current value as a loss?
What’s more, is you can offset that loss from your taxable income.
This will undoubtedly boost your cash flow.
In this article, we’ll break down exactly what you need to know to make the most of all your assets - even if you’re throwing them in the bin!
Scrap value is the loss in value of an asset, in your investment property, that you’re demolishing or throwing away when you’re doing a renovation or replacing it with something new.
Example:
Charly is currently renovating her investment property.
She plans to rip up the carpets and to replace it with wooden floors. Instead of just ripping the carpet out and throwing it away, Charly calls a quantity surveyor to assess the carpet’s scrap value.
The scrap value of the carpet will be its original value minus the value at the time it’s being ripped out.
So, if the carpet originally cost $1,500 and at Charly has already claimed $600 in depreciation, the value of the carpet at the time of disposal is $900 - this would be scrap value:
$1,500 (original value) - $600 (deducted value to date) = $900 (scrap value)
Charly can claim the $900 as an instant deduction in the same financial year.
Charly may be doing the renovations to upgrade her investment property value, but because she’s essentially ripping out $900, she can count that as a loss in value, and that’s what scrap value is.
By claiming the scrap value of an investment property asset as a loss, you can reduce the amount of taxable income you submit on your annual tax return.
This can help with your cash flow and could be the difference between having your property negatively geared or having it generate a profit.
The amount you receive back is dependent on the income tax bracket you fall under.
Suppose Charly falls under the 32.5% tax bracket, scrapping an asset and claiming it as a loss will allow her to claim back 32.5% of that value:
$900 x 32.5% = $292.50
So, she is eligible to claim $292.50 back on her tax return as a loss.
Instead of just disposing of an asset that is at the end of its effective life, you can increase your cash flow while renovating your investment property by claiming it as a loss.
Before starting your renovation, you should get in touch with a quantity surveyor and have them draw up a depreciation schedule for your property.
A depreciation schedule is a report that details the tax depreciation deductions you can claim on your property.
The purpose of a depreciation schedule is to outline the value of both your Division 40 and Division 43 assets as well as how much it has depreciated and will depreciate. This will give you a clear idea of how much you can claim.
The quantity surveyor will need to prepare a schedule both before and after assets are disposed of. Having the starting depreciable value of the assets you’re disposing of will ensure that you’re able to make the most of you claim.
The good news is that the cost of a tax depreciation schedule is 100% tax-deductible.
Claiming the scrap value of assets when renovating (or during demolition) applies to both commercial and residential properties.
In fact, obtaining a scrapping report is even more relevant when refurbishing or demolishing a fit-out in a property which is particularly relevant in the commercial industry.
For example, suppose a commercial tenant vacates the property and doesn’t remove the fit-out installed during the duration of their lease. In that case, the property owner may be able to claim remaining commercial property depreciation for the items.
Or, if you need to get rid of the asset, instead of just paying the fees to have a company remove the fit-out, a scrapping report can be obtained to immediately write-off the fit-out as a loss.
Example
David owns a small coffee shop and has decided to update the shops’ fit-out.
He contacted a Duo Tax quantity surveyor to organise a scrapping report before starting the fit-out renovation.
The scrapping report found that the total scrap value of the removed fit-out came to $31,000. His new fit-out plant and equipment assets totalled to $57,000.
By combining the scrap value deduction and claiming depreciation on his new assets, David can benefit from claiming a significant deduction of $88,000!
Claiming the scrap value of an asset that you would have otherwise thrown away can significantly increase cash flow and tax savings - especially if you’re undertaking a major renovation or demolition.
It’s essential to get your hands on a scrapping report to help identify the original assets’ value and ensure that you’re getting the most out of your claim.
If you’re about to undertake a renovation, the best practice is to have the assets valued before starting the renovation or demolition.
As a team of property investors ourselves, we, at Duo Tax, understand that every dollar counts. We’ve got the expertise to help you maximise the return on your investment.
To receive a free estimate on your scrap value, or to request a sample report, get in touch with us today!
When it comes to property investment strategies, positive gearing is considered one of the more conservative investment strategies, with most investors rather leaning towards negative gearing.
According to the Australian Taxation Office (ATO), around 30% of Australians own an investment property with 40% of those being neutrally or positively geared. That means that 60% of investment properties are negatively geared.
But is negative gearing the right investment strategy for you?
It helps to weigh up all your options, and depending on your circumstances, you may want to consider positive gearing as a strategy.
To equip you with all you need to know about positive gearing, we’ve drafted this article to cover all the positive gearing bases including what it is, the tax consequences as well as the pros and cons.
Put simply; gearing means that you used a home loan to buy your investment property.
Having a positively geared property means that your investment property rental return is higher than your home loan repayments and other property costs.
In other words, you are consistently making a profit from your investment property, and you could use the surplus income to reduce the size of your home loan, for example.
Example:
Bruce purchased his first investment property in Melbourne for $485,000 in a suburb just outside the city.
Bruce manages to rent out the apartment for a strong rental return of $575 per week.
Assuming that the property costs he incurs from owning the property amount to $460 per week, Bruce can cover the expenses with the rental return and have a surplus of $115 per week:
$575 - $460 = $115
This means that Bruce’s property is positively geared.
As with any investment strategy, you must weigh up the possible advantages and disadvantages of positive gearing - especially in relation to your current financial circumstances and future financial goals.
Some of the potential advantages of positive gearing your property include:
Just like the income you receive from your wages, the income you generate from your investment property is subject to tax.
You’ll pay tax depending on your income tax bracket. You can access the income tax rates on the ATO’s website.
The key benefit associated with a negatively geared investment is that you can offset the loss from your income. In other words, you’ll deduct the loss from your assessable income, resulting in a reduced taxable income.
However, there are various beneficial tax deductions that you can claim on your positively geared property that can also reduce your taxable income. So, by claiming all your investment property tax deductions, you can reduce the amount of income tax you pay each year.
The top three investment property tax deductions include:
To access a full list of tax deductions, you can claim, make sure to check out our ultimate guide on investment property tax deductions.
While there are many advantages to buying and opting for a positive gearing strategy, there are some other factors you should take into account:
It all comes down to planning and keeping up to date with economic and property market fluctuations. That’s why we emphasise building a team of property investors and other property professionals to help you navigate through making the right decision for you and your circumstances.
Opting for a positive gearing strategy means that you aim to have a higher rental return than your loan repayments and other expenses.
While it’s harder to find positively geared properties and you’re likely to pay higher income tax, there are ways in which you can find the right property for your circumstances and reduce the amount of tax you have to pay:
Seeing the full potential of all the tax breaks available to you could be the difference between you hoping to earn enough money from your investment property and having positively geared property.
One of the most significant tax deductions you can claim is depreciation and depreciation schedules are one of the most effective tools to maximise your returns.
As a team of avid property investors ourselves, we, at Duo Tax, understand that every dollar counts. We’ve got the expertise to help you maximise the return on your investment.
To see how our quantity surveyors can help you, get in touch today!
You’ve just purchased your first investment property and are looking for ways in which you could reduce your taxable income through tax depreciation.
One of the ways in which you can maximise the tax deductions on your investment property is through assessing the effective life of your assets.
How do you assess the effective life of your assets? And how do you know what rate you can use to depreciate your assets?
The Australian Tax Office prescribes an effective life to each asset you may own in your investment property.
We’ve put together this ultimate guide to provide you with an overview on how the effective life of depreciating assets are calculated.
As a building gets older, its structure and the assets within the building are subject to general wear and tear. In other words, each year, the value decreases and thus, depreciates.
The Australian Tax Office (ATO) allows property investors, who generate income from their properties, to claim the depreciation as a tax deduction.
There are two types of depreciation deductions.
Capital Works Deductions refer to the depreciation of the structure of the building. The structure of a residential building, if constructed after September 1987, generally has an effective life of 40 years.
This means that the depreciation rate is calculated at 2.5% each year for 40 years.
“Plant and equipment” refers to the fixtures and fittings that are found within the building. These are generally known as easily removable assets and includes items such as:
The effective life of a depreciating asset is the estimated period that it’s considered to last before it needs to be replaced.
According to the ATO, the effective life of a depreciating asset is how long it can be used to produce an income. For property investors, this will include the fixtures and fittings known as “plant and equipment” as well as the “capital works”.
The effective life of depreciating assets is used to determine the length of time an asset declines in value - its depreciation - for income tax purposes.
Plant and equipment assets that are found in the property will generally wear out more rapidly than the actual structure of the building. Therefore the effective life of these depreciating assets is shorter.
The ATO recognises more than 6,000 different assets that investors can claim depreciation deductions on.
For example, a carpet, which is subject to a fair amount of wear and tear, has an effective life of eight years.
However, it’s important to note that in 2017, legislation was passed that restricts property investors from only claiming depreciation for plant and equipment assets that they personally purchased or that was included in the property that was newly built.
Moreover, if you live in your investment property while installing any new plant and equipment assets, it will be considered as “previously used” assets for tax purposes.
This means that you won’t be able to claim depreciation deductions.
For assets costing $300 or less, the ATO allows you to claim its entire cost as an immediate deduction.
Depreciating assets that cost more than $300 must be claimed over its effective life.
There are two ways in which you can determine the effective life of depreciating assets, namely by:
Each financial year the Commissioner issues a Taxation Ruling in which he decides on the effective life for several different depreciating assets in various industries.
The latest Taxation Ruling is published on the ATO’s website.
The standard estimate provided by the Commissioner may not always necessarily fit your specific circumstances, so the ATO allows you to work out the effective life yourself in these cases.
The following factors can be used to determine how many years an asset can reasonably be expected to produce income based on the circumstances it’s being used:
The effective life of a depreciating asset should be calculated from the date of its first use or the date that it is installed and ready for use.
Each financial year the ATO issues a “Guide to Depreciating Assets” which details, among other things, how to work out the decline in value of your depreciating assets.
You may find this guide helpful should you opt to self-assess the effective life of the depreciating assets in your investment property.
Christine owns an investment property in Wellington Point, Queensland.
In May 2019, after two years of owning the property, she decided that it was time to replace all the carpets in the property.
The total cost of replacing the carpets amounted to $6,120.
According to the latest Taxation Ruling, carpet has an effective life of eight years. If the depreciation is calculated using the diminishing value method, the rate of depreciation is 25%:
$6,120 x 25% = $1,530
In the first full financial year following the carpet installation, Christine is eligible to claim $1,530 in depreciation deductions.
A good way of staying on top of the depreciation process is having a quantity surveyor draw up a depreciation schedule. A depreciation schedule charts the loss in value of an asset over its effective life.
Below is a sample depreciation schedule drawn up by us at Duo Tax:
This report can be issued to you and your accountant to tax plan for subsequent years when filing your annual tax return.
If you have any plant and equipment assets that are valued at less than $1,000, the ATO allows you to depreciate those assets using the low-value pooling method.
The depreciation of certain low-value assets can be calculated by putting them into a ‘low-value pool’ and then depreciating the assets at a set annual rate.
This will allow you to depreciate any plant and equipment assets at a faster rate so that you can maximise your depreciation deductions.
Assets within the low-value pool can be depreciated at a rate of 18.75% in the first year and 37.5% each subsequent year.
As the assets in your property investment get older, they decrease in value. This is known as depreciation.
The benefit of depreciation for property investors, however, is that it allows you to claim the loss in value as a tax deduction. The effective life of depreciating assets is used to determine the asset’s decline in value.
While the ATO does allow you to self-assess the effective life of your fixtures and fittings, calculating the depreciation and what you can claim could get tricky, especially if you are dealing with various moving pieces.
Consulting an experienced tax professional or quantity surveyor would be beneficial in more ways than one. Oftentimes, it’s difficult to gauge or estimate the initial costs. Not having any expertise in understanding the components that go into certain aspects, particularly with capital works, could mean you miss out on significant tax depreciation opportunities.
At Duo Tax, our tax depreciation experts are both building and tax experts who can provide you with a depreciation schedule that will not only break down your claimable deductions but will also save you thousands of dollars in tax each year.
To see how our quantity surveyors can help you, get in touch today!
As a first-time property investor, I’m sure you’ve heard that tax depreciation deductions are typically one of the largest tax deductions you can claim as a property investor in Australia.
But it can be quite overwhelming navigating through the different claimable tax depreciation deductions.
For example, you may know that there are two different depreciation methods, but you aren’t sure if it’s best to use the diminishing value method or the prime cost method.
You know that there are several types of assets that you can claim depreciation deductions on, but are they capital works assets or are they classified as plant and equipment?
And, how is the effective life different for all these assets?
This article aims to help you navigate through all these questions and equip you with everything you need to know about a capital works deduction.
Before delving into what a capital works deduction is, it’s important to understand property tax depreciation.
As a building gets older, its structure and the assets within the building are subject to general wear and tear. In other words, each year, the value decreases and thus, depreciates.
The Australian Tax Office (ATO) allows property investors, who generate income from their properties, to claim the depreciation as a tax deduction.
There are two types of depreciation deductions in the space of property investing, namely:
Also referred to by the ATO as Division 43, capital works are income tax deductions that investors can claim from the wear and tear of the structural components of a property as well as items that are permanently fixed to the property.
The expenses incurred from any structural improvements made to your investment property, such as adding an extra room, for example, can also be claimed as a capital works deduction.
Property investors who own income-producing properties are entitled to claim on a capital works deduction.
In other words, tax depreciation deductions are available for both residential investment properties as well as commercial buildings.
The percentage rate at which a building depreciates is dependent on:
Property investors who own residential properties built after 15 September 1987 are eligible to claim a capital works deduction at a percentage rate of 2.5% per annum over 40 years.
Where investors make structural improvements to residential properties after 27 February 1992, they can similarly claim a capital works deduction for the cost of construction at a rate of 2.5% per annum for 40 years from the date that construction completed.
In cases where the property is used for commercial purposes, a capital works deduction can be claimed at either 2.5% or 4% per annum depending on when construction commenced, the type of capital works and the nature of their use.
For example, commercial properties such as offices can be depreciated at a rate of 2.5% per annum if the construction commenced 15 September 1987.
But if construction commenced between 21 July 1982 and 15 September 1987, it can be depreciated at a rate of 2.5% or 4%.
Duo Tax has developed an easy guide to understanding property types and their applicable rates:
| Construction Year | 21 Aug 1979 | 20 July 1982 | 22 Aug 1984 | 18 July 1985 | 16 Sept 1987 | 27 Feb 1992 to Present | |
|---|---|---|---|---|---|---|---|
| Structural Improvements | 2.5% | ||||||
| Residential | 4% | 2.5% | |||||
| Offices, Warehouses & other Commercial | 2.5% | 4% | 2.5% | ||||
| Manufacturing | 2.5% | 4% | 2.5% | 4% | |||
| Hotels, Motels & Guest Houses | 2.5% | 4% | 2.5% | 4% | |||
| Key: | 2.5% | 4% |
|---|
In January 2020, Carla purchased her first investment property for $410,000 and immediately rented it out.
Based on a report that she obtained from a Quantity Surveyor, the construction of the property commenced in January 2005 and was completed in October 2005. The cost of construction was estimated to be $290,000.
To determine the capital works deduction that she can claim in her tax return, she must use a depreciation rate of 2.5% as the construction of her residential property commenced after 15 September 1987.
The calculation is thus as follows:
$290,000 x 2.5% = $7,250
Carla rented out her property from 1 January 2020 to 30 April 2020, so she can only claim a deduction for 121 days of the year:
$7,250 x (121 days 366 days in 2020) = $2,397
So, Carla can claim a capital works deduction of $2,397 in her 2019-2020 tax return.
To determine the capital works deduction that Carla can claim in her 2020-21 tax return, the calculation is as follows:
$290,000 x 2.5% = $7,250
Carla rented out her property for a full year to her new tenants, so she can claim for the full 365 days a year:
$7,250 x (365 365) = $7,250
As the property was built in 2005, Carla can continue claiming capital works deductions until 2045, provided that she still owns the property and it’s being used to produce income.
The following table provides a comprehensive list of assets that you can claim under capital works for both residential and commercial properties.
| Residential Property | Commercial Property |
|---|---|
| Bricks and mortar | Car Parking Space |
| Walls | Steel-framing of warehouse |
| Flooring | Built-in workstations |
| Electrical wiring | Glass partitions |
| Doors and door attachments (i.e. handles and locks) | Kitchenette |
| Sinks and basins | Shelving |
| Fences | Sinks and basins |
| Retaining walls | Down Pipe |
| Baths and showers | Flooring |
| Toilet bowls | Paint |
A property investor can claim the following construction expenses under a capital works deduction:
Note: any expenses incurred before the construction such as architect fees, engineering fees, quantity surveyor fees as well as building permits all form part of the construction expenditure and can be claimed as a capital works deduction.
Works completed that may seem like capital work in nature, may not always be depreciable. Items such as:
As a property investor, knowing how to maximise the tax depreciation deductions that you claim will help you get the most out of your investment property.
The ATO outlines two categories of depreciating assets that you are eligible to claim as a property investor, namely:
Capital works deductions are claimable on the depreciation of the structural elements of a building as well as the fixed items within the property.
As a property investor, you are also eligible to claim construction costs for improvements or alterations made to your income-producing property.
Depreciation on your investment property is a significant tax-deductible expense. In fact, it’s the second-largest tax deduction for your investment property after interest on your loan.
That is why it helps to purchase a tax depreciation schedule.
A tax depreciation schedule is a report that details the tax depreciation deductions you can claim on your investment property.
To maximise the benefits available to you, the deductions for the depreciation of your investment property must be accurately assessed by an expert quantity surveyor who specialises in tax depreciation.
At Duo Tax, our Quantity Surveyors are not only the very best agents but, most importantly, we’re a team of avid property investors who are keen to help other property investors save thousands of tax dollars every year.
To see if you qualify for capital works deductions, or to request a sample report, get in touch with us today!
Deciding on the best property investment strategies for you can be a daunting task, especially if you’re a first-time property investor.
But give yourself credit!
You’ve already accomplished a big part of the daunting task - making the actual decision to invest in the property market.
If you can take one bold step towards a flourishing investment future, the next few steps shouldn’t be much more challenging.
To ease any pressure that you may be feeling; we have compiled a list of some of Australia’s most popular property investment strategies.
While there is no ‘one size fits all’ property investment strategy, this list aims to provide some direction when it comes to picking the best investment path for you.
One of Australia’s most popular property investment strategies simply involves buying a home in which you can principally reside.
Whilst you don’t immediately generate revenue from living in the property you buy, the two most significant financial advantages of this property investment strategy are that:
Generally, this is how most Australian’s first get their foot in the property market door.
The buy and hold property investment strategy involves purchasing a property with the ultimate goal of holding onto it long enough to generate capital growth.
Deemed as one of the most straightforward property investment strategies, all that you are required to do is purchase the property and let it appreciate over time.
The only downside of going this route with your investment property is that it’s likely to take up to 7 - 10 years before you realise any capital growth.
However, while you are waiting to realise capital growth, you could use the property to generate a rental income.
The rental income can cover the mortgage costs and comes with one significant benefit: investment property tax deductions!
Knowing about your investment property tax deductions could be the difference between you hoping to earn enough money from your investment and having actual positive cash flow.
You can claim:
For the best ways to maximise your investment property tax deductions have a look at our ultimate guide here.
Put simply; gearing means that you have borrowed money to buy your investment property.
Negative gearing occurs when you borrow money to invest in property and the income you make from it, through rent, for example, is less than your expenses.
In other words, you’re running at a loss.
Running at a loss is not an ideal situation, but in terms of Australian tax law, it’s not actually all that bad.
The Australian Tax Office (ATO) allows property investors to deduct any losses they make on their investment property from their taxable income.
Investors who purchase properties for the long term capital growth don’t usually expect to make their money on the rent.
So, they will generally use the negative gearing strategy in conjunction with the 'buy and hold' property investment strategy.
While the investors wait to cash out on the property’s long-term capital growth, the rent can contribute to any expenses incurred.
Linda purchased an investment property in 2017 for $330,000.
She was able to cover some of the cost but took out a $300,000 loan to cover her shortfall. Her annual interest payable on the loan is $21,000.
Linda has decided to go with the “buy and hold” property investment strategy and rents out her property in the interim. She charges her tenants $350,00 per week in rent, which totals to $18,200 in annual rental income.
$350,00 per week x 52 weeks = $18,200 annual rental income
$18,2000 annual rental income - $21,000 annual interest on loan payable = - $2,800
Linda is running at a loss of $2,800 per year, and so her property is ‘negatively geared’.
The benefit, however, is that she can reduce her taxable income by $2,800, which means she will pay less tax on her investment property.
Positive gearing, on the other hand, involves having an income that amounts to more than your expenses.
In other words, you are consistently making a profit from your investment property, and you could use the surplus income to reduce the size of your loan, for example.
Unfortunately, this does mean that you will be subject to a higher marginal income tax rate.
The objective of renovating and holding your investment property is maximising the earning potential of your property.
In 2018, Mitchell purchased an investment property in Sydney in a prime location, boasting beautiful Sydney Harbour views from the dining room, kitchen and the lounge room.
The purchase price of the property was $920,000.
He spent $115,000 on renovation costs to remove the walls between the dining room, kitchen and lounge room. The idea was to increase the amount of natural light into the property by creating a more open plan living space.
After the renovation costs, the value of the property increased to $1,120,000.
Before the renovation, Mitchell's rental rate was $950 per week. Post-renovation, he was able to increase his rental rate to $1200 per week.
This increase covers the interest costs for the loan used to complete the renovation and leaves him with surplus income.
The risk, however, with the ‘renovate and hold’ property investment strategy is that there's no guarantee that your circumstances will turn out the same as Mitchell's example.
While you may plan as best as you can to lessen the risk, there still is a chance that your newly renovated home won’t make more money than you spend.
Not all property investors are interested in waiting years to see a profit from their investment. So, instead, they search for old, broken-down properties to renovate to increase the sale value.
This process is known as “flipping”.
The benefit of this property investment strategy is that you can make a profit relatively quickly because most investors try to complete the entire process within 12 months.
However, it is one of the property investment strategies that demands the most skill.
A lot of planning has to go into ensuring that you accurately predict the potential of the renovation. You also risk spending more money than you budgeted if you don’t tightly monitor your costs.
This property investment strategy is generally best suited to an experienced investor who is looking to expand his/her portfolio quickly.
Subdividing involves purchasing one piece of land and legally splitting it to create two individual parts of the land.
Subdivision can provide you with various options. You can then either choose to:
Not only will you have various options when it comes to deciding how to utilise the plots, but the value of the land will also generally increase once it has been subdivided.
However, compared to other property investment strategies, subdivision generally takes a longer time to complete.
In the time that it takes to complete the subdivision, there may be a change in the market, making it challenging to sell one or both individual parts of the land.
Similar to the renovating property investment strategies, there is potential to maximise the return on your investment, but there are also quite a few risks.
For that reason, you must do all the necessary research and calculations beforehand to make sure it's worth the potential risks.
There is “no one size fit all” strategy when it comes to property investment strategies.
The key to picking the right property investment strategy for you is making sure it lines up with your current financial needs as well as your future financial goals.
This alignment requires having a good understanding of the property market in its varying stages.
Right now, it may make the most sense to gear your property negatively for the tax benefits. While at a later stage, it may be better suited to renovate with the goal of eventually positively gearing your property.
Either way, it pays to speak to an expert.
As a team of property investors ourselves, we, at Duo Tax, understand that every dollar counts. We’ve got the expertise to help you maximise the return on your investment.
To see how our quantity surveyors can help you, get in touch today!
Discovering how to avoid capital gains tax when selling your investment property can save you thousands of dollars.
Yet so many first-time property investors continue to be overwhelmed at the thought of potentially paying capital gains tax on the hard-earned growth of their investment.
But don’t be discouraged, we have some good news for all first-time property investors.
To reduce any feeling of angst, we have put together the ultimate ‘how-to’ guide that will show you how you can considerably reduce the amount of capital gains tax you pay and how you can avoid paying it at all.
According to the Australian Tax Office (ATO), when you sell your property, the difference between how much you paid for it and how much you sold it for, is known as capital gains.
Suppose you lost money on the sale of your asset. In that case, the difference will be a capital loss.
Any profit on the sale of your investment property is considered a capital gain, and you will need to declare it on your annual income tax return.
Unless expressly excluded, you are required to pay CGT on the sale of your investment property, if you acquired it after 20 September 1985.
The gain from the sale of your property is added to your income tax return for the relevant income year.
The capital gain on the sale of your investment property is likely to push you into a new tax bracket. If that’s the case, then you may be required to pay a more considerable amount of income tax for that particular financial year.
The ATO offers its taxpayers a few concessions and exemptions when it comes to paying CGT.
The following list will offer some insight into how to avoid capital gains tax when selling your investment property.
As a general rule, you can avoid capital gains tax when selling your investment property if that property is your primary place of residence (PPOR).
This rule exists because you usually don’t generate an income from living in your own home. So, you won’t need to declare any profit on the sale of your home on your annual income tax return.
The ATO considers a property to be your PPOR if:
Moreover, you’ll need to live in the property for a minimum of 6 months, from the settlement date, for it to be considered your PPOR.
The CGT 6-year rule allows you to use your PPOR as an investment, by renting out, for a period of up to six years.
So, if you decide to sell the property within the six years, you would be exempt from paying CGT as you would if you sold the house that you primarily reside in.
The benefit of the CGT 6-year rule similarly appeals to homeowners who want to make some extra money for the time that they are not, for whatever reasons, able to stay in their home - without prompting the need to pay CGT upon its eventual sale.
Samuel purchased his first home in Melbourne in 2014. It has been his PPOR for the entire time that he has owned it.
He lived in it for four years before being offered a job in Brisbane.
The job placement was only for two years, so he decided to temporarily move in with his sister and hold onto his house in Melbourne. As a result, he did not need to treat any other home as his PPOR.
Throughout the period that he was away, he rented out his house in Melbourne to generate some extra income and not have the house standing empty.
After the two years, in 2020, Samuel decided that he enjoyed living in Brisbane and wanted to relocate permanently.
He consequently decided to sell his house in Brisbane. Through learning about the CGT 6-year rule, he discovered how to avoid capital gains tax when selling his investment property.
Through the application of the CGT 6-year rule, Samuel was, thus, exempt from paying capital gains tax.
For more information on the CGT 6-year rule and how you can apply it, read here.
Self-managed superannuation funds (SMSF) have become considerably more attractive to property investors because the SMSF can now borrow money to purchase a property.
There are several tax benefits if you purchase your investment property through an SMSF. For example, the fund is only required to pay a 15% tax rate on rental income from the property.
This is substantially lower than other income tax rates in Australia.
Moreover, if you keep the property for more than twelve months, the tax rate will drop from 15% to 10%, and you would be eligible for a 33% discount on your CGT upon sale of the property.
The most beneficial perk of the SMSF is that when it’s in its pension phase, you will not be required to pay any CGT on the sale of your investment property.
Even if your property doesn’t meet the eligibility criteria for a full investment property exemption, the ATO does provide ways in which you could reduce how much capital gains tax you pay on the sale of your investment property.
If you’re selling an investment property and consequently not eligible to avoid paying CGT, you may want to consider increasing your cost base through your expenses.
Remember,
capital gain = selling price - cost base.
Your cost base = purchase price + expenses (see below) - (grants + depreciation)
The expenses that you can add to your cost base include, but are not limited to:
By adding expenses to your cost base, you can reduce the capital gains you declare on your annual income tax return.
This could lead to a reduction in the amount of CGT that you’re required to pay on the sale of your investment property.
The best way to determine what expenses you can add to your cost base and how you can reduce the number of capital gains you declare would be to have a quantity surveyor draw up a Capital Gains Report.
Suppose you aren’t able to claim a full exemption because your property is not considered your PPOR.
If that is the case, the ATO does provide ways in which you could potentially reduce the amount of tax you pay on the capital gain from the sale of your property.
One of these partial exemptions allows you to claim a 50% discount on your capital gains tax if you have owned the property for at least 12 months before selling it.
If you decided to turn your rental property into your primary residence at a later date, in other words, you did not move in straight away; then you are eligible to claim a partial CGT exemption.
The discount percentage on your capital gains will be calculated proportionally, according to the years that you rented the property out and the years that you lived in it.
After two years of renting out her first investment property, Bianca decided to move in and declare it her PPOR.
Eight years later, in 2020, Bianca decided to sell the property. She made a capital gain of $235,500.
She only has to pay CGT for two of the ten years that she has owned the property:
$235,000 x 2⁄10 = $47, 100.
So, Bianca's taxable amount is only $47,100.
If you are selling a property, you should know that any profit made from the sale is potentially considered a capital gain and therefore subject to capital gains tax.
There is, however, some good news.
Knowing how to avoid capital gains tax when selling your investment property can save you a pretty penny!
If you hold onto your investment property for at least 12 months, you can qualify for a 50% discount on your capital gain.
Or, to avoid capital gains tax when selling your investment property entirely, make sure your property remains your PPOR. Even if you don’t necessarily reside in it, you could still sell it within six years and capital gains tax property 6-year-rule to qualify for the main residence exemption.
At Duo Tax, our team of quantity surveyors are not only property tax depreciation experts, but we’re also avid property investors who are keen to help you save thousands of tax dollars!
If you aren’t able to avoid capital gains tax, you can substantially reduce the amount of CGT you pay by having one of our quantity surveyors draw up a Capital Gains Report for your property.
To get the best possible advice on your CGT options, and to enquire about our Capital Gains Report, get in touch with us today.
You’re thinking about having your rental property become your main residence. But you aren’t sure if the decision comes with any tax consequences.
Will the move affect the tax deductions you claim? Is it possible to turn my rental property into my main residence and still rent a part of it out? Will you still be exempt from capital gains tax?
Don’t panic.
Here are a few of our tax tips to help you navigate through your potential move.
Perhaps you’ve decided that you would like to retire in your investment property, or you’re a first-time buyer who couldn’t afford to live in the property yet but wanted to get into the property market early.
Either way, should you decide to have your rental property become your main residence, you will need to declare this for tax purposes.
In other words, you will need to disclose that your investment property is now your principal place of residence (PPOR).
It’s essential to make the declaration because how property is defined determines what tax deductions you’re entitled to claim.
The Australian Tax Office (ATO) considers a property to be your PPOR if you:
Suppose you purchase an investment property to generate an income by renting it out.
In this case, the ATO allows you to claim the expenses you incur in managing your investment property against your rental income as a tax deduction.
These tax-deductible expenses include:
For more on rental property deductions, read our ultimate guide here.
On the other hand, while your PPOR does have some tax benefits, you can’t claim the expenditure incurred from managing your own home, because you’re not generating any income for yourself from the house.
Thus, you have no income to offset the expenditure against.
There is, however, some good news.
Once your rental property becomes your main residence, you may be entitled to a capital gains tax (CGT) exemption for the period that you live in your investment property.
According to the ATO, any profit on the sale of your investment property is considered a capital
gain and needs to be declared on your annual income so that the ATO can tax you accordingly.
There are, however, certain circumstances in which you can avoid paying CGT. These exemptions include:
So, if your rental property becomes your main residence and you declare it as your PPOR, you're entitled to a full CGT exemption.
This exemption means you won't have to pay any tax on the profit made from the sale of your property in the future.
Or, if your rental property becomes your main residence and you declare it as your PPOR, and then decide to move out again, you will be exempt from paying CGT for a period of up to 6 years.
You may decide to have your rental property become your main residence and still rent out a portion of the property.
For example, you may have an extra room that you aren’t using and renting it out will help generate some more income. Or you may have a granny flat on the property that you can rent out.
If this is the case, you will be entitled to claim some of the rental expenses.
In other words, you can’t claim expenses incurred from the entire property, but you are entitled to claim a percentage of the property expenses because part of your property is now producing income.
Take note, however, that any domestic arrangements, such as allowing a friend or family member to live in a part of your property rent-free, does not entitle you any tax-deductible expenses.
The ATO suggests that you apportion the rental expenses incurred according to the floor space occupied by the tenant. You can, similarly, add a fair amount for the tenants' access, where applicable, to any general living areas such as the kitchen, garage or outdoor areas.
In May 2020, Kyle decided to have his rental property become his main residence and declared it his PPOR after four years of renting it out.
There is a granny flat on the property which he has decided to rent out to generate some income from his property still.
The floor area of the granny flat amounts to one-fourth of the property’s area.
Kyle rented the property out to Brendon, who signed a 4-month rental agreement, for $125.00 per week.
During the rest of the year, Kyle's sister, Sasha, lived in the granny flat rent-free until she was up on her own feet.
The total annual expenses for the property, including his loan interest, utilities and insurance, amounted to $12,000.
Kyle can apportion these expenses based on the floor area of the granny flat, which amounts to one-fourth:
$12,000 x ¼ (floor space of the granny flat) = $3,000
The apportioned expense amount is $3,000. Kyle can, however, only claim a deduction for the four months that the flat produced rental income:
$3,000 x 412(4 months of the year) = $1,000
So the total expense amount that Kyle can claim as a tax deduction is $1000.00 (one-third of the apportioned expenses).
If you decide to have your rental property become your main residence and subsequently declare it your PPOR, you will no longer be eligible to claim any property depreciation deductions.
If, on the other hand, you decide to have your rental property become your main residence but still rent part of it out, the depreciation will count as a tax-deductible expense.
In that case, it would be helpful to have a quantity surveyor produce a depreciation schedule for you.
You can then have your accountant assess what percentage of the depreciation goes toward the part of the property that you use to generate income.
For more on quantity surveyors and depreciation schedules, read here.
If your rental property becomes your main residence and you declare it your PPOR, you can no longer claim the property’s expenses as a tax deduction.
You may, however, qualify for a CGT tax exemption.
You may also decide to have your rental property become your main residence and continue renting out just a portion of your property. If that is the case, then you may claim the property's expenses apportioned to the part being rented out, as a tax-deductible expense.
For depreciation tax purposes, if you rent out part of your PPOR, it will be helpful to have a quantity surveyor produce a depreciation schedule so that you can see how much depreciation you are entitled to claim as a tax deduction.
Calculating what you can and can't claim in different situations can be tricky. We always recommend that you work with an experienced quantity surveyor and tax agent to see how much you can save.
Get in touch with one of our Duo Tax Quantity Surveyors today to see how you can maximise your tax return.
Property investment in Australia is supported by government schemes such as HomeBuilder and First Home Loan Deposit.
While the HomeBuilder scheme was not extended, ‘budget papers’ have stated that housing demand has increased as it’s supported by other housing policies and a low-interest environment.
The HomeBuilder scheme allows cash grants for investors to renovate or build new homes and is subject to income (assessed as an individual or couple).
The First Home Loan Deposit scheme (FHLDS) was also extended during the budget announcement to capture an additional 10,000 first home buyers.
This scheme was introduced at the beginning of this year and initially allowed 10,000 first home buyers to purchase a property with a small deposit.
As these loans we’re backed by the government, no Lenders Mortgage Insurance was required cutting holding costs when the property had been transacted.
This scheme was largely popular and more than half of the allocations were filled within the first six weeks of the calendar year.
Now, as this scheme (FHLDS) is extended to an additional 10,000 investors, entry costs are significantly lower for new home buyers. The price cap for the first homes was also increased during the Budget Night and is shown in the table below:
| State / Territory | Capital City / Regional Centre | Rest of State |
| NSW | $950,000 | $600,000 |
| VIC | $850,000 | $550,000 |
| QLD | $650,000 | $500,000 |
| WA | $550,000 | $400,000 |
| SA | $550,000 | $400,000 |
| TAS | $550,000 | $400,000 |
| ACT | $600,000 | N/A |
| NT | $550,000 | N/A |
Furthermore, the Budget has fast-tracked infrastructure projects and state developments, allowing the provision of more motorways and railways, council roads and footpaths and street lighting. This is a beneficial outlook for investors purchasing in the captured areas as more amenities become available.
Businesses have benefited from government support with schemes such as the Instant Asset Write Off.
This write-off allows businesses to claim the full value of assets under a certain threshold as a tax deduction. The eligibility criteria and timeframe have now been extended until June 2022, and the Treasurer has commented that 99% of businesses will be able to access this incentive.
The threshold is $150,000 per asset, and the business must have a turnover up to $5 billion to be able to write off both new and second-hand assets. This may allow businesses to invest their cash flow further and allow for more opportunities in employment.
For small to medium enterprises, a cut in tax rates will be effective from 1 July 2022 and sees the rate of 27.5% to 25%.
What does this mean for commercial property investors and tenants?
The ability to write-off larger asset purchases immediately means that businesses can make significant and immediate savings in the year that the asset was bought, installed and first used rather than depreciating it across a longer period of time.
‘Tax cuts’ initially scheduled to start in July 2022, have been brought forward for this financial year 2020 – 2021.
The tax cuts will automatically be applied and backdated from 1 July 2020, meaning the taxpayer will have a reduced tax liability moving forward. The taxpayers can expect to receive extra amounts due to the tax reduction and are subject to earnings described below:
What does this mean for property investors?
This means by taking advantage of tax deductions on your investment property such as claiming tax depreciation, this means even more money is kept in your pocket rather than being paid toward tax, depending on your income.
There are a multitude of ways to take advantage of the tax cuts proposed in the Federal Budget for property investors.
Whether it’s the HomeBuilder scheme for first home buyers, commercial property investors or just general home buyers, tax depreciation is one of the fastest and best ways to claim bigger tax benefits with the new Federal Budget incentives.
If you’ve purchased a residential or commercial property, or you’re a commercial tenant with a new fit-out, you can request a free estimate from our team to find out how much more we can now help you save on tax. Give us a call on 1300 185 498 to find out how we can help you.
https://www.abc.net.au/news/2020-10-02/government-extends-first-home-buyer-support/12728010
https://business.nab.com.au/2020-federal-budget-what-it-means-for-small-and-medium-business-42684/
Not sure if stamp duty is tax-deductible?
You’re not alone.
Many first-time investors find themselves asking this. It’s not surprising because stamp duty is the one acquisition expense that is likely to poke a significant, perhaps unexpected, hole in your budget.
This article will equip you with all you need to know about stamp duty on investment property, including whether or not stamp duty is tax-deductible.
So many first-time property investors are hit with a nasty surprise once they realise that many additional purchasing expenses come with buying an investment property.
One of these purchasing expenses includes stamp duty costs.
Stamp duty is a form of tax that is levied by the government for the transfer of the property from the seller to the buyer. The transfer duty is payable by the investment property buyer and is generally due within 30 days after settlement of the property.
However, the payment due date is dependent on which state or territory the property is purchased. For example, in New South Wales (NSW), stamp duty must be paid within three months of settling the property, while in Queensland (QLD), you need to pay the stamp duty within 30 days.
Stamp duty rates are similarly dependent on various factors, such as:
Stamp duty fees are fully outlined in each state or territory’s revenue office:
The table below is an example of stamp duty calculations from 1 July 2020 in NSW:
| Property Value | Transfer Duty Rate |
|---|---|
| $0 to $14,000 | $1.25 for every $100 (the minimum is $10) |
| $14,000 to $31,000 | $175 plus $1.50 for every $100 over $14,000 |
| $31,000 to $83,000 | $430 plus $1.75 for every $100 over $31,000 |
| $83,000 to $310,000 | $1,340 plus $3.50 for every $100 over $83,000 |
| $310,000 to $1,033,000 | $9,285 plus $4.50 for every $100 over $310,000 |
| Over $1,033,000 | $41,820 plus $5.50 for every $100 over $1,033,000 |
Purchasing investment property opens many doors when it comes to the tax breaks available to you. Knowing about these tax deductions will undoubtedly maximise your investment property returns.
While you may be able to claim various expenses associated with your investment property as tax deductions, unfortunately, stamp duty is not one of these tax-deductible expenses.
According to the Australian Tax Office (ATO), stamp duty is a capital cost related to the acquisition of your investment property. This means that stamp duty forms part of your property’s cost base and is consequently not tax-deductible.
The only exception to this is when purchasing an investment property in the ACT. When acquiring properties in the ACT, this is commonly done under a 99-year crown lease. This means that preparation and registration costs like stamp duty that's incurred on the lease are deductible provided that the property is used or will be used to produce income.
Certain circumstances may allow you to be exempt from paying stamp duty fees.
Some states waiver the stamp duty fee for first-time homebuyers up to a specific value. This is to encourage new homeowners and help them enter into the property market.
For example, in NSW, the government offers a “First Home Buyers Assistance Scheme.”
Eligible first-home buyers are generally exempt from paying stamp duty on newly built homes up to the value of $650,000.
However, from 1 August 2020, the NSW government has decided to temporarily eliminate stamp duty for first-home buyers purchasing a newly built home up to the value of $800,000.
If you are an eligible first-home buyer purchasing vacant land to build your PPOR, then you are generally exempt from paying stamp duty up to a purchase price of $350,000. In August 2020, this was temporarily increased to $400,000.
The first-home buyer eligibility criteria in NSW include:
If the property is transferred between family members due to death or divorce, the new owner will not be required to pay stamp duty upon transfer of the property.
Thankfully, the answer to this question is yes.
Stamp duty on the property transfer, along with conveyancing costs, can be claimed against Capital Gains Tax (CGT).
CGT is a tax you are required to pay on the profit made from the sale of your investment property. For more on CGT and how to reduce it, read here.
As these expenses form part of your investment property’s cost base, it can reduce the amount of CGT that you pay upon the sale of your property.
Jessica purchased a second-hand home in Sydney for $500,000 in August 2012. She is not a first-home buyer, so she is liable to pay around $17,500 stamp duty on the transfer of the investment property.
The conveyancing costs were around $2,750.
She decided to sell the investment property in 2020 for $770,00. The difference between her purchase and selling price is $270,000. For CGT purposes, she can deduct her stamp duty and conveyancing costs to reduce her total capital gain:
$270,000 – ($17,500 + 2,750) = $249,750
Consequently, Jessica is only required to pay CGT on her $249,750 capital gain.
If however, Jessica was a first-home buyer purchasing a new property, she wouldn’t need to pay stamp duty, provided that she resides in it as her PPOR for at least six months before using the property to generate an income.
To avoid any expensive surprises when purchasing your investment property, it’s best to arm yourself with the knowledge of all the purchasing costs, such as stamp duty, that go beyond the purchase price of the property.
Unfortunately, the stamp duty costs are not immediately tax-deductible, but luckily for investors, there are ways to be exempt from paying stamp duty. For instance, if you are a first-time buyer purchasing a new home.
If you don’t meet the exemption criteria, you can offset the cost of the stamp duty against your capital gain when you sell the property to help reduce your CGT liability.
At Duo Tax, we can help you with this by producing what's called a capital gains report that will factor in buying expenses to help increase your cost base so that you can reduce the amount of capital gains tax you pay. If you're looking to sell your property soon, get in touch with us to purchase one today.
Beyond this, although stamp duty isn’t tax-deductible, there are many expenses that property investors can claim. As Quantity Surveyors, our team at Duo Tax can help you with tax depreciation schedules to help you save thousands on tax. To get a free estimate on your property, get in touch with us today.
