Understanding how tax works, particularly in relation to property investment, will give you the confidence and knowledge to make strategic investment decisions.
So if the world of tax has been mostly a mystery up to this point, now is the perfect time to dive in and start learning!
Let’s start with the basics.
The basics of the taxation system Good vs bad debt
‘Good’ debt is tax deductible (such as an investment loan), while ‘bad’ debt isn’t (think of holiday loans or car loans for private use).
Purchase tax
This is the stamp duty payable to the government when you purchase a property.
Income tax
This is the tax on your income, calculated over a financial year. The rate varies depending on your income bracket.
Selling tax
Also known as capital gains tax, this is based on a percentage of the profit you make after the sale of your property and is paid to the government.
Holding taxes
Holding taxes are typically known as property outgoings/expenses. These are things like council rates, water rates and land tax.
Government approved incentives Government incentives can help pay your investment loan and reduce the amount of tax you pay.For an investment purchaser, these incentives are generally in the form of tax credits (both cash and non-cash) on rental losses.
Other government incentives on offer from time to time include the first homeowner cash grant, stamp duty exemptions, builder incentives and more, depending on the government of the day. Typically, these government incentives will have an expiry date and are designed to help young first home buyers purchase their first home or stimulate sales and builder activity to promote a healthier economy.
If you’re looking for the allowable government incentives relevant to where you live and the timing of purchase, just ask! I have all the info on hand and can let you know what conditions apply.
Depreciation
Depreciation is the decrease in the value of an asset over its period of use. A qualified quantity surveyor will provide you and your accountant with a tax depreciation schedule relevant to the actual cost of build (including fixtures and fittings) over the life of your property.
This depreciation schedule will outline the yearly sum of money that is allowable to reduce the tax you pay. This could lead to a cash refund, which can be used to pay down your mortgage or increase the money in your Investment Property Management Account.
Remember, increasing the amount of cash in your Investment Property Management Account may lead you to purchase your next investment property sooner!
Negative gearing
As described in the article on Maximising Government Approved Incentives , there are tax benefits when your expenses of holding an investment property are greater than your rental income.
In effect, the Australian Tax Office partially funds your investment as losses (both cash and non-cash) can be deducted from an investor’s taxable income.
Introduction to Self-Managed Super Funds for property investing
Self-managed super funds (SMSFs) are a way of saving for your retirement.
The difference between an SMSF and other types of funds is that the members of an SMSF are usually also the trustees. This means the members of the SMSF run it for their benefit and are responsible for complying with the super and tax laws.
Most people will have their super money automatically deducted out of their pay and transferred into an approved super fund that will invest this money on your behalf. With an SMSF, however, you manage the investment strategy yourself.
An SMSF is a highly regulated undertaking that requires your financial planner or accountant’s approval. If you have enough money in your SMSF, you can purchase an investment property or shares, for example, and if required you can borrow money to achieve this purchase.
As a strategy to build wealth, SMSF requires serious consideration; you will also need approval by a qualified financial advisor. While I’m not a financial planner or accountant, we do have a good team of qualified people around us and we can provide introductions if needed.
I’ve covered a lot in the above, so if you have any questions just ask me in the chat!
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SUMMARY
Understanding how tax works, particularly in relation to property investment, will give you the confidence and knowledge to make strategic investment decisions. So, if the world of tax has been mostly a mystery up to this point, now is the perfect time to dive in and start learning!
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