SMSF, Tax Depreciation & TID Variation Considerations. Want to know more?
ASK US about Property Investment and Capital Gains Tax at Knox Taxation and Business Advisory in Boronia. We’ll take you through the information you need to understand when it comes to SMSF, Tax Depreciation and TID Variations – as well as all of the other finer points to help you achieve a successful investment outcome.
At Knox Taxation and Business Advisory, we’re much more than ordinary Accountants. We know business, how to help you grow, what you need to know to be financially protected – and how to explain everything until it sinks in, in words that work for you.
Coral Page, Principal of Knox Tax, was recently published in an Amazon Bestseller, sharing her chapter of wisdom about Capital Gains Tax and how it relates to Property Investment. You’ve already heard about the notion of entering into buying, working out if it’s affordable, structuring your investment, and with whom you should invest in the last two weeks.
Consider this:
Have you ever been nagged to death by your child because she wants a pony, and she wants it now? “But Dad, I’ll look after it, I’ll ride it, you won’t have to do anything, and it’ll make me very happy – and it’ll keep me busy so I won’t annoy you!”
Mmmmmmm. Do you look at those big brown eyes and just say, “Okay, Pumpkin.”? Thankfully, Dad does the research and finds out it’s going to cost $35 a week to rent a paddock, riding equipment will need to be purchased, it’ll need new shoes every six weeks, and then hard feeding in the summer. And then there’s bound to be vet bills, Pony Club fees, caring for the darn thing when the family goes on holidays – and the list goes on. What seemed to be a shiny idea at first has suddenly turned to a nightmare. The same can be said for an adult drawn to the idea of investing hard-earned money into that ‘great new development up the road’. It doesn’t have four legs and a tail – but all of your successful friends are doing it, and the Real Estate Agent makes it sound so appealing – and soooo incredibly simple!
Read on… Coral’s keen to share more in Part 3 of her series of information about Capital Gains Tax and Property Investment to help you plan, prepare, and develop knowledge about the lurks and perks of buying into that alluring Investment Property.
Here’s some more of those questions she’s frequently asked along the way:
I’VE NOW GOT ACCESS TO MY SELF MANAGED SUPERANNUATION FUND. CAN I USE IT TO BUY A MONEY-SPINNING PROPERTY?
In recent years there’ been considerable publicity regarding purchasing residential property in a Self Managed Super Fund (SMSF), BUT this structure is only suitable for some people. It does have the advantages of the ultimate asset protection, and tax relief. However, for these tax benefits to be relevant, the property is locked away until the beneficiaries are at least 55 to 60 years old.
It’s important that the fund retains liquidity (i.e. it holds assets such as cash and securities that can be quickly converted to cash), so it needs a good balance of liquid assets as well as a property.
My view is that if residential property is to be held in a Self Managed Super Fund the deposit should be large enough to ensure that the property is positively geared, particularly when the limits for contributing to the Super Fund are capped at such a low level.
Many property spruikers and real estate agents are pushing potential investors towards Self Managed Super, which has the potential to be disastrous for many would-be investors. This trend has caught the attention of ASIC, and they have issued warnings accordingly.
Every investor’s personal and financial situation is different. I have clients who want to set up a SMSF and purchase property, believing it is going to generate a wonderful windfall for them in retirement. Just because a relative, business associate, or mate has property in their Super Fund does not mean it’s right for you.
There are many elements to consider when investing in property in a Super Fund, including the cost of setting up a SMSF and paying the ongoing annual costs. It is vital that you consult with experienced and reputable experts such as professional Financial Planners, Self Managed Superannuation Fund experts, or us at Knox Taxation and Business Advisory in Boronia. We’re your expert Accountants and Advisers who’ll take the time to impress upon you the importance of ensuring that your personal and financial situation and goals are all taken into account.
CAN YOU ORGANISE FINANCING FOR ME, OR SHALL I JUST GO TO THE BANK?
Whilst we’re your Capital Gains Taxation experts at Knox Tax, this is a topic best addressed by your Mortgage Broker. They have the certified expertise to guide you with up-to-the-minute knowledge about what you should be aware of when it comes to establishing a loan for your proposed investment property. For example – Interest only loans may be most affordable, but many clients will want the option of being able to pay out the loan on the property without penalty, particularly if nearing retirement. Talk to us TODAY and we’ll refer you to a Mortgage Broker that we highly recommend to give you the best factual advice.
WHAT IS A TAX DEPRECIATION REPORT? DO I REALLY NEED ONE?
Investors who purchased a property that was built after 16th September, 1987, should always invest in having a Tax Depreciation Report prepared. For investment properties constructed after this date, you will be entitled to claim a 2.5% depreciation rate on the cost of the building. It is this claim (for the cost of the construction of the building) that can make a property much more affordable for you as the investor, as a significant deduction can be claimed without the requirement to make a cash outlay.
It’s important to be aware of a little-publicised fact, that being that this 2.5% building write-off reduces the cost base of the property and will increase Capital Gains Tax upon disposal. However, it is twice as effective to claim the 2.5% deduction in the annual rental return than it is in the eventual cost base and capital gains calculation, due to the 50% Capital Gains Tax discount. This can work well for you (as an investor), if you’re on a high income and can make good of the tax deduction, but are not planning to sell the property until you retire, or if and when your income is reduced.
Generally, this Tax Depreciation Report is best obtained through a Quantity Surveyor for an approximate cost of between $600 and $700. This cost will be well and truly covered in your first investment year through tax savings, AND the cost of the professional Tax Depreciation Report is also tax deductible. If you’d like more clarification, you’re more than welcome to talk to one our experts TODAY – at Knox Taxation and Business Advisory in Boronia.
CAN YOU EXPLAIN WHAT A TID VARIATION IS, AND HOW IT WORKS?
At Knox Taxation and Business Advisory in Boronia we certainly can!
Just for starters, are you aware that the Tax Office allows you, as a Property Investor, to submit a “TID Variation”, that authorises an employer to deduct a reduced amount of tax from your regular pay? This means that, instead of waiting for the nice big refund when your Tax Return is lodged at the end of the financial year, you can receive extra money in your pocket throughout the year. But do remember and be aware that your year-end refund will be reduced as a result.
Let’s say you’re waiting for a Tax Refund cheque of say $5,000 after 30th June 30, for the whole financial year. If you qualify for the TID Variation as a Property Investor, you can, instead, receive an extra $100 per week in your weekly pay packet throughout the entire year. The ATO doesn’t pay you interest on this property tax because you waited for your end-of-year refund, so it is far better that you take advantage of having that money passed on to you weekly, so that you can then benefit from the interest yourself throughout the year.
Do be aware, that care needs to be taken when you’re lodging a TID Variation. It is a provisional Tax Return based on estimates for the upcoming Financial Year. Consequently, it is important that you get sound professional Accounting advice from us, and to err on the side of being conservative when calculating expenses, rather than find out later that you have not paid enough tax throughout the year. If you want to know more about TID Variations pertaining to your individual situation, make an appointment with us TODAY.
You’ll get the answers you’re looking for at Knox Tax.
And you thought buying a pony was a big decision!!! Just as your child may plead to persuade you that they know all there is to know, the same goes for investing in property. Sometimes we can make ill-informed decisions based on emotional excitement, or because we’re persuaded that ‘she’ll be right’ by someone else who thinks they have all the answers.
The very best advice I can give you is to think hard about any investment decisions, ask the right questions of the professionals at your fingertips, and do your homework.
BUT WAIT – THERE’S MORE!
Next week I’ll take you through more pertinent information regarding Capital Gains Tax and Property Investment, including:
- What expenses you can claim
- What expenses you can’t claim
- What’s claimable and deductible immediately (such as Repairs and Maintenance, Interest on Loans, Body Corporate Fees, Advertising for Tenants, and Travel to your investment property), and
- What’s claimable and deductible over a number of years to come (such as Borrowing Expenses, Depreciation of your Asset’s Value, and Capital Works Costs).
Stay tuned and watch this space to find out more, OR make an appointment to see us TODAY.
We’re always here to help.
