Are your eyes wide open, or just peeping out of the corners?
At Knox Taxation and Business Advisory, your Accountants in Boronia, we’re here to help de-mystify what you think you know about Capital Gains Tax, and replace that with sound knowledge and advice.
“There’s a lot of talk about buying into an investment property, but, professionally, I feel compelled to point out some of the things you ought to consider before buying something ‘off-the-plan’, or over-committing yourself with a property purchase believing it will pay for itself in rent, sustain you into retirement, and/or boost your SMSF,” says Coral Page.
Coral Page has been in public practice as an Accountant for over twenty years, and has worked with hundreds of property investors. “As Principal at Knox Taxation and Business Advisory, in Boronia, I’ve seen the successes and failures – and particularly those who have neglected to consult with their Accountant or expert adviser, and have gone on to make bad and/or costly decisions. This may have been due to a poor choice of property, poor structuring of ownership, and/or not ensuring the affordability of the property was truly investigated and maximised.
Tax laws are complicated and forever-changing. You might address a particular issue, and then find this opens a “whole can of worms” – For instance, you could structure the ownership of your property to take advantage of the “now”, but where does this position you as a taxpayer (for Capital Gains Tax) in the future? There are many “grey areas” where the law is unclear and open to incorrect interpretation. It takes knowledge, experience, and usually the wisdom to ask a professional to (at least) bring you up to speed on what you should be aware of, in order to make the best decision possible.
I have personally witnessed the following scenarios, where ill-informed Property Investors have proceeded to:
- Buy several negatively geared properties at once, only to then find that there are no tax advantages in holding two of the properties, because the tax losses not only placed their income below the tax free threshold, but actually resulted in a negative income outcome;
- Buy properties in a trust and ‘expect’ the losses to be transferred to their individual return, and thus deliver a lovely refund. In fact, that’s not actually the case;
- Buy two properties in a company structure, on the advice of a “friend”, only to then discover there would be no Capital Gains Tax concessions – should those properties be sold;
- Have to sell their investment property at a loss, because they’ve been caught by property spruikers and developers. The property they’ve purchased subsequently lost value and/or hasn’t been tenanted as expected. Zero tenant means zero income. The owner then became unable to afford to hold the property, and the potentially forced sale price ended up not even covering the borrowings;
- Purchase an old property, pour significant funds into renovating it, and then discover these renovations are not tax deductible in their first tax return – and, worse still, must be included in the capital cost of acquiring the property. (Note: Investors may gain some consolation from the fact that it may be possible for these improvements to depreciated at 2.5% per annum);
- Purchase a property in joint names. Half of all the losses were then wasted, because one of the co-owners was not earning any beneficial income (and is not likely to);
- Purchase properties without being aware of allowable deductions. This may have eventuated where Tax Returns were prepared over a number of years, and the buyer had no knowledge that they could be claiming extra deductions of $3,000 to $4,000 per annum (that didn’t require an initial cash outlay).
I can only reiterate that, when entering into the property investment arena, it is essential to set the correct foundations. This includes:
- Selecting good property that will appreciate in value
- Financing it correctly
- Ensuring the ownership is as advantageous as possible, and
- Exploring every available means to take advantage of making the property affordable to hold.
This information is only the ‘tip of the iceberg’ when it comes to understanding the complexities, advantages and pitfalls, and over the coming weeks we’ll discuss some more of the finer points of Capital Gains Tax. We’re your Capital Gains Tax Accountants in Boronia.
Stay tuned and watch this space, OR make an appointment to see us TODAY. We’re always here to help.”
Coral Page and the Knox Tax Team