The new burden on purchasers of properties over $2m from 1 July 2016 and the message to local resident vendors
Posted on April 4, 2020
It may come as a shock to investors and owners who are looking to buy properties for more than $2m from 1 July that they may be liable to withhold 10% of the proceeds and hand the money over to the ATO instead of the vendor.
In the attempt to strengthen the foreign capital gain tax regime to assist with collection of foreign residents’ liability, the ATO introduced a new law which comes into effect on 1 July 2016 and delegated the tax collection and payment process to the purchasers.
Australian residents selling their properties will need to apply for a clearance certificate from the ATO to ensure amounts are not withheld from the sale proceeds.
What do you need to know as a potential property purchaser?
The new $2 million rule applies to vacant land, buildings, residential and commercial property, leasehold and strata title schemes and indirect Australian real property interest (that is, a membership interest of 10% or more in an entity whose underlying value is principally derived from Australian real property).
If the vendor fails to provide the tax certificate, or you have reasonable grounds to believe they are a foreign resident, you are required to withhold 10% of the purchase price and pay this to the ATO if no other exclusions apply
Where the vendor is not entitled to a clearance certificate but believes a withholding of 10% is inappropriate, they can apply for a variation and show it to you before settlement to ensure the reduced withholding rate applies
It is evident that vendors, purchasers, real estate agents, banks and conveyancing solicitors will get very busy to administer the new law from 1st July and become familiar with the tiny prints of the new legislation. In many instances vendors will rush to complete negotiations before the new law kicks in by taking a hit on the sale price.
It appears that Australian vendors should have nothing to worry about and obtaining the certificate will be a streamlined process. We have dealt with the ATO long enough to know that issues and complications will always arise. A simple example is sorting out a change of name or having multiple owners on title each needing the clearance.
The ATO checks and processes may also uncover profit making enterprises where capital gains tax doesn’t apply and profits are taxed on revenue basis. Many neighbor-vendors are teaming up to offer their properties to a single developer for premium prices relying on the main residence exemption and may be unpleasantly surprised if ATO knocks on their door to demand the tax.
There are always those who simply failed to lodge tax returns for many years or have disclosed very little income which indicates they could not afford such property.
Australians love property improvements and increasing values through subdivisions, however some may loose the main residence exemption if they happen to be in the business of property development.
In other words, the clearance certificate will single out foreign residents and force them to lodge tax returns and pay capital gains tax but may also put at risk the tax affairs of many Australian vendors.
Are you thinking of selling a property worth more than $2 million after 1 July 2016? Get your tax affairs in order before you apply for the clearance certificate and double-check the tax implications on property transactions you have been involved in, as there are many hidden traps in the tax and property legislation.
Written by Venetta Sacha
Posted on April 4, 2020
Unfortunately, the life of a property investor is not all Private Jets, Champagne and Caviar. One of the most important aspects is making sure that all records are kept correctly from the start. Yes, we are referring to the dreaded record keeping.
There has been a recent push by the ATO to remind all taxpayers of the importance of record keeping and that the rules are the same regardless of whether a taxpayer holds an investment property for 6 months or 20 years.
The ATO can knock on the door at any time and start questioning the income and expenses that have been reported and if valid invoices can not be shown, the ATO can disallow deductions and amend income.
To ensure that an ATO visit does not become a stressful experience, it is important to have the correct record keeping procedures in place. An annual file which contains all income and expense invoices for the financial year is a great start. This can include Rental Agent summaries, bank statements and expense invoices such as Council Rates. It is also important to keep detailed records of all improvements made during the financial year to ensure the correct tax treatment i.e. whether the cost is expensed or depreciated.
At the end of each financial year, this annual file can then be provided to your friendly Accountant to assist in the smooth preparation of the Income Tax Return. It’s a win-win!
But wait, there’s more! The record keeping does not stop there. A separate file can also be kept in regards to the purchase of the property. As properties can be held for an extended period of time, it is important to keep track of these records to avoid any future hassles of chasing up information that is five or ten years old or more. This file can contain information such as:
If an investment property is held for a number of years, or if you hold more than one investment property, record keeping files can pile up and storage can become an issue. That’s why we at Hall Consulting are looking into efficient processes for storing the abovementioned information electronically such as our client portal, where information can be uploaded and accessed at anytime.
A reliable record keeping system will be useful when it comes time to cash in on your investment, calculate that Capital Gain and buy that Luxury Yacht. Now you will just need a file for all those boating expense…
Written by Sean Crowley
Posted on April 4, 2020
A client came to see us for advice and review of his current tax and financial situation. He mentioned that he had bought properties in the US and bitterly admitted that he had made a significant loss from this investment.
“I wish I had jumped on the plane and went to Detroit to see the properties before I signed the contracts” said our client. He trusted a promoter in Australia and didn’t do a proper research before making the decision. It is a consolation that he did not invest through his superannuation fund.
One of the most common questions from clients with a Self Managed Superannuation Fund (SMSF) is, can I buy property? Followed by the second question, can I buy property in the United States?
SMSFs provide investment flexibility for those that understand the rules. They can also be a significant liability if you get it wrong. There are a few key things to check before purchasing a property:
The SMSF’s investment strategy and trust deed must allow for the purchase you are contemplating.
You can’t purchase property from a related party (for example a relative or spouse) unless the property qualifies as business property (business real property to use the technical term).
When you are exploring the viability of the property purchase, be aware that the SMSF cannot lease the property to a related party (again, unless it is business real property). For example, you can’t have your kids living in the property even if they pay market rate rent.
Your SMSF needs to have the cashflow and liquidity to purchase the property.
Factor in transaction costs such as stamp duty into your planning
Consider the exit strategy of both SMSF and property.
Australian SMSFs can purchase property in the US if it is correctly structured (you will need good legal and structuring advice). The question is, should you invest your retirement savings in a market where you have limited visibility or knowledge?
A SMSF would not usually acquire US property directly. Generally, the fund would structure the property investment through a Limited Liability Company (LLC) where the SMSF (and its associates) own and control the majority of the “membership” (the shares). The US LLC is likely to be required to lodge a tax return and pay US federal and state taxes.
As the actual investment the fund holds is the interest in the company (with the company owning the property), there are in-house asset issues to consider. One issue is that the company bank account needs to be with an entity that is classified as an Authorised Deposit Institution (ADI) – not all foreign banks are. Fail this criteria and the investment held by the SMSF may become an in-house asset and require the fund to sell the asset.
But most importantly, do your ground work and consider all the risks!
If you are contemplating purchasing property in your SMSF, talk to us today about achieving the right structure and outcome.
Posted on April 4, 2020
Are you relying on negative gearing?
There has been a lot of negative conversation about negative gearing lately. But, if you are currently negative gearing your investment property, should you be concerned?
Negative gearing is when you claim more in deductions than you earn for an income producing asset that you have purchased using debt. It is not limited to property, you can for example negatively gear shares, but property is the dominant negatively geared asset claimed by Australians.
The latest Taxation Statistics show that we claimed $22.5 bn in rental interest deductions in 2012-13 against gross rental income of $36.6 bn. While these statistics are not as bad as previous years because of the low cost of borrowing ($1.6 bn less than 2011-12), it’s more than the total Defence budget in 2013-14 at $22.1 bn.
The use of these property deductions does not vary widely across income ranges – that is, it’s not just those on the highest income bracket using negative gearing. The highest proportional losses were experienced by those with incomes (net of the rental loss) between $55,001 and $80,000, where deductions exceeded rental income by more than 28%. Negative gearing makes owning an investment property accessible to those who potentially would not invest for the long term gain in property value alone.
The Reserve Bank has stated that the ‘hot’ property market, particularly in Sydney, is because “Investor demand continues to drive housing and mortgage markets, with low interest rates and strong competition among lenders translating into robust growth in investor lending.” In NSW, lending to investors now accounts for almost half of the value of all housing loan approvals. Demand drives price.
The tax policy experts we canvassed generally held the view that negative gearing distorts the market and – in combination with the CGT discount – provides considerable and unnecessary tax advantages to those who least need them. To quote one, “[Negative gearing] is a uniquely Australian phenomenon (no other country is so generous) and I would abolish it (and the CGT discount) immediately (and not be so generous as to grandfather existing owners). The suggestion that its (temporary) abolition in the early 1990s led to an increase in rent was based on spurious and incomplete evidence. More relevant research has subsequently debunked the suggestion that the spike that happened in Sydney house prices had little to do with the abolition and a lot more to do with other, unrelated market forces.”
At present, the Government and property investors want to keep negative gearing. It’s a lonely policy position.
The Government Tax White Paper is due out later this year and may provide a better indication of any potential risk for investment property owners. But, negative gearing is not something to bank on as a long term strategy. It’s just a question of which Government will have the support to remove it.
Friends, family and holiday homes
If you have a rental property in a known holiday location, chances are the ATO is looking closely at what you are claiming. If you rent out your holiday home, you can only claim expenses for the property based on the time the property was rented out or genuinely available for rent.
If you, your relatives or friends use the property for free or at a reduced rent, it is unlikely to be genuinely available for rent and as a result, this may reduce the deductions available. It’s a tricky balance particularly when you are only allowing friends or relatives to use the property in the down time when renting it out is unlikely.
A property is more likely to be considered unavailable if it is not advertised widely, is located somewhere unappealing or difficult to access, and the rental conditions – price, no children clause, references for short terms stays, etc., – make it unappealing and uncompetitive.
Repairs or maintenance?
Deductions claimed for repairs and maintenance is an area that the Tax Office is looking very closely at so it’s important to understand the rules. An area of major confusion is the difference between repairs and maintenance, and capital works. While repairs and maintenance can be claimed immediately, the deduction for capital works is generally spread over a number of years.
Repairs must relate directly to the wear and tear resulting from the property being rented out. This generally involves a replacement or renewal of a worn out or broken part – for example, replacing damaged palings of a fence or fixing a broken toilet. The following expenses will not qualify as deductible repairs, but are capital:
Also remember that any repairs and maintenance undertaken to fix problems that existed at the time the property was purchased are not deductible.
Travel expenses to see your property
If you fly to inspect your rental property, stay overnight, and return home the following day, all of the airfares and accommodation expenses would generally be allowed as a deduction. Where travel is combined with a holiday, your travel expenses need to be apportioned. If the main purpose of the trip is to have a holiday and the inspection is incidental, a deduction for travel is not allowed. In these circumstances you can only claim a deduction for the direct costs involved in inspecting the property such as the cost of taking a taxi to see the property and a proportion of your accommodation expenses.
If you drive a car to and from your rental property to collect rent or for inspections, you can claim your car expenses. Just keep in mind that you need to be able to prove that you needed to visit the property.
Redrawing on your loan
The interest component of your investment property loan is generally deductible. Take care if you have made redraws on your investment loan for personal purposes. A portion of the loan may be non-deductible.
You are able to claim a deduction for borrowing costs over 5 years such as application fees, mortgage registration and filing, mortgage broker fees, stamp duty on mortgage, title search fee, valuation fee, mortgage insurance and legals on the loan. Life insurance to pay the loan on death is not deductible even if taking out the insurance was a requirement to get finance. If the loan is repaid early or refinanced, the whole amount including mortgage discharge expenses and penalty interest become deductible.
Posted on April 4, 2020
The Government are continuing their crack down on non-residents with the introduction of a 10% non-final withholding tax on the purchase price of taxable Australian property purchased from a non-resident from 1 July 2016.
The 10% withheld from the proceeds will be paid directly to the ATO by the purchaser. The ATO will then allow this amount to be recorded as a credit in the non-resident seller’s income tax return.
The Government hope that by introducing this new law, non-residents will enter the Australian tax system by applying for a tax file number and lodging an income tax return, to claim the credit from the 10% withholding tax.
How will this affect you?
The practical implications of this law are still to be outlined, but from 1 July 2016 purchasers will be required to identify if the seller is a non-resident and if so, remit the withholding tax to the ATO. If withholding tax is not remitted correctly, the ATO can impose penalties and fines on the purchaser. This will lead to additional compliance costs incurred as it is the purchasers duty to determine if the seller is a non-resident and if the new withholding tax rules will apply.
However, it must be noted that not all taxable Australian property will be covered by this law. The Government has outlined that there will be no requirement to withhold tax on residential properties under $2.5 million.
As this idea is still in its early stages, we will be following the progress of this development and provide any updates where available. At this stage, we recommend that anyone thinking of purchasing property from a non-resident keep this new legislation in mind.
Please feel free to contact us at Hall Consulting if the above situation applies to you.