Working With The Numbers & Thinking Outside The Numbers

Transcription

1 Business, Investor & SMSF Specialists Working With The Numbers & Thinking Outside The Numbers

2 DISCLAIMER GENERAL INFORMATION ONLY DOES NOT CONSTITUTE ADVICE DISCLAIMER TODAY S PRESENTATION PLEASE CONSULT A QUALIFIED PROFESSIONAL BEFORE TAKING ANY ACTION DOES NOT TAKE YOUR PERSONAL SITUATION INTO ACCOUNT

3 PROSPERITY PLAN COMBINATION OF FACTORS GETS ULTIMATE RESULTS SHARES STRUCTURES SELF MANAGED SUPER FUND INSURANCES INVESTMENT PROPERTIES TAX DEDUCTIONS

4 TODAY S PRESENTATION WILL GIVE YOU STRATEGIES TO: MAXIMISE TAX DEDUCTIONS AND MINIMISE PROPERTY HOLDING COSTS EACH YEAR

5 NEGATIVE GEARING RENT PLUS TAX BENEFITS, LESS COSTS MEANS IT S COSTING YOU MONEY EACH YEAR TO HOLD PROPERTIES.

6 TAX DEDUCTIONS Expense incurred (paid for) in earning income = DEDUCTIBLE IF IN DOUBT, KEEP YOUR RECEIPT AND ASK YOUR ACCOUNTANT!

7 IMMEDIATE DEDUCTIONS SOME EXAMPLES: Interest on Loans Advertising for Tenants Quantity Surveyor s Fees Travel and Car Expenses Repairs and Maintenance Gardening and Lawn mowing Body Corporate fees and charges Property Agent s Fees and Commission Gifts to Tenants and/or Property Managers Insurance: Building/Contents/Public Liability Land Tax Council Rates Legal Expenses Water Rates and Charges Mortgage Discharge expenses

8 INTEREST ON LOANS Follow the money trail TAX HINT You would need to ensure that a separate loan is established for the $60,000 and that no personal money is ever deposited to/ withdrawn from this loan. The interest on both loans is claimed against any rent received on this property. WHAT WAS THE MONEY USED FOR?

9 RENOVATING OR BUILDING A RENTAL PROPERTY TAX HINT From the time you purchase the land AND / OR property to the time that you build the rental property / renovate it and rent it out, you can also claim other holding costs such as: ü INTEREST ü WATER RATES ü LAND TAX ü MOWING ü COUNCIL RATES ü INSURANCE

10 THOUGHT ABOUT BUYING YOUR NEW DREAM HOME AND RENTING OUT YOUR OLD HOME? AVOID THE TRAP SET BY THE ATO.. WE LL SHOW YOU HOW! For 90% of you, this will be the scenario from a tax perspective this is not the optimum tax minimisation. We can t change the past but we can assist you with your future decisions I ll show you how shortly.

11 LOAN PRODUCTS I LL SHOW YOU A $48,000 EXAMPLE OF HOW YOUR CHOICE OF LOAN PRODUCT CAN AFFECT YOU Line of Credit (LOC) / Redraws Offset Account

12 LINE OF CREDIT (LOC) / REDRAWS A LINE OF CREDIT IS A LOAN WHICH HAS A SET, PREDETERMINED MAXIMUM LIMIT THAT IT CAN BE DRAWN UP TO. INTEREST IS ONLY CHARGED ON THE DRAWN BALANCE. If interest for the month was $1,000-60% or $600 would be tax deductible - 40% or $400 would be private TAX HINT Originally the full $1,000 would have been tax deductible before the payment of the inheritance and the purchase of the boat. The inheritance should be used to reduce personal loans never put into a tax deductible line of credit. If you have no personal debt, then the next loan type will suit your purposes.

13 OFFSET ACCOUNT THE ANSWER TO THE ATO TRAP WHEN RENTING OUT YOUR OLD HOME AN OFFSET ACCOUNT IS WHERE THERE IS AN INTEREST ONLY LOAN WITH A TOTALLY SEPARATE BANK ACCOUNT TO THE SIDE. THE BANK ACCOUNT IS WHERE ALL DEPOSITS GO INTO AND ANY PAYMENTS GO OUT OF WHICH ARE OF A PERSONAL NATURE. THE ORIGINAL INTEREST ONLY LOAN REMAINS UNCHANGED. If interest for the month was $1,000 There would be no private portion TAX HINT : - 100% or $1,000 would be tax deductible The original loan of $100,000 (which is deductible against the property) has not changed, so buying the car for $40,000 has not affected the interest deductions on the $100,000 loan. Utilising an offset account on your private home will maximise interest deductions claimable against your home if you ever want to rent it out in the future. Offset accounts keep your options open which is CRUCIAL., e.g. this would have solved the previous problem.

14 CASH FLOW SUPPORT STRATEGY WANT TO PUT AN EXTRA $50,000 INTO YOUR PERSONAL MORTGAGE AND TAKE IT FROM THE FUTURE EQUITY OF YOUR RENTAL PROPERTY? LET ME SHOW YOU HOW.

15 CASH FLOW SUPPORT STRATEGY CONTINUED EXAMPLE 1 HOLDING COSTS OF RENTAL PROPERTY EACH YEAR Rent received for the year $ 15,000 Less: Cash Expenses Bank Fees $ 300 Body Corporate Fees $ 1,200 Council Rates $ 1,100 Insurance $ 700 Interest Paid $ 16,000 Property Agent s Commission $ 1,200 Repairs $ 1,000 Water Rates $ 400 Total Cash Expenses $(21,900) CASH SHORTFALL $ 6,900 The cash shormall each year of $6,900 can be funded by a line of credit. The line of credit must not be mixed with private funds to maintain the loan s 100% deducybility. The interest on the cumulayve balance of this LOC would also be claimable.

16 CASH FLOW SUPPORT STRATEGY CONTINUED Cost to hold rental property for 2014 $ 6,900 Interest on cost to hold rental property for 2014 ($6,900 x 10%) $ 690 Balance at 2014 $ 7,590 Cost to hold rental property for 2015 $ 6,900 Total cost to hold rental properties for 2015 $14,490 Interest on cost to hold rental property for 2015 ($14,490 x 10%) $ 1,449 Balance at 2015 $15,939 Using 10% interest p.a. to keep the calculations as easy as possible This interest each financial year would be claimable against the property outlined above. You are not required to fund the investment property cash shormall withpersonal funds You can choose to use this personal money (that you do not need to uylise to fund holding the property) to pay down your non- deducyble private home loan. The loan on your property is increasing, however you are not actually having to find any money to fund the holding of the property.

17 DEPRECIATING ASSETS One of the most attractive benefits from a Tax deduction point of view DEPRECIATION IS A TAX DEDUCTION THAT YOU GET EACH YEAR THAT DOES NOT COST YOU A CENT! The benefits you receive will depend on how much you paid for the property that you have bought, such as: - Stove - Oven - Hot plates - Hot water service - Curtains - Light fittings - Blinds - Ducted heating - Dishwasher - Ducted cooling - Carpet - Security system - Stand alone heater - Stand alone air-conditioner A QUANTITY SURVEYOR IS THE BEST OPTION TO DETERMINE YOUR DEPRECIATION ENTITLEMENTS FOR YOUR PROPERTY

18 CAPITAL WORKS DEDUCTIONS (BUILDING WRITE OFF) YOU CAN CLAIM BUILDING (CONSTRUCTION) EXPENDITURE OVER 25 OR 40 YEARS: EXAMPLES OF BUILDING EXPENDITURE INCLUDED: Plumbing Electrical Roofing Slab Carpenters Architect s and engineer s fees Frame A building or extension (e.g. adding a room, garage, pergola) Alterations (e.g. removing or adding an internal wall) Structural improvements to the property (e.g. gazebo, carport, fence, retaining wall, sealed driveway) EXAMPLES OF BUILDING EXPENDITURE NOT INCLUDED: The cost of the land on which the rental property is built Expenditure on clearing the land prior to construction Expenditure on landscaping

19 CAPITAL WORKS DEDUCTIONS TAX HINT No claim is available until the construction is complete. You can only claim deductions for the period during the year(s) that the property is rented or is available for rent. The claim % available is determined by when construction (building) was first started. That is, the date that the foundations were laid. Try and purchase something first built after 17 th July ESTIMATING CONSTRUCTION COSTS ESTIMATION OF CONSTRUCTION COSTS WILL BE THROUGH A QUANTITY SURVEYOR

20 QUANTITY SURVEYORS WHAT! A gift from the Tax Office? A QUANTITY SURVEYOR S REPORT GIFTS ME $37,799 OR A TAX REFUND (at 31.5%) OF $11,907 TAX HINT A Quantity Surveyor s fees are also tax deductible in the year they are paid.

21 THE DIFFERENCE A GOOD QUANTITY SURVEYOR CAN MAKE AVERAGE QUANTITY SURVEYOR Property purchased for $150,000 in January Built in 1987 and syll has all original fixtures and fibngs AMOUNTS CALCULATED BY Q.S. GOOD QUANTITY SURVEYOR Property purchased for $210,000 in June Built in 1987 and still has all original fixtures and fittings AMOUNTS CALCULATED BY Q.S Total DepreciaJon $13,639 Total Building write off $45,354 ($1,814 p.a.) Total Depreciation $53,615 Total Building write off $12,873 ($1,126 p.a.) AVERAGE QuanYty Surveyor claims over 5 years: $13,639 x 60% = $ 8,183 $ 1,814 x 5 = $ 9,070 TOTAL CLAIMS $ 17,253 GOOD Quantity Surveyor claims over 5 years: $53,615 x 60% = $ 32,169 $ 1,126 x 5 = $ 5,630 TOTAL CLAIMS $ 37,799

22 THE DIFFERENCE A GOOD QUANTITY SURVEYOR CAN MAKE CONTINUED. TWO PROPERTIES PURCHASED AT SAME TIME BOTH BUILT IN 1987 AND STILL HAVE ALL ORIGINAL FIXTURES AND FITTINGS TOTAL CLAIMS AVAILABLE OVER FIRST 5 YEARS AVERAGE QUANTITY SURVEYOR - $17,253 GOOD QUANTITY SURVEYOR - $37,799 Difference in claims over 5 years = $20,546 Tax savings foregone at 31.50% = $6,472 (Cash flow lost)

23 REPAIRS AND MAINTAINENCE REPAIRS CAN GENERALLY BE CATEGORISED INTO 2 TYPES: Repairs that are immediately claimable Repairs that are depreciable

24 REPAIRS AND MAINTAINENCE CONTINUED. IMMEDIATELY CLAIMABLE REPAIRS: Repairs must relate directly to wear and tear or other damage that occurred as a result of you renyng out the property. Repairs generally involve a replacement or renewal of a worn out or broken part e.g. replacing some gujering damaged in a storm, or part of a fence that was damaged by a falling tree branch. A repair simply restores the item that is being repaired to its original state prior to it needing to be fixed. Examples of repairs for which you can claim deductions: HINT FOR TAX RETURN : ü Replacing broken windows ü Maintaining plumbing ü Repairing electrical appliances You need to consider how long you have been renting out the property before a repair is deemed to be from the wear and tear associated with the use of the tenant.

25 REPAIRS AND MAINTAINENCE CONTINUED. DEPRECIABLE REPAIRS: The following expenses are depreciable at the rate of 2.50% p.a.: EXAMPLE Improvements: A section of the fence in your rental property that has been rented out for a few years has come apart and needs replacing (not the entire fence). The fence is currently made out of timber. If you replace the timber fence with a colourbond fence then this is deemed to be an improvement rather than a repair. EXAMPLE Initial Repairs: You need to do some repairs to your newly acquired rental property before the first tenants move in. You pay an interior decorator to repaint dirty walls, replace broken light fittings and repair doors on two bedrooms. You also discover white ants in some of the floorboards, requiring white ant treatment and replacement of some of the boards. These expenses are incurred to make the property suitable for rental and did not arise from your use of the property to generate rental income.

26 REPAIRS AND MAINTAINENCE CONTINUED. GENERAL GUIDE TO CLAIMING REPAIRS: Repairs to a rental property will generally be claimable if: The property continues to be rented on an ongoing basis OR The property remains available for rental but there is a short period when the property is unoccupied e.g. unseasonable weather causes cancellations of bookings or advertising is unsuccessful in attracting tenants. If you no longer rent the property, the cost of repairs may still be deductible provided: The need for the repairs is related to the period in which the property was used by you to produce income, AND The property was income-producing during the income year in which you incurred the cost of repairs.

27 REPAIRS AND MAINTAINENCE CONTINUED. EXAMPLE Repairs when the property is no longer rented out: August Tenants moved out September You discover that the stove doesn t work, kitchen tiles are cracked and toilet window is broken. You also discover a hole in a bedroom wall that had been covered with a poster. October You pay for this damage to be repaired. Despite the fact that the property is no longer rented out, you can still claim the repairs to the property. This is because the repairs related to the period when the property was being rented and the repairs will be completed before the end of the financial year in which the property ceased to be rented out. HINT FOR TAX RETURN : You will need to have some rental income in the same financial year that you claim the repairs. This also applies even if you choose to use the property as your home after the tenants move out.

28 TRAVEL EXPENSES YOU CAN TRAVEL TO INSPECT, MAINTAIN YOUR PROPERTY OR COLLECT THE RENT AND YOU MAY BE ABLE TO CLAIM THE COSTS OF TRAVELLING. Potential Travel Expense Claim Examples: ü Airfares (retain boarding pass and ticket) ü Taxis, Bus, Train etc. ü Accommodation ü Phone calls ü Meals ü Parking costs and bridge tolls ü Car hire & petrol ü Cents per km usage of own car

29 TRAVEL EXPENSES CONTINUED EXAMPLE Cents per km usage of own car: Your local rental property is managed by a property agent, however you decide to inspect the property 3 months after the tenants move in. During the income year, you also make a number of visits to the property in order to carry out minor repairs. You travel 162 kilometres during the course of these visits. On the basis of a cents-per-kilometre rate of 76 cents for your 2.6 litre car, you can claim the following deduction: Distance travelled x rate per km = Deductible amount 162kms x 76 cents per km = $ On your way to cricket each Saturday, you drive past the property to keep an eye on things. These motor vehicle expenses are NOT deductible as they are incidental to the private purpose of the journey.

30 TRAVEL EXPENSES CONTINUED APPORTIONMENT OF TRAVEL EXPENSES: You are allowed a full claim where the sole purpose of the trip relates to the rental property. If you fly to inspect your rental property, stay overnight and return home on the following day, all of the airfare and accommodation expenses would be generally claimed as a full deduction provided the sole purpose of your trip was to inspect your rental property. Where travel related to your rental property is combined with a holiday or other private activities, you may need to apportion the expenses. If this is the case, you need to take into account the reasons for your trip. If the main purpose of you trip is to have a holiday and the inspection of the property is incidental to that main purpose, you cannot claim a deduction for the cost of the travel. However, you may be able to claim local expenses directly related to the property inspection and a proportion of accommodation expenses.

31 TRAVEL EXPENSES CONTINUED EXAMPLE Apportionment of travel expenses: You own a rental property in Cairns. You spend $1,000 on airfares and $1,500 on accommodation when you travel from your home in Melbourne to Cairns mainly for the purpose of a holiday but also to inspect the property. You spend $50 on taxi fares for the return trip from the hotel to the rental property. You spend one day (10%) on matters relating to the rental property and 9 days (90%) swimming and sightseeing (10 days in total). NO deduction can be claimed for any part of the $1,000 airfares. You CAN claim a deduction for the $50 taxi fare. A deduction for 10% of the accommodation expenses (10% of $1,500 = $150) would be considered reasonable in the circumstances. The total travel expenses you can claim is therefore $200 - ($50 taxi fare plus $150 accommodation)

32 BORROWING EXPENSES IF THE TOTAL DEDUCTIBLE BORROWING EXPENSES ARE $100 OR LESS, THEY ARE FULLY DEDUCTIBLE IN THE INCOME YEAR THEY ARE INCURRED IF YOUR TOTAL BORROWING EXPENSES ARE MORE THAN $100, THE DEDUCTION IS SPREAD OVER 5 YEARS OR THE TERM OF THE LOAN, WHICHEVER IS LESS. THESE ARE EXPENSES DIRECTLY INCURRED IN TAKING OUT A LOAN FOR THE PROPERTY. THEY INCLUDE: - Loan establishment fees - Title search fees - Mortgage broker fees - Stamp duty on the mortgage - Valuation fees - Mortgage Insurance HINT FOR TAX RETURN : If you repay the loan early and in less than 5 years, you can claim a deduction for the balance of the borrowing expenses in the year of repayment. If you obtained the loan part way through the income year, the deduction for the first year will be apportioned according to the number of days in the year that you had the loan.

33 BORROWING EXPENSES CONTINUED EXAMPLE: BORROWING EXPENSES For a $316,000 loan to purchase a rental property, you pay a total of $3,670 in borrowing costs. As your borrowing expenses are more than $100, they must be apportioned over 5 years, or the period of the loan, whichever is the lesser. The loan was obtained on 17 July 2014, so the borrowing expense deduction for the first year is as follows: PREPAID BORROWING EXPENSES Mortgage Stamp Duty $1,264 Registration Fee $ 70 Establishment Fee $ 700 Settlement Fee $ 200 Mortgage Insurance $1,436 TOTAL $3,670 Days in the year Claim Balance 30 th June $ th June $2, th June $1, th June $ th June $ th June $ 0 1,827 3,670

34 BORROWING EXPENSES CONTINUED HINT FOR TAX RETURN : If you refinance the property at 30 th June 2016, then the remaining borrowing costs yet to be amortised/claimed of $2,232 can be written off in full at the point in time that the refinance happens. A new calculation (similar to this one over 5 years) will also need to be done for the new loan taken out to pay out the old loan.

35 Deferring Capital Gains Tax Capital Gains (Where Property Sold) You should consider deferring the disposal of assets unyl the following income year, if there are insufficient capital losses to absorb those capital gains. This is done with a PUT/CALL OPTION agreement. Note: CGT is triggered by contract date, not sejlement date.

36 SUPERIOR ACCOUNTING GROUP PO Box 922, Mount Eliza VIC Mereweather Ave Frankston, VIC Phone: (03) Fax: (03) facebook.com/sagroup.accountants