Property Taxes & Tax Minimisation

Transcription

1 STEP 1E 1 Property Taxes & Tax Minimisation The Australian Government is responsible for the collection of the majority of taxes applicable in a property transaction. The government bodies that do this, differ from state to state. Always use a tax accountant who specialises in property not a general tax accountant. A property accountant will minimise your tax liabilities and be able to give you specialist advice relating to your property transactions and your individual circumstances. This can save you thousands of dollars and reduce expenses in not having an incorrect structure set up. There are 8 taxes that may be applicable to your renovation and / or property project. You can determine if any or all of them will be applicable to your project by talking to your property accountant, before you buy a property. A fool and his money are easily parted Proverb STEP 1E PROPERTY TAXES & TAX MINIMISATION 1 OF 14

2 Stamp Duty Stamp Duty is payable every time you buy a new property. It is a general tax imposed upon a property when the ownership changes from one person or entity to the next. Stamp Duty is usually paid by the incoming purchaser of a property. Stamp Duty is made up of 3 costs Mortgage Registration Fee, Transfer Fee and Stamp Duty on the property purchase price. These 3 costs are payable in one fee, by bank cheque only. Rates Of Stamp Duty Stamp duty rates vary from state to state. It is not one common rate applicable to all property transactions in Australia therefore some states pay a higher rate of stamp duty, than other states of Australia. Stamp Duty is payable to the following government bodies: NSW ACT VIC QLD SA WA NT TAS Office of State Revenue (OSR) ACT Revenue Office (ARO) State Revenue Office (SRO) Office of State Revenue (OSR) Revenue South Australia Department of Finance Treasury Revenue Office (TRO) State Revenue Office (SRO) Stamp Duty rates also vary depending on whether you re buying the property as an investor or as an owner-occupier. Investors typically pay a slightly higher rate. Stamp Duty rates also vary according to the sale price of a property. The higher the property purchase price, the more stamp duty you'll generally pay. Stamp Duty is a hefty cost in buying a property. This cost is already pre built into my Cosmetic Feasibility Calculator - Step 4A. You can still reference other stamp duty calculators online to give you an exact dollar amount, at the time you purchase a property. Just google your state name followed by the words stamp duty calculator". STEP 1E PROPERTY TAXES & TAX MINIMISATION 2 OF 14

3 When Is Stamp Duty Payable? Stamp Duty has to be paid before or on the day you officially settle and become the new legal owner of a property. If you negotiate a longer settlement period (say 120 days), stamp duty must be paid within 90 days of you exchanging a conditional Contract Of Sale. If you do not pay this fee on time, you'll be sent a penalty fine from the government body responsible for collecting this tax, in your state. Every time you buy a property, your legal representative will automatically send you a legal letter confirming your purchase and outlining how much Stamp Duty you ll need to pay and what date it is due by. Can I Avoid Paying Stamp Duty? There is no creative way to avoid Stamp Duty on a normal residential sale. In the past, people have avoided paying Stamp Duty with put and call option contracts on a property but the Australian Government now includes those transactions as taxable. In some instances, Stamp Duty is not payable. For example, Stamp Duty is not payable, if you re a first home buyer and the property you re buying, is under a certain dollar value. As these rules tend to change from time to time, please always consult your property accountant first, (if you're a first home buyer). Goods & Services Tax (GST) Goods & Services Tax (GST) is a broad-based tax of 10% that is applicable to most goods, services and other items that are sold or consumed in Australia. The company to whom you are paying the invoice to, is responsible for collecting and paying the 10% tax back to the Australian Government. It is not a tax that you get sent a bill for at the end of a financial year. The GST is automatically included and payable at the time you buy a product or service in Australia. As a renovator, you ll be paying GST on a wide range of trade labour and fixtures for your renovation project. STEP 1E PROPERTY TAXES & TAX MINIMISATION 3 OF 14

4 Can I Claim GST As An Expense? If you buy a property under your personal name, the GST you ve paid on all invoices forms part of your overall costs (for the calculation of Capital Gains Tax). If you buy your property under a company or trust structure, you can claim all of the GST back as a deduction in your quarterly Business Activity Statement. When negotiating rates with trades people, always confirm the price they're quoting you is GST inclusive, not GST exclusive. Paying Tradies By Cash It is illegal to pay tradies in cash however some owner occupiers sometimes do so to avoid paying GST which they can t claim back. This is not the proper thing to do however it happens in Australia for owner-occupier properties where no tax deductions or the GST can be claimed. For any property owned under a company or trust structure, never pay tradies in cash. Under a company structure, you can claim back all of the GST therefore there is no financial benefit in doing a cash deal. For cash payments, you have no warranty on the trade persons work. GST Margin Scheme If you buy a property under a company structure and you intend to on-sell it, you may be eligible to use the GST Margin Scheme as a way to minimise your tax liability on your profits when selling. In order to claim the GST Margin Scheme, both the seller and purchaser of the property must be registered for GST. The GST Margin Scheme must be declared in your Contract Of Sale at the time you purchase a property and cannot be implemented after you ve settled on a property. The GST Margin Scheme replaces the need to pay capital gains tax when selling. If you don t implement the GST Margin Scheme when you buy, you can't minimise this tax and will therefore need to pay Capital Gains Tax instead. Ultimately, you always pay either one of the 2 taxes (GST Margin Scheme or Capital Gains Tax) but the key is for you to know which one will save you tax, before you buy. STEP 1E PROPERTY TAXES & TAX MINIMISATION 4 OF 14

5 The GST Margin Scheme can only be applied if the sale of the property is taxable, eg. purchase price of the property + 1/11th of the purchase price for GST added to the contract price. The GST Margin Scheme is a complex taxation question and this fact sheet does not seek to explain it at length as there are so many variables to take into consideration. Please make sure you source expert advice from your property accountant, before you buy a property, to determine if this scheme has any financial merits for you. Capital Gains Tax Capital Gains Tax (CGT) was introduced in Australia on 20 September, Any properties purchased prior to that date are exempt from CGT. All real estate assets purchased after that date (except your primary place of residence PPOR) are applicable to this tax. Certain types of properties are exempt from CGT but they generally are not run of the mill, everyday properties. How Is CGT Calculated? CGT is a tax you pay when you dispose of an investment property and you make a profit. Profit is calculated on the price you sold the property for less the total costs of the project. For example: if you sold a renovated house for $600,000 and all your purchase and project costs total $550,000, your net profit would be $50,000. Tax is payable on your net profit only. If you're a co-owner of an investment property, you'll make a capital gain or capital loss in accordance with your interest (or percentage ownership) in the property. STEP 1E PROPERTY TAXES & TAX MINIMISATION 5 OF 14

6 Try to avoid cross collaterising your properties with your finance company. CGT Exemptions CGT is not applicable to your PPOR. In order to qualify for a CGT exemption, you must live in the property and have all your belongings there on a day to day basis, your mail should be delivered there, you re registered to vote at the property s address and you've connected either a phone, gas or electricity account to that property. If you have 2 homes, you're only allowed to claim one home as your PPOR. The other home will be subject to CGT when you eventually sell. Married or defacto couples are only allowed to claim one PPOR between them. You are not allowed 1 Principal Place Of Residence each. Does CGT Affect My Taxable Income? Any capital gains you make (ie: your net profit) forms part of your income earnings in the financial year that you sold your property. The capital gain is added to your income for that year. For example, if you worked a full-time job and you normally earn $70,000 a year and you did a cosmetic renovation, which you sold and made a $50,000 net profit on, your taxable income for that financial year would be $120,000. Remember, the higher your income, the higher tax rate you incur, which means you pay more tax. Calculation Your Normal Income $70,000 PLUS Profit made on a renovation $50,000 Taxable income for the financial year you sold the property $120,000 STEP 1E PROPERTY TAXES & TAX MINIMISATION 6 OF 14

7 When Is The Best Time To Sell? If you re adamant you want to Buy, Renovate & Sell immediately on completion of your project, always consider the timing of when your property will settle. You want to time the settlement wisely so you settle at the beginning of a new financial year, not the end of the financial year. Example Capital Gains Tax - Timing Your Sale In Australia, our financial year ends on the 30th June. If I was selling a property, I would time the property settlement to take place on any date from 1st July. By timing the settlement date in the next financial year, I won't have to pay any of the CGT for at least another 12 months or until I lodged my next income tax return, in the following year. By contrast, if I was to sell and settle on a property a few days prior to end of the financial year, the capital gain would be factored into that year s income tax return and be payable just a short time thereafter. Different Rates Of CGT The amount of CGT you pay will be dependant on when you sell your property. If you were to buy and sell a property within 12 months of buying a property, you will be subject to the highest amount of capital gains tax potentially up to 45 cents tax for every dollar of profit earnt. If you keep the property for 12 months, then sell after the initial 12-month period, you automatically receive a 50% discount off the capital profit, which in effect, reduces your CGT liability by half the amount. STEP 1E PROPERTY TAXES & TAX MINIMISATION 7 OF 14

8 Calculation To continue on with the previous calculation used for taxable income. Included in calculation Buy and Sell before 12 months ownership Buy and Sell after 12 months ownership Normal Income $70,000 $70,000 Profit Earnt $50,000 $50,000 CGT Liability $50,000 $25,000 Taxable Income $120,000 $95,000 Approximate Tax Payable $32,032 $22,782 *correct at the time of printing. In the unfortunate event that you made a loss on your renovation project and therefore made a capital loss (as opposed to a capital gain), you can t claim the income loss off your taxable income amount but you can use the loss to reduce a capital gain in the same income year. And if your capital losses exceed your capital gains in an income year, you can generally carry the loss forward and deduct it against capital gains in future years 6 Year CGT Rule As a general rule, a property is no longer your main residence once you stop living in it. However, in some cases, you can choose to have a dwelling still treated as your Principal Place Of Residence (PPOR) which would make you exempt from Capital Gains Tax (GGT) even though you no longer live in the property. If you move out of your PPOR and choose to rent it out, you may be exempt from Capital Gains Tax liability under the 6 Year CGT Rule. To qualify for this ruling, the nature of first usage of the property is of utmost importance it s either your PPOR or a rental property. Under this ruling, when you buy a property, it must be established and lived in first as your PPOR. There is no set time period of how long you have to live in the property for initially. In the event your circumstances change and you decide to move and rent the property out, the property can still be treated as your PPOR for a period of up to 6 years (even though you are not living in it) thus STEP 1E PROPERTY TAXES & TAX MINIMISATION 8 OF 14

9 making the property exempt from CGT. You cannot claim another property as CGT free whilst claiming the 6 year CGT rule on another property. Please speak to your accountant for further information and whether this can apply to your own situation. Many successful renovators and investors buy and sell a PPOR every couple of years. They do this to create short term profits which are exempt from capital gains tax. CGT & Self Managed Super Fund Buying property through your Self Managed Super Fund (SMSF) is one way you can generate profits through residential property whilst minimising Capital Gains Tax. If you sell a property once you retire, you won t pay any capital gains on the property. Even if you sell the property, whilst you re still working, you'll only be taxed at a rate of 15% approximately. Furthermore, if you re holding onto the property for longer than a year in your SMSF, the tax rate will effectively drop to 10%. Buying a property with your SMSF does comes with some risks and it s not a straight forward process so please speak to your property accountant first to get professional advice. The rules of SMSF are always changing. STEP 1E PROPERTY TAXES & TAX MINIMISATION 9 OF 14

10 Substantial Renovations Tax The Substantial Renovations Tax is applicable when you complete a major / substantial renovation to a property where the property is brought up to a new standard that causes the property to be classed as "new residential premises. Some structural renovations (if major) may attract this tax. Whole house cosmetic renovations typically do not attract this tax. This tax is payable when you sell your property. 10% of your sales price will need to be paid to the Australian Government as a tax which you never get back. For a structural renovation, being sold at a higher price, this tax can be a substantial cost and a large chunk of lost profit While every situation is different, and each property will be assessed on its own specific circumstances and merits, the ATO does have set criteria for substantial renovations. It still however remains somewhat of a grey area. It considers that for substantial renovations to occur, for the purposes of the GST Act and the payment of this tax, the renovations need to satisfy the following criteria before it is necessary to establish whether the renovations are substantial: 1 Your renovation needs to affect the building as a whole; and / or 2 Your renovation needs to result in the removal or replacement of substantially all of the building, regardless of whether those works are structural or non-structural in nature; and / or 3 Works must directly affect most rooms in your property. The renovation of only one part of your property, without any work on the remaining parts of the building, would not constitute substantial renovations. Once it is determined that a building has been substantially renovated and new residential premises created, all additions to the building form part of the new residential premises. This will occur, for example, where all or substantially all of a two bedroom bungalow is removed and replaced. STEP 1E PROPERTY TAXES & TAX MINIMISATION 10 OF 14

11 Premium Property Duty The Premium Property Duty is applicable when someone or an entity buys a property where the dutiable land value of that land exceeds $3 million. This tax was introduced on 1 June 2004 and is applicable to NSW only. By way of definition, this tax is applicable to residential land that may or may not have a dwelling on it and is applicable regardless of whether the land is freehold or strata title ownership. The Premium Property Duty must be paid within 90 days of the date you exchanged your Contract Of Sale (except for off the plan purchases) and is payable by the purchaser of the property. For any land purchased off the plan, the premium property duty must be paid within 90 days from the date of completion of the agreement or the assignment of the whole or any part of the purchaser s interest under the agreement or 12 month after the date of the agreement, whichever occurs first. This tax is often payable by property developers, not residential renovators. Land Tax Land Tax is a state revenue tax, payable in all states of Australia (except Northern Territory) and is applicable to investment properties only. It is due at the following times: NSW Annually 31 December ACT Quarterly 1 July, 1 October, 1 January and 1 April VIC Annually 31 December QLD Annually 30 June SA Annually 30 June WA Annually 30 June NT Not Applicable TAS Annually 1 July STEP 1E PROPERTY TAXES & TAX MINIMISATION 11 OF 14

12 Land Tax applies depending on what type of owner you are, the total taxable value of your land, and if any exemptions apply. Owner occupiers who are living in their own PPOR are exempt from this tax. Investment properties typically attract this tax if the dutiable value of the land exceeds the state by state thresholds. Land tax is calculated by collectively tallying up the land values of your total property portfolio (as determined by the Valuer Generals Dept) less the exempt value of your principal place of residence value (PPOR) Example Land Tax Calculation Megan has 3 properties in NSW. 1 property is her PPOR with a valuers general value of $268,000. Her 2nd property is a unit with a general valuation of $274,000 that is rented out. Her 3rd property is an investment property with a general valuation at $313,000. Property 1 $268,000 (exempt as PPOR) Property 2 $274,000 Property 3 $313,000 Dutiable Value $587,000 ($274,000 + $313,000) Land tax threshold in NSW $482,000 (as at time of writing) Taxable Value $105,000 ($587,000 dutiable value less $482,000 threshold) In NSW (at the time of writing) the rate of Land Tax is $ % of every dollar of taxable value which would result in a land tax bill to the property owner of $100 + ($105,000 x 1.6%) = $1,780 each year for all 3 properties combined. Land tax does not apply to commercial property in most states of Australia. You will automatically receive a land tax bill each year from your state revenue office. Be sure to fill out a Land Tax Exemption Form for any property you own that is your PPOR so it s not included in your land tax bill. STEP 1E PROPERTY TAXES & TAX MINIMISATION 12 OF 14

13 Income Tax Income Tax is a general tax levied on the personal income you earn each year and is applicable in most countries. The revenue derived from this tax typically pays for all infrastructure within a country, amongst other things. The more money you earn, the higher the rate of Income Tax you pay. For higher income earners, it s absolutely essential to get good accountancy advice on how you can structure yourself to legally minimise the amount of income tax you pay. This process can save you tens of thousands, each year alone. Without this structuring, you can be losing a lot of money unnecessarily. The Income Tax rates for 2017 / 2018 across all states of Australia are as follows: Taxable Income Tax Rate Tax On This Income $0 - $18,200 0% Nil $18,200 - $37,000 19% 19c for each $1 over $18,200 $37,000 - $87, % $3,572 plus 32.5c for each $1 over $37,000 $87, $180,000 37% $19,822 plus 37c for each $1 over $87,000 $180,000 and over 45% $54,232 plus 45c for each $1 over $180,000 The above rates do not include: Medicare levy of 2%. Temporary Budget Repair Levy. This levy is payable at a rate of 2% for taxable incomes over $180,000. If you sell a property, any capital gains / net profit earned will be added to your taxable amount in that financial year (thus potentially pushing you into a higher tax bracket). Always speak to your accountant before buying or selling a property to correctly plan for tax minimisation. STEP 1E PROPERTY TAXES & TAX MINIMISATION 13 OF 14

14 Referral Accountancy Hoffman Kelly Chartered Accountants Available nationally for all your accountancy advice. Phone: (07) Website: This firm also understand Dominique Grubisa s Asset Protection System in detail to ensure effective asset and tax structuring cohesively together. STEP 1E PROPERTY TAXES & TAX MINIMISATION 14 OF 14