There are a multitude of important considerations in
making an appropriate investment decision
A qualified Property Investment Advisor will work to provide advice tailored specifically for you.
Your circumstances needs and preferences should be the basis on which any strategies are formulated, and recommendations presented.
Firstly, to know you and your needs, the Advisor will need to analyse many important considerations and criteria specific to you and your situation – importantly, the information needs to be both qualitative and quantitative.
A FACT FIND should be completed to determine for the investor:
Once the situation, needs and preferences are clear, the Advisor is then able to formulate a strategy and property recommendations that fit the ‘brief’ that has been identified in consultation with the investor.
Some of the critical considerations in selecting properties for review include:
Investment advice is about knowing the client, their needs and taking into account all the critical criteria and parameters to formulate an appropriate strategy and to present a well researched shortlist of property options.
The marginal rate of tax or MRT
is the percentage of tax
levied on the last dollar earned.
It doesn’t mean that you pay that percentage overall, just on the number of dollars that are in your highest tax bracket.
Tax rates applicable in 2020-2021 (excluding the Medicare Levy of 2%) are:
Someone on $125,000 is in the 37% marginal rate but they would probably pay approximately 25% of their income in tax because some of their income incurs ZERO tax and some 19% and some 32.5% and some 37%
In this example, assuming no deductions, the tax-payer is liable for approximately 25% of their income in tax even though they fall into the 37% tax bracket – $31,317 / $125,000 = 25%
The Medicare Levy is then applied to your taxable income. If taxable income is $125,000, then 2% or $2500 would be added to this taxpayer’s liability. $31,317 + $2500 = $33,817 which = 27% of their total income. ($33,817/ $125,000)
If you can reduce your taxable income with legitimate costs incurred in earning an income (including property-related), the tax payable will be calculated on the lower level of income and not your total earnings. You will have the opportunity to reduce your tax payable on income and the Medicare Levy payable as well.
Using the example in the negative gearing topic, assume this taxpayer has an investment property earning $25,000 per annum in rent and costs of $33,500 plus depreciation benefits of $10K (it’s a brand new property). This means the new gross income becomes $150,000 ($125,000 + $25,000). The allowable deductions are $43,500 ($33,500 + $10,000). The new taxable income becomes $106,500 ($150,000-$43,500). Tax payable will now be calcuated on $106,500, not on $125,000.
Total tax liability now equals $25,079 + $2130 = $27,209 or 18%
This taxpayer’s liability has been reduced by $6,608 (or $127 per week)
Australia has a progressive system of income tax. The more you earn, the larger proportion of your income is paid in tax.
The GST, for example; is a flat rate of tax for all, and therefore more of a burden on low-income earners than it is for higher-income earners.
It is a regressive tax.
Tax brackets are adjusted to achieve a more equitable tax system.
‘Bracket creep’ occurs when incomes rise as a result of inflation, and tax-payers are forced into higher marginal tax brackets. They can’t buy more with the ‘extra’ income because it is a result of inflation (a general increase in prices) and so they are negatively impacted.
Tax liability is assessed on ‘taxable income’ = gross income minus any allowable deductions.
Rental income from an investment property is considered income and as such is added to your gross income.
BUT all the costs of ownership can be deducted from your gross income as can depreciation.
The rate at which you can claim tax credits from the ATO is at your highest marginal rate of tax.
Tax minimization through negatively geared property investment is legal, and an Australian Tax Office supported tax strategy.
It is a requirement to keep accurate records of all expenses.
A Quantity Surveyor’s Report (QSR) professionally prepared for every investment property is essential to ensure that the maximum depreciation benefits are claimed.
Ownership may be divided
The decision about who will own the property and in what proportion is typically based around individual incomes and marginal tax rates, to maximise rebates and to minimise tax obligations.
However, it’s also essential to consider the future. One party to the contract may be the lower-income earner now, but their future earning potential may be very different. Depending on the time horizon of the investment; they may need to sacrifice some rebates now to benefit from more significant returns in the future.
Exit strategies should also be considered. Capital Gains Tax obligations can be minimised by timing the exit in line with periods of lower-earning, planned absences from the workforce or retirement dates, and all may influence the ownership split nominated now.
Ownership splits of 99/1 to secure the vast majority of claims in the highest income earners name are now frowned upon by ASIC. They mandate that a borrower must stand to gain a ‘distinct benefit’ from being a co-borrower and 1% no longer amounts to that in their view.
To have a 1% interest and liability still means that borrower is jointly responsible for the entire debt and they must seek independent legal counsel before committing to such an arrangement. The accountancy fees for a 1% benefit is also unlikely to be justified by the small tax benefit.
The minimum is now a preferred 80/20 split.
In the case where a couple decides to have the property 100% in the higher income earners name, if the equity offered to secure the purchase is jointly owned, the other partner will be required to be a guarantor, and therefore is jointly responsible for the loan.
What one owns, the other does too, and what one owes, the other does also!
Deciding on the ownership split is a decision best made in conjunction with your accountant and mortgage broker.
A couple buying together will nominate whether they want to be:
- Joint tenants
Joint tenants hold the property equally between them and the income or loss from the property will also be split evenly. The property can only be disposed of wholly, not in parts and on death, ownership of the property passes to the surviving owner. Most committed couples would elect to have this setup.
2. Tenants in common
Shares in the property can be uneven (in line with the lending and regulator’s guidelines), and so the income and tax benefits are attributed according to percentage ownership. Tenants in Common can dispose of their share if they choose to. On death, the will of the deceased determines the outcome of the deceased’s share in the property.
ATO – Co-owners of a rental property