What is surprising is that so many (would-be) investors hope that Google can provide sufficiently comprehensive yet simple details of such a complex area. The following is a simple explanation of the relevant taxes affecting property investors. As they say, the devil’s in the detail and I don’t have the space here to deal with all the detail.
The main taxes we need to watch out for are - income tax, capital gains tax, GST, land tax and rates. The first 3 apply uniformly across Australia. Land tax is a state-based tax (so you need to be familiar with how it applies in each state you invest in) and rates are a local government version of land tax.
Rates are levied on the property (irrespective of who owns the property). The other taxes are levied on the entity that owns the property. This provides some tax planning opportunities as it will be possible to reduce the tax impact by careful use of ownership entities.
GST is not relevant to the rental of residential properties but may be relevant for owners of commercial property. A reasonably complex set of rules apply if you are building new residential property. Here your intentions (and subsequent actions) are relevant – build and rent or build and sell have different GST outcomes.
Of course, capital gains tax (CGT) is a tough one to keep simple. First, it only happens when you sell or transfer it. The impact of CGT is affected by the period of ownership and any applicable discounts.
If you own the property for less than 12 months, any gain on sale is treated as income and added to your income from other sources. If you have owned the property for more than 12 months, a discount may apply. Different entities attract different discount rates. So a company pays CGT on the total capital gain, a superannuation fund pays CGT on 2/3rds of the capital gain and other entities are entitled to a 50% discount.
To make sure you don’t pay more CGT than you have to, keeping records of the purchase and any improvements made at any time is advisable.
And of course, according to the Tax Office and some commentators, income tax is not an issue as “all” property owners make losses. They do that by knowing what is deductible and when. This is a huge topic but there is excellent information available on the ATO website.
Knowing how taxes can impact the eventual return from your property investing activities is always important. As you can see, the topic is complex with plenty of ifs, buts and maybes. Being aware of the issues is important but fully understanding how they all affect your personal situation is critical.
If you are going to be a serious property investor, you need to commit to a careful study of all the relevant taxation laws or consult someone who already has done that. The team at J&T Accountants & Advisors has years of experience helping property investors navigate the complexities of investment property taxes. Why not contact us?