It’s that dirty little three-letter word….tax. I bet there is not a single Australian who enjoys paying taxes – yet we all participate in the annual ritual which is the end of the financial year.
It’s kind of like Christmas, but for grown-ups where we go to the man (or woman) and find out whether we have been naughty or nice with paying out tax and keeping records of our expenses. If we’re lucky, we walk away with a present – a nice lump sum of cash in our bank account.
For most people, this ritual is quite simple. We report out annual PAYG statement and we deduct our meager eligible expenses such as work uniforms, mileage, etc.
However, as soon as you invest in property things become a little bit more complicated.
Suddenly now we have a whole new class of expenses – interest fees, rental management fees, insurances, repairs, maintenance, depreciation, portfolio administration costs, etc.
And we have a whole new host of taxes to deal with like council rates, land tax, stamp duty, tax on rental income and possibly transfer fees or capital gains tax.
Suddenly things become more complicated – and you realize very quickly that you’re DIY eTax skills are no longer up to the job.
So what can you do? Well, the best thing to do is to enlist the help of a qualified accountant and bookkeeper to take the burden off your hands.
The second thing is to get up to speed with the broad strokes of Australian property tax law, so you know what questions to ask your accountant.
Stamp duty is paid upon the purchase of a property. Each state and territory administer its own Stamp Duty legislation and collection; therefore, rates vary across Australia. Subsidies and concessions are available for first home buyers. Generally, you can expect to pay tens of thousands of dollars in stamp duty. It applies to both personal home and investment property purchases.
Transfer fees are similar to stamp duty and are paid at the time of purchase in certain states. These fees are generally small in comparison to stamp duty fees and range from a few hundred to a couple of thousand dollars.
Capital Gains Tax:
Capital gains tax is the tax paid upon the sale of an investment property (it does not apply to the sale of your personal home). Although called capital gains tax, it is essentially just an application of the regular tax upon your income. When you sell an investment property, the gain you make is treated as income for that financial year and taxed at the applicable tax rate as per your “income bracket” for that year. You will only be taxed on the profit you made, not the total sale price of the property. However, if you help onto the property for over a year between purchase and sale you will receive a Capital Gains Tax discount of 50%! So, it’s makes waiting a few extra months to sell worthwhile.
Although we don’t tend to think of council rates as a tax, they most certainly are. This is a cost you will need to start paying as soon as you own a property. Council rates vary from council to council and are determined by a number of factors such as your property value and street frontage area. Most councils send a rates bill each quarter and can amount to several thousand dollars a year.
Land tax is not usually something you have to pay unless you exceed a certain threshold of land area under ownership within a single state. In order to avoid paying land tax, many investors plan their acquisitions strategically to minimize the land footprint under ownership – through the acquisition of apartments, etc. Or by making sure that their investment properties are spread across many different states. There are a lot of complicated calculations that affect land tax rates so it’s best to check the government websites or speak with your accountant.
Income Tax or Corporation Tax:
If your investment property makes net rental income after all expenses, then you will need to pay the marginal Person Income Tax or Corporate Tax rate on this income earned.
The government realizes that running an investment property is like running a business. As such, investors are entitled to claim expenses related to the purchase, sale, operation or upkeep of their investment property.
Common deductions that property investors can claim include rental advertising costs, property management fees, loan interest charges, strata fees, building depreciation, appliance depreciation, repairs and maintenance, legal fees, accounting fees, stationary expenses, insurance costs and the cost of travel to view your property.
What makes things confusing is that a lot of the different property taxes which you need to pay such as land tax and council rates can be deducted. I know that sounds a little inefficient, but who can argue with the wisdom of government bureaucracy?… at least it keeps your accountant in business!
So, there you go. Those are the very broad strokes of Australia Property Tax law. For detailed advice please consult your accountant.