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tax benefits through negative gearing The Quinn Group

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					                                                                                                                                                                                                                                                                        Tax | negative gearing



                                                                                                                              deductions any expenses incurred on an
                                                                                                                              asset not producing income.                   
                                                                                                                                                                                How does it work?
                                                                                                                                 In addition to the tax breaks, the


     How to                                                                                                                   investment continues to make capital          Using an investment property as an example, a simple application
                                                                                                                              gains during this time.                       of negative gearing can be demonstrated as follows:
                                                                                                                                                                            Sarah purchases a house as an investment for $400,000. She has
                                                                                                                              What expenses can you claim?



     max out your
                                                                                                                                                                            borrowed the entire amount at 10% pa interest, making the annual
                                                                                                                              In order to maximise your total tax-
                                                                                                                                                                            interest repayments a total of $40,000.
                                                                                                                              deductible amount at the end of the
                                                                                                                              financial year for a property that’s
                                                                                                                                                                              If the house is rented out for $400 a week, this gives Sarah an annual
                                                                                                                              negatively geared, there’s a range of         rental income of $20,800. The cost of the rates, home maintenance,
                                                                                                                                                                            insurance, agent’s fees and so on total $5,000 a year. She can also



     tax benefits through
                                                                                                                              expenses that can be included in the
                                                                                                                              total annual cost of the property for         depreciate the property at a rate of $5,000 per year.
                                                                                                                              deduction purposes.
                                                                                                                                                                             Mortgage interest .................................................................. $40,000
                                                                                                                                                                             Rates, maintenance, etc ...........................................................$5,000
                                                                                                                              1    Prepaid expenses




     negative gearing
                                                                                                                                   It’s possible to claim any prepaid        Depreciation ...............................................................................$5,000
                                                                                                                              expenses that are related to your              Total expenses................................................................. $50,000
                                                                                                                              income-producing asset.
                                                                                                                                                                             Rental income ................................................................. $20,800
                                                                                                                                 If the payment covers a period of 12
                                                                                                                              months or less and the period ends on         Total loss ......................................................................................$29,200
                                                                                                                              or before 30 June, the expense can be
     Negative gearing has long been used by spruikers to lure                       There are two important things            deducted immediately for that income            The shortfall of $29,200 ($50,000 minus $20,800) is tax deductible from
                                                                                 to note when considering whether             year. But, if the repayment is for more       Sarah’s gross income at the end of the financial year when assessing her
     unsuspecting investors wanting to make a quick buck in                      negative gearing is appropriate for          than a 12-month period and more than          taxable income. This results in a considerable tax saving for Sarah while she
     property. But while the strategy can offer substantial tax                  your situation.                              $1,000, it may need to be spread over         holds the investment.
     relief, it can also result in massive losses. Michael Quinn,                   First, you must have other forms          two years or more.
                                                                                 of assessable income in order for this          Examples of expenses that can              Sarah’s tax refund
     lawyer, accountant and director of The Quinn Group,                         to work. Otherwise, you simply incur         be prepaid include costs associated           30c tax threshold – $8,760; 40c tax threshold – $11,680;
                                                                                                                                                                            45c tax threshold – $13,140
     shows how to make it work for you                                           a loss as there is no income to offset       with preparation of leases, payment
                                                                                 it against.                                  of interest, insurance, rates and body
                                                                                    And secondly, the investment is           corporate fees.                                 If you repay the loan early, and
                                                                                                                                                                                                                                        4    Legal expenses


                                    W
                                                hile negative gearing is most    purchased with one of two possible                                                        in less than five years, you can claim                            There are a number of legal
                                                commonly associated with
                                                property investment, it can
                                    also apply to the investment of other
                                                                                 outcomes in mind.
                                                                                    Either there is the expectation that
                                                                                 current losses are going to turn into
                                                                                                                              2    Borrowing expenses
                                                                                                                                   These are expenses directly
                                                                                                                              incurred in taking out a loan for
                                                                                                                                                                           a deduction for the balance of the
                                                                                                                                                                           borrowing expenses, in the year of
                                                                                                                                                                           final repayment.
                                                                                                                                                                                                                                        expenses which are deductible under
                                                                                                                                                                                                                                        various sections of the Income Tax
                                                                                                                                                                                                                                        Assessment Act.
                                    assets such as shares or bonds.              profit over time, or it is sold for a        your property. They can include                 If you obtained the loan                                     The most important of these are
                                       The term ‘geared’ refers to any           capital gain which is big enough in          establishment fees, valuation fees,          part-way through the income                                  associated with the preparation of
                                    investment that is purchased with the        total to cover all past losses incurred.     title search fees, costs of preparing        year, the deduction for the first                            leases, the registration of patents,
                                    assistance of borrowed funds. Thus a            A good investment is, above all,                                                                                                                    designs and copyrights, and debt
                                    ‘negatively geared’ investment is one        designed to create a profit.                                                                                                                           collection fees. This can also include
                                    that is purchased with the assistance of        While negative gearing initially             The fact that, historically, property prices                                                           the costs involved in evicting a non-
                                    borrowed funds and, after deducting          provides tax breaks, both the ongoing                                                                                                                  paying tenant.
                                    other expenses, the net rental income        profit and capital gains options                continue to rise over time is equally                                                                     Most legal expenses are of a
                                    is less than the interest paid on the        eventually have to generate a profit                                                                                                                   capital nature and are, therefore,
                                    borrowings in any income year.               and – as a result – a taxable income            beneficial to the investor, as it’s likely that                                                        not deductible. These include costs
                                       At first glance, it is understandable     amount, to be effective.                                                                                                                               of processes such as purchasing or
                                    that you might think to yourself: “Why          So, you need to be confident that         the investment will generate a capital gain                                                               selling your property, resisting land
                                    would anyone buy an investment that          one of these two options is likely,                                                                                                                    resumption and defending your title to
                                    is losing money?”                            based on your investment choice.             and filing mortgage documents, stamp          year is apportioned according to the                        the property.
                                       But the benefit of this situation            If, upon assessment, these outcomes       duty charged on registration of the          number of days in the year you had                              For capital gains tax purposes,
                                    is that, where negative gearing is           are unlikely, negative gearing is            mortgage and mortgage insurance              the loan.                                                    however, non-deductible legal
                                    concerned, the entire shortfall amount       probably not a wise option and you           (where applicable). Interest costs do                                                                     expenses may form part of the
                                    can be deducted against the investor’s
                                    other assessable income. The fact that,
                                    historically, property prices continue
                                                                                 would need to assess whether the
                                                                                 investment itself is, in fact, a good one.
                                                                                    It’s also not possible to negatively
                                                                                                                              not qualify as borrowing expenses.
                                                                                                                                 If the total cost of these items is
                                                                                                                              over $100, the deduction is spread
                                                                                                                                                                           3   Mortgage discharge expenses
                                                                                                                                                                               Provided that the mortgage was
                                                                                                                                                                           used as security for the repayment of
                                                                                                                                                                                                                                        cost base or reduced cost base of
                                                                                                                                                                                                                                        your property.

                                    to rise over time is equally beneficial to
                                    the investor as, in the long term, it is
                                    likely that the investment will generate
                                                                                 gear an investment that does not
                                                                                 produce an income.
                                                                                    Under sec 51 of the Income Tax
                                                                                                                              over five years or the term of the loan,
                                                                                                                              whichever is the lesser. If the total cost
                                                                                                                              is $100 or less, it is fully deductible in
                                                                                                                                                                           money borrowed to produce assessable
                                                                                                                                                                           income, the costs of discharging the
                                                                                                                                                                           mortgage are deductible in the year
                                                                                                                                                                                                                                        5   Deduction for decline in value
                                                                                                                                                                                                                                            of depreciating assets
                                                                                                                                                                                                                                        From 1 July 2001, the uniform capital
                                    a capital gain.                              Assessment Act 1936, you cannot claim as     the first year.                              they are incurred.                                           allowance system (UCA) applies to

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Tax | negative gearing



                                                                                            for expenses such as clearing land prior
                                                                                            to the construction, landscaping or the
                                                                                            cost of the land that the rental property
                                                                                            is built on, as the value of the land is
                                                                                            not depreciated over time.

                                                                                            Yes! Negatively gearing your
                                                                                            home is possible
                                                                                            This is done by establishing a
                                                                                            discretionary family trust with a shelf
                                                                                            company to act as trustee. You and your
                                                                                            family then rent the house at a proper
                                                                                            market rental on a long-term lease.
                                                                                               Be aware, however, that if the
                                                                                            home is owned by a trust, any capital
                                                                                            gains exemptions may be lost and
                                                                                            you also may be liable to pay land
                                                                                            tax. But your lease on the house will
         Assets claimable as depreciable include                                            be valued for capital gains tax and,
                                                                                            meanwhile, you can claim any interest
         airconditioning units, electronic security                                         payable, insurance, rates, repairs and
                                                                                            depreciation as tax deductions.
         systems, rainwater tanks, TVs, antennas,                                              Once you have established negative
                                                                                            gearing on the property you can, if
     roller-door motors and washing machines                                                you wish, provide your employer with
                                                                                            a PAYG Variation Certificate. This
     most depreciating assets, including        using a diminishing value rate of           allows your employer to give you
     those acquired before that date.           37.5%. Low-cost assets that are added       reduced PAYG deductions, providing
     The UCA consolidates a range of            to the pool are depreciated at half the     for the losses that are being incurred
     former capital allowance provisions,       rate – 18.75% – for the year in which       on your property.
     including those relating to plant and      they enter the pool.
     equipment by providing a set of general                                                Seek advice
     rules that applies across a variety of
     depreciating assets and certain other
     capital expenditure.
                                                7    Capital works deduction
                                                     You may be eligible to claim
                                                a deduction for the construction
                                                                                            Negative gearing can be a beneficial
                                                                                            investment tool for the right person if
                                                                                            it is applied correctly, and the necessary
        You can calculate deductions for        expenditure related to these expenses.      research and projections are carried
     your depreciating assets’ decline in       Known as capital works deductions,          out prior to execution. Without sound
     value using these new rules, and           these are usually spread over a period      professional advice there are many
     then deduct an amount equal to the         of either 25 or 40 years.                   hidden traps that could see a potential
     decline in value for an income year of a      It’s necessary to point out that total   money-making venture turn into a
     depreciating asset that you held at any    capital works deductions must not be        financial-loss nightmare.
     time during that year.                     greater than the total construction             This is why, if you are considering
        Examples of assets claimable as         expenditure, and no deduction can           negatively gearing an investment
     depreciable items include electronic       be claimed until the construction is        property, it’s important that you seek
     security systems, airconditioning units,   complete. Also, deductions can only be      the advice of professional accountants
     rainwater tanks, roller-door motors,       claimed for as long as the property is      and financial planners as they will be
     television antennas, television sets and   being rented, or is available for rent.     able to assist you in making the right
     washing machines.                             Deductions for capital expenditure       decisions for your situation.
                                                can be applied to a variety of works,

     6    Low-value pooling
          You can allocate both low-cost
     assets and low-value assets to a low-
                                                for example, a building or extension –
                                                adding a pergola, a garage or another
                                                room – or alterations like demolishing
                                                                                            Michael Quinn, director of The Quinn
                                                                                            Group, is an experienced
                                                                                            lawyer, accountant and
     value pool. Low-cost assets are all        or putting up an internal wall, or          educator. For further
     those that cost less than $1,000 not       structural improvements such as a new       information or assistance,
     inclusive of GST and low-value assets      fence or a retaining wall.                  contact Michael and
     are those that have declined in value         Costs that are admissible in the         the team of legal and
     under the diminishing value method         expenditure total can include fees for      accounting professionals
     to less than $1,000. The deduction for     engineers and architects, and payments      at The Quinn Group on
     the decline in value of depreciating       to tradespeople like bricklayers or         1300 QUINNS or visit
     assets in a low-value pool is calculated   carpenters. However, you cannot claim       www.quinns.com.au

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