A window of opportunity

PORTFOLIO POINT: With the financial year-end fast approaching, it’s time for property investors to make sure their tax affairs are in order.

Most property investors regard tax time as a chore, and are very happy to delegate their responsibilities to an accountant or tax adviser. While engaging professionals is definitely a good idea, it can also pay dividends to be more attentive to how the timing of investment actions can impact the size and due date of tax liabilities.

More specifically, with the end of the financial year just over four weeks away, property investors should consider what steps are best taken before July 1, and what actions should be deferred until after June 30.

Before July 1

If it is apparent that your investment property will require some maintenance work in the next 12 months, consider activating the plan before July 1. Not only are tradespeople likely to be less busy now than in spring or summer, but any work done before July 1 can be claimed in this year’s tax return. If you delay the repairs until July 1, you’ll have to wait another 12 months before claiming them on tax.

It is important to understand the difference between maintenance and improvements. Rick Henderson, principal of ProSolution Tax Advisory, agrees: “Replacing a door with a similar door is maintenance. Adding an extension is an improvement. Improvements are not deductible in that financial year. Rather, the expense is added to the cost base and the financial benefit is received when the property is sold.”

For investors who have borrowings against a property, pre-payment of some or all of their 2012/13 interest rate bill before July 1 will bring forward their tax deduction. Henderson points out that the tax rules will only allow fixed loans to be prepaid. “The ATO disallows prepayment of variable loans as it is too difficult to determine the interest payable over the next 12 months given the interest rate is subject to change at any time.”

Henderson advises that this hurdle can be overcome by converting a variable loan into a fixed-rate version. “If you are looking at setting up a fixed loan for this purpose, there are some good fixed interest rates available at the moment.”

Investors who have recently purchased a property should ensure they engage a quantity surveyor to prepare a depreciation schedule for their tax return to maximise their legal deductions. Other investment property owners should commission a new depreciation schedule every three to five years.

After June 30

Those who are considering selling an investment property may benefit from waiting until July 1, according to Johan Vloedmans, director at chartered accountants Chamber & Partners. “The 1% Flood Levy on higher incomes ends June 30. So many people who sell from July 1 will have a lower effective marginal tax rate as a result and therefore a lower capital gains tax bill.”

Another reason for delaying the sale until July 1 is to delay the receipt of the tax bill. According to Henderson, if you sell on June 30 2012, then your capital gains tax bill is payable by May 15 2013. If the sale takes place the next day, then the capital gains tax bill is not payable until May 15 2014, a whole year later.

Henderson points out that taxpayers who don’t engage an agent to look after their tax affairs are required to pay their tax bill nearly six months earlier than those with advisers. “So, if you are likely to have a tax bill for the 2012 tax year, consider using a tax agent so you can defer tax return lodgement and payment dates, if you need to.”

Another consideration for some property investors who are considering buying or disposing of property is land tax. While the rates and thresholds for paying land tax vary from state to state, the onus for paying land tax falls on the owner of the land on a particular date each year. For example, in New South Wales and Victoria, the owner of the land as of midnight on December 31 of each year is responsible for paying the tax. In Western Australia, the key date is June 30.

So in New South Wales and Victoria, the period between the end of the tax year and December 31 can be a sweet spot to sell, at least from a tax perspective, because you defer your capital gains tax to 2014 and avoid paying any more land tax.

Compliance

Of course, property investors need to be mindful of the fact that the Australian Taxation Office is strict about compliance. Henderson alerts taxpayers to the latest intelligence out of the ATO. “For those who invest through trusts, the ATO has announced that it will be focussing on whether distribution minutes have been prepared and signed for the 2012 year by June 30 2012,” he says. “Those found not compliant may be taxed at their highest marginal tax rate. In addition, property investors should note that the ATO has announced that it will increase its scrutiny of property investor tax returns for the 2011/12 year.”

To this end, investors should be vigilant about collecting maintenance receipts, rental and banking statements. Vloedmans reminds property investors that rental income is accounted for on a cash basis. “When doing your 2011/12 tax return, only count the rent that was due or received before 30 June 2012,” says Vloedmans.” Rent received from July 1 onwards counts towards your 2012/13 tax returns.”

A word of warning when it comes to tax affairs: it is critical to distinguish between tax compliance and maximising investment success. I always tell prospective property investors to never make saving tax the primary reason for investing in property, or anything else for that matter. A tax-specific focus can make investors lose sight of the bigger picture, which is to attain financial independence, not tax deductions! No one ever became wealthy through tax deductions alone.

A good example of this is the investor who opts for a brand new property instead of an established dwelling, simply because they can make a large claim for depreciation. They lose sight of the fact that, just like a new car off the showroom floor, the property is not holding its value, let alone growing in excess of the purchase price.

That said, every property investor should be mindful of tax issues, as it is all too easy to fall foul of the ATO or pay more tax than one needs to. So now is the time to get your proverbial (and actual!) house in order. And please, engage a professional tax adviser to help you. For that matter, their fees are tax deductible too.

Property Q&A

This week:

• The best suburbs for Perth apartments.
• I’ve saved $250,000 – what should I buy?
• Should I ask my tenants to leave before I sell my property?
• Buying a property in winter versus spring.

Perth apartments

Which suburbs would be worth considering in Perth for apartment investing?

Notwithstanding the powerhouse performance of the Western Australian economy in recent times, Perth is still a relatively small city population-wise compared to Sydney and Melbourne, and a more volatile market given its over-reliance on the mining sector. Consequently, the outer limit of the prime investment area in Perth is only around 7 or 8 kilometres from the centre, compared to 12 kilometres or so in these larger capitals.

Suburbs in the inner west and southwest are particularly appealing due to their proximity to the city and the beach. Consider older style apartments in suburbs such as Crawley and Nedlands, Shenton Park, Subiaco, Claremont and South Perth.

Buying in Northcote

My daughter, a reasonably well paid professional in her 30s, is renting at present in Northcote with a view to eventually purchasing a house in this area, or at least on the northern side of Melbourne close to transport and the city. Should she buy a two-bedroom terrace type house with a small frontage and yard or a two-bedroom apartment in a smaller apartment block? Where will she achieve best value for money and longer term capital gain? She has about $250,000 saved; how much should she borrow and what price bracket should she look at?

The first step is to seek the advice of a bank, accountant or well-regarded mortgage broker to ascertain your daughter’s borrowing capacity as ultimately this figure will determine whether a house or an apartment is the better option. It will be wise for her to be conservative when it comes to borrowing and have substantial equity in any property she buys – with $250,000 saved that should be relatively easy.

On a fundamental basis, there is no pre-determined pecking order between apartments and houses. There are well-performing houses and poor-performing houses, and likewise with apartments. It is all about choosing the right type of property in the right location. The styles you describe in your question both sound suitable; make sure you stick with quiet, well-regarded streets close to amenities.

Ultimately, what your daughter buys will depend on her budget and her accommodation preferences. In the current market, a typical two-bedroom house in Northcote and surrounds costs around $700,000, whilst a good two-bedroom apartment costs around $500-550,000. Given that she has saved a very considerable sum, her borrowing capacity will be determined by her income.

Your daughter should also be aware that if she wants to combine lifestyle with investment performance, some compromises may be necessary, depending on what she sees as the key purpose of the purchase.

Selling an investment property

I’m looking to sell my investment property in Melbourne, which is currently tenanted. Should I give notice to the tenants to vacate and wait until they have moved on before selling?

There are two matters to consider: how well is the tenant presenting the property and is there a lease in place?

Regardless of how the tenant is presenting the property, you cannot offer the property for sale with vacant possession if there is a lease in place. To do this, the lease must have expired and have reverted to a monthly tenancy. If this is the case, you can give the tenant 60 days’ notice to vacate.
Assuming the status of the lease isn’t an issue, is it a wise strategy to ask the tenant to vacate? If the property is well presented by the tenant and they are likely to be co-operative during the selling period, it would be better to have them stay on. If you suspect the tenant’s upkeep of the property will detract from the appeal of the dwelling, ask them to vacate, but keep in mind costs to hire furniture or spruce the property up for sale will be incurred.

Market rebound

You advise that the market is looking up. Given that we’re heading into winter when activity in the property market slows, should I buy now or wait until spring?

Astute buying can take place at any time of the year, provided you understand how the market operates in terms of supply and demand, so keep your eyes peeled, even during winter, in case a property that meets key investment criteria becomes available.

In general, however, markets which are in full supply favour buyers, both in terms of choice and reduced price pressure. Supply often builds during spring, and buyers can find October, November and early December a time for happy hunting.

Monique Sasson Wakelin is a director of Wakelin Property Advisory, an independent firm specialising in acquiring residential property for investors. Monique can be found on Twitter: @WakelinProperty.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Monique? Send an email to monique@eurekareport.com.au