By Tatum West

Investment properties are a popular form of long-term investment in wealth creation, especially for individuals and couples wanting to directly own and control their assets. But the tax implications are quite complex. Not only are there many types of tax to be aware of, there are also different ways in which you can enter property investment that affect the deductions and exemptions available to you.

Here, I’ve put together a guide for those of you thinking about property investment. This is by no means an exhaustive list of everything you need to know, but simply a starting off point that will help you ask the right questions and give you some direction.

Capital Gains Tax and investment properties

CGT for residential properties

Here are some important things to know about CGT and your main residence.

• Your main residence, also known as your primary place of residence (PPR), is exempt from CGT up to two hectares.
• You can only have one main residence at a time, and husband and wife cannot own a main residence each.
• Having said the above, there is a circumstance where you may be building a new primary residence while living in your current primary residence and be able to claim both properties as your main residence for a short window, but neither can be rented out or used to generate any income.
• If you rent out a room of your primary residence, on AirBNB for example, that portion of your house is no longer exempt from CGT.
• There is an Absence Rule which allows you to live away from your main residence for up to six years at a time and still claim that property as your PPR and have it exempt from CGT. But you can’t have another PPR during that time. You can live for multiple periods of up to six years away from your main residence – there’s no limit.
• There is no main residence discount for foreign buyers

Scenario: How do I calculate CGT on my main residence that I have at times rented out?

Bob is selling his main residence that he’s lived in for 20 years. For the first 10 years, he occupied the property, and then he rented it out for the next 10 years. There are two ways to calculate the CGT he must pay. You can either substitute your cost base for the property to be market value at the time it first started generating an income, so you’re only paying CGT from that time onwards. The other way is to calculate full capital gain, and then apportion it for the times when the property is exempt.

CGT for commercial and primary production

Outside of residential and main residence exemption, commercial and primary property are subject to CGT. There are possible exemptions to CGT around these types of property, so get in touch for more details.

CGT for vacant land

Vacant land is subject to CGT.

Who can get CGT discounts?

Individuals can receive a CGT discount for holding property longer than 12 months. Companies don’t have access to this discount. Trusts are eligible, but it all depends on who that capital gain is distributed to. If it’s distributed to individuals, then they would receive the discount. If it’s distributed to an SMSF, it would receive a third of the discount. Once again, companies are not eligible.

GST and investment properties

In terms of renting, residential properties are not subject to GST, but commercial and primary production properties are. The same goes for the selling of those properties.

The only exception is the sale of a new residential property, which is subject to GST.

Tax implication for new vs existing properties

Claiming a tax deduction on the depreciation of assets (fixtures and fittings) is only available to those who have bought a home new or had it built it themselves. Claiming depreciation on capital works (depreciation on the structure itself) is available to those who own new or existing properties, but you generally have less of a claim on older houses versus new ones.

Tax on Rental Income

What is considered rental income?

Rental income is anything you earn from renting out a property or part of a property. It could be a whole house, or it could be a room in your primary residence that you have on AirBNB.

If you rent out a commercial property to a business you own, you would declare the rent as income and the business would declare that rent as an expense.

Scenario: I’m renting out an investment property to my daughter for 50% of market value. Can I still claim as normal?

If you have an investment property that you are renting out for less than market value – say, 50% – then you can only claim 50% of the amount of the deductions you’re eligible for.

What is the difference between ongoing and capital expenses?

Regarding investment properties, ongoing expenses include costs such as rates, maintenance, insurance, pest control, depreciation on capital improvements, repairs, cleaning, agent management fees, etc. All of these can be claimed as you go, whereas you can only claim a portion of your capital expenses, which cover things like structural improvements, alterations and extensions to the property.

Sometimes, it’s not exactly straightforward figuring out what is a maintenance cost and what is a capital expense. For instance, if you repaint a kitchen, are you simply refreshing that space or is it part of a larger kitchen renovation? These sorts of scenarios are worth a chat with your financial planner.

Negative gearing in a nutshell

Negative gearing occurs when your expenses relating to an investment property outweigh the income from that property, and you then offset that loss against other incomes. For instance, Sally earns $30,000 in a year from her investment property, but has $40,000 in expenses during that same time, creating a loss of $10,000. Sally can use that $10,000 to reduce her taxable income. So, if Sally’s average tax rate is 30%, she would receive $3,000 back.

Can I deduct interest paid on loans?

The interest you pay on a loan is deductible depending on what that loan is used for. For instance, if you redraw on a loan that was used to purchase an investment property, the purpose of that loan must have something to do with that property in order for the interest to be deductible.
If you use that loan, or a part of the loan, to pay for a holiday, you need to deduct that amount from what you can claim.

Land Tax and investment properties

You don’t pay land tax on:

• your main residence
• rooming houses
• charitable institutions
• primary production land (see below)

You do pay land tax on:

• investment properties
• commercial properties
• holiday homes
• vacant land

Land tax and primary production land (PPL)

Typically, primary production land, such as that used for grazing or agriculture, is exempt from land tax. Where it gets a little complicated is when this land also has a main residence on it, or property that is rented out for income, such as an AirBnB.

It all comes down to this question: what is the main purpose of the property? Is it for living on? Is it for grazing or agriculture? Is it for AirBNB? It doesn’t necessarily come down to which aspect generates more income; it’s about the scale, the amount of investment that’s gone into the respective parts of the land.

As you can tell, this topic warrants a discussion with your financial planner if it’s applicable to you.

Once you’re over the threshold, land tax is a fixed percentage. It’s a state based tax, so consult your financial planner in the state where you live for more information.

Individual Ownership vs Trusts/Companies/SMSFs

In terms of owning an investment property as an individual or in a structure like a trust, there are differences in tax rates, CGT consequences, discounts, exemptions, land tax, asset protection and many other aspects. This is quite a complex area with many different scenarios, each with their own advantages and disadvantages. Some relevant questions you might want to ask yourself are:

• What do you want to use the property for?
• What kind of return are you expecting?
• Where can you get funding for the purchase of the property?

It’s best you speak with your financial planner regarding your particular situation for the most relevant information.

Thinking of property investment? Have a chat with your financial advisor

As you can see, property investment and its tax implications is quite complex. It’s pivotal that you speak with your financial and taxation advisors about your unique situation to get the most relevant information. At People and Partners, we’ve helped many people break into the property investment world in a way best suited to them, empowering them with information and guidance. If you’re planning to make your dream of property investment a reality, get in touch with our experienced team today.