Accountants’ biggest obsession.. with the smallest refunds.
Funny how most people are busy thinking about how to get a few dollars extra on a measly refund. Meanwhile, in the background, the government has mechanisms set up. Mechanisms that will take hundreds of thousands of dollars away from them and their children later too. Yet, most accountants instead focus on cars and shirts “with logos” on them. What can I say – we live in a crazy world that does not make sense.
Let’s try to turn that around. Make It Make Sense Again? (My own “MIMSA” cap)
How about the BIG refunds?
Here are a few ways you can claw back hundreds of thousands of dollars back from the gov. Legitimately. In fact, the ATO will help you do just that. I will tell you later why.
Many try to pay their tax with a smile.. I heard the ATO only takes cash though. So what to use?
Some have even tried cancelling their subscription to the ATO. They just can’t get off the mailing list!
Well, the second biggest one to try? that no accountant uses? It’s simply this.
Brainstorm a proper tax plan with a property tax specialist. There are not many of them around. Because of that most just go their regular accountant looking for tips.
This is what they don’t know. 99.9% are really good at one thing. They also get paid to a lot of $$ to do that one thing. As a result they only focus on that. What is the one thing?
When it comes to property tax advice, the outlook is not great. Out of the 200 new clients we surveyed, not one of them had a property tax plan in place. Not a single one. We are not talking 50%, or even 10%. We are talking zero percent got the right amount of advice.
It is not just about setting up an SMSF or a trust etc. Without the right plan, that sort of advice will always backfire. E.g. just yesterday I spoked with someone that was going to pay close $1M in taxes over his lifetime. Even if you only pay $30k p.a., if you work for 33 years, you get there – and most of all will have done that easily.
And most don’t have a tax plan.
It’s not about “dodgying” things up or avoiding taxes.
How come Government is just giving away money then?
Here’s where it gets interesting. The biggest baddest property tax strategy that can make you wealthy, faster than you probably think possible?
The truth of the matter is that there is a housing crisis and other dramatic issues in Australia. As a result, the government has established certain policies. If you align yourself with the same ones and build your tax plan on supporting those policies, well, my friend, they reward you. Big time.
If you don’t they punish you. Harshly.
Here are a few more things to consider. (Remember these are just building blocks i.e. without the right strategy they actually lose you money)
Have you heard of the SMSF Accountant?
Self-Managed Superannuation Funds (SMSFs) are gaining traction among Australians seeking greater autonomy over their retirement funds. Within SMSFs, one notable investment avenue is property investment. This option enables individuals to use their superannuation funds to invest in real estate.
Nonetheless, as with any investment approach, it’s crucial to weigh the advantages and disadvantages before embarking on property investment via an SMSF.
Traditionally, property investment has been considered a reliable choice, offering prospects for long-term capital appreciation and rental income. When individuals use a Self-Managed Superannuation Fund (SMSF), they have the opportunity to invest their retirement savings in property, potentially capitalizing on the increase in property values.
(Obviously all this advice is just general in nature. Because we don’t know your specific circumstances. So we are mostly writing to tell people that these structures exist. But we are not making any claims that they will be good or bad for you. Again, because we don’t know your (the reader’s) specific financial situation. You can change that by giving us a call and we can tailor something really cool for you. But until you do that, we strongly recommend not trying to implement anything you read anywhere (including here) online)
Incorporating property into your Self-Managed Superannuation Fund (SMSF) provides a chance to diversify your investment portfolio, extending beyond conventional assets such as stocks and bonds. This addition of property to your investment portfolio can help distribute risk more evenly and potentially lead to steadier returns over the long term.
SMSF Tax Deductions
Self-Managed Superannuation Funds (SMSFs) enjoy specific tax benefits. The rental income generated from property within an SMSF is typically taxed at a concessional rate of 15% during its accumulation phase. This income may even become tax-free when the SMSF transitions to the pension phase. Furthermore, capital gains on the property are subject to a reduced tax rate of 10% if the property is held for more than 12 months.
Choosing to invest in property via a Self-Managed Superannuation Fund (SMSF) grants you considerable control over your investment choices. It enables you to select the precise property in which to invest, negotiate terms, and directly oversee the property management. This degree of control affords you the flexibility to shape your investment strategy according to your personal preferences and financial goals.
Investing in property using a Self-Managed Superannuation Fund (SMSF) can incur significant expenses. The costs related to acquiring property include stamp duty, legal fees, and property management fees. Moreover, property investments are typically illiquid, implying that converting these assets into cash swiftly, if required, can be a complex process.
While investing in property can offer diversification advantages, allocating a substantial part of your retirement savings to one asset class also involves risks. Should the property market face a decline, or if the specific property you’ve invested in doesn’t perform as expected, it could adversely affect your total retirement savings.
Overseeing a Self-Managed Superannuation Fund (SMSF) necessitates adherence to a range of rules and regulations established by the Australian Taxation Office (ATO). These include stringent guidelines on related-party transactions, the use of the property, and borrowing arrangements. Non-compliance with these directives can lead to penalties or the forfeiture of tax benefits.
But there is risk too?
Choosing to invest in property via a Self-Managed Superannuation Fund (SMSF) results in a significant part of your retirement funds being invested in the property market. Property values are subject to fluctuation, and economic factors can affect the rental income. Such a concentration of risk might not be ideal for everyone, particularly for those who favor a more diversified approach to investment
It’s essential to seek advice from a financial advisor or a specialist in Self-Managed Superannuation Funds (SMSFs) who can navigate you through the intricacies of property investment within an SMSF. They can assist in comprehending the associated risks, ensuring adherence to relevant regulations, and determining how property investment fits into your broader retirement planning strategy.
Before investing in property through your Self-Managed Superannuation Fund (SMSF), evaluate its cash flow and ability to repay loans. Take into account various factors, including loan repayments, recurring property-related expenses, and possible vacancy periods. It’s vital to make sure that your SMSF has enough financial resources to manage these costs, without adversely impacting your retirement savings.
How about the notorious discretionary trusts? This one is truly despised by the ATO.
Acquiring properties via a family trust is growing in popularity as an investment tactic, primarily due to its potential tax advantages and asset safety.
Clients often consider family trusts as a viable option when they consult with us for effective investment structures.
From our perspective, it’s essential to have a thorough grasp of the function of a family trust in property investment.
Before delving into the methods of structuring investment ownership, there are several critical factors to take into account.
Therefore, if you’re contemplating a family trust as the means to buy your next property, it’s important to be well-informed about what this entails.
The Australian Tax Office (ATO) defines a trust as a legal relationship where the trustee holds assets for the benefit of the trust’s beneficiaries.
Simply put, the trustee manages the trust’s assets for those who are intended to benefit from them.
Asset Protection for trusts
Unlike individuals or companies, which are recognized as natural or legal entities capable of suing or being sued, a trust does not have this legal standing. Instead, it exists solely as a relationship between the trustee, the legal owner of the assets, and the beneficiaries, the ones who benefit from them.
Assets within a trust are held under the trustee’s name.
Opting for a family trust as an ownership structure for an investment property means you’ll be the beneficial owner, not the legal owner.
In this arrangement, the trustee, who could be an individual or a corporate entity, holds the title to the property on your behalf.
Investors often use a family trust to buy property because it establishes a clear separation between the asset’s legal owner and the beneficiaries who will gain from it.
So, what are the benefits of this separation?
The main reasons investors choose this structure are for:
Asset protection: safeguarding the property from personal financial risks.
Tax planning: potentially optimizing tax liabilities.
Estate planning: ensuring a smooth transfer of assets upon the investor’s passing.
When an investment property is held in the name of the trustee rather than in your personal name, it offers protection from creditors in case a beneficiary faces bankruptcy or legal action. This arrangement means that creditors are unable to claim the property to settle any debts owed by the beneficiaries.
However, it’s important to note that this structure should not be used with the intent to unfairly defeat the rights of creditors.
Tax Benefits of trusts
The trustee of a family trust has the ability to allocate the income generated from an investment property according to their discretion. This means they can distribute the income among the beneficiaries in a tax-efficient manner each fiscal year.
For instance, if some beneficiaries are in a lower tax bracket, the trustee can allocate a larger portion of the income to them, thereby reducing the overall tax liability.
By strategically distributing the income, the trustee can effectively lower the tax burden for those who benefit from the property owned by the family trust.
Additionally, if the trust retains the investment property for over 12 months, beneficiaries can benefit from a 50% discount on capital gains tax.
The deed of a family trust explicitly outlines the operational procedures of the trust and defines the roles of each party involved in it.
One key aspect of a family trust is that control can be transferred without triggering capital gains tax or stamp duty.
This feature is designed to prevent legal disputes and streamline the process of transferring control.
When deliberating on the structure of property investments in trusts, there are several key considerations to factor in:
Your investment choices should align with strategies that support your desired lifestyle post-retirement. It’s crucial to determine which structures will best facilitate this goal.
Family Succession: A primary function of family trusts is to manage family assets and facilitate the transfer of wealth to children or other family members. It’s important to structure your family trust in a way that ensures a smooth asset transfer, without burdening your heirs with excessive taxes, stamp duties, or other trust-related costs.
Cost: Weigh the benefits against the expenses involved in establishing and maintaining a family trust. The process can be expensive, so it’s essential to evaluate whether the potential advantages justify the financial investment.
Every investment strategy, including using a family trust for property investment, carries its own set of risks and downsides alongside its benefits.
As an investor, it’s crucial to seek advice from a tax professional, such as those specializing in property tax, to determine if the benefits outweigh the risks in relation to your unique financial situation.
Before proceeding with a family trust for purchasing an investment property, consider these potential risks:
Negative Gearing issues:
If the income from your investment property is insufficient to meet its expenses, the property becomes negatively geared, meaning it operates at a loss.
Typically, a significant advantage of a negatively geared investment property is the ability to offset this loss against other forms of income, such as your salary. This means you can deduct the loss from your assessable income, which reduces your overall taxable income.
However, when you purchase an investment property through a family trust, these losses cannot be deducted from your personal taxable income.
Instead, the loss remains confined within the trust until it accumulates sufficient income to offset the loss.
In certain states, holding properties within a family trust could mean that your property is not eligible for the tax-free land threshold.
For instance, in New South Wales and Victoria, properties held in a family trust do not qualify for the land tax-free threshold. This can result in a higher land tax liability. If you already own property under your personal name and are subject to land tax, it might be advantageous to contemplate a trust structure for any subsequent property investments.
Tax-wise, should you transfer assets to a trust?
If you’re thinking about transferring property you already own into a family trust due to its potential benefits, it’s important to be aware of the financial implications of such a transfer.
Firstly, the process of transferring the property into the trust will incur stamp duty, which the family trust will be responsible for paying.
Additionally, you should consider that as the individual transferring the property to the family trust, you may be liable to pay capital gains tax on this transaction.
A family trust is an arrangement where a person or a legal entity, such as a company, holds assets for the benefit of others, known as beneficiaries.
Investing in property through a family trust offers several advantages, including efficient tax planning and robust asset protection.
However, there are important factors to consider. For instance, losses from the investment property cannot be deducted from your taxable income in a trust structure. If the property is negatively geared, meaning its expenses exceed its income, the loss remains confined within the trust.
This article provides a general perspective on buying investment property through a family trust. However, the suitability of family trusts varies widely based on individual circumstances.
The specific benefits and risks depend on your unique situation. To assess if a family trust is the right choice for you, it’s advisable to seek guidance from a tax specialist or financial advisor.
We will be updating this resource with more information on Unit Trusts, CGT basics, Pty Ltd structures for advanced property specialists, CGT event basics and other interesting benefits like the 6 year rule.
Or even better.