(In this article Accounting expert Noel May of Noel May & Associates shares his knowledge on why investors often get confused when it comes to tax laws and structuring their investments the right way – or the best way for their situation.)
I have seen the horror stories first hand.
I have had clients transfer to me for tax advice and at the first meeting they will proudly tell me about their years of work in developing up their property portfolio, how they researched localities, monitored and targeted properties, went to dozens of inspections, fought hard in negotiations, juggled the finances and mortgages and often scrimped, saved and done without, just to get the finances in line.
They have worked hard and are justifiably proud of their efforts. Then you delve a little deeper and it could make to cry when you find out that most of their hard work will be wasted when they face a potentially huge tax bill or when you see them with under-utilised losses. Without exaggeration I had one potential client come in the other day with 8 properties, all owned in a company!! – (and you’ll find out over the next few editions why that is an enormous No-No).
Often, poorly researched decisions made at the time of purchase simply cannot be economically reversed. You just have to pay. It’s heartbreaking.
Why is it so confusing
Current tax law in Australia sees income tax being levied on profits made from renting out property and capital gains tax being charged on profits made from the disposal of a property.
Unfortunately, not always are profits made and sometimes losses are incurred, either while renting out or on the actual disposal of the underlying property.
Under the tax law, different rates of tax apply to each of the entities mentioned and different treatments exist for each when losses are incurred. No wonder people get confused.
Individual taxpayers enjoy a system which has tiered rates of tax ranging from zero to 46.5% depending upon the level of income you earn. Profits made from rental properties owned by individuals can therefore be taxed at 5 different tax rates. Losses incurred may be able to be offset against your wages and salary income, but in the wrong structure the loss is quarantined to that entity leaving you paying tax on one hand while sitting with an unusable loss on the other.
Capital Gains may be taxable in full, or may be discounted by 50% in some circumstances, 33.3% or 75% in other circumstances, or not taxed at all due to a number of different concessions.
And you wonder why people get it wrong.