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Tax changes for investors: What negative gearing means

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Joe Hockey

YOU buy a house to rent out as a way to make money.

But the cost of maintenance and the interest you’re paying on a home loan is more than the rent you’re getting paid, so you are out of pocket.

Joe Hockey

Australian Treasurer Joe Hockey at the launch of the National Prevalence Survey of Age Discrimination in the Workplace report in Sydney, Wednesday, April 23, 2015.

The Tax Office allows people in this situation to claim the loss as a tax deduction. But Shadow Treasurer Chris Bowen has indicated a Labor government would consider cutting back on the concession.

Economic experts differ in their thoughts about proposed changes.

Queensland University of Technology property economics expert Professor Chris Eves did not believe the situation should change.

He said negative gearing acted as an incentive for investors to enter the property market.

Without that incentive, he said there would be a massive impact on the economy. There would be less incentive to build houses and the government would have to provide more affordable social housing for renters.

Prof Eves said savings an investor made through the deductions were not large.

“For it to be a substantial amount you might have to own 11 or 12 houses before you get to a point where there is no tax paid at all,” he said.

“But for most mums and dads who own a second house that they negatively gear, it’s not as if it’s a fortune that is coming back.”

But Griffith University’s business school economics professor Fabrizio Carmignani was in favour of changing negative gearing.

“I do believe the budgetary cost is huge,” he said. “I do believe with this money we could do more in terms of sustaining lower income families and making housing affordable for younger generations.”

Claiming a tax deduction for negatively geared investments has been part of the tax system for decades.

The Hawke government abolished it in 1985 as it was believed it was costing the government $175 million.

Rental prices increased in Perth and Sydney. It is debated whether abolishing negative gearing deductions caused this. They were re-instated in 1987.

Mr Bowen did not want to disadvantage investors who made decisions under current rules nor reduce housing supply. But it was responsible for Labor to consider how to tackle the economy.

Treasurer Joe Hockey said taking away negative gearing would have flow-on consequences for people who rent homes. – APN NEWSDESK

What is negative gearing?

  • It means that the interest on a home loan and expenses being paid on a house (such as maintenance) are more than the income made from rent. The homeowner is making a loss. The “negative” is the loss and the “gearing” means there is a loan involved
  • When this occurs, the owner can claim a tax deduction.
  • When they do a tax return, the owner can claim a deduction for the full amount of rental expenses (such as repairs on the house etc) against their total income (including wages and rent from the property).

Here is an example:

  • John owns a house and gets $50,000 in rent from it each year.
  • Keeping the house in shape and the interest paid on the mortgage costs a total $60,000.
  • John has a taxable loss of $10,000. Therefore, he can use this to reduce the tax payable on his wages.

Debate in summary

THERE are many arguments for and against tax concessions on negative gearing. Here is a breakdown from the experts:

PROS:

  • It is an incentive for people to enter the property market. Queensland University of Technology’s Professor Chris Eves said this led to more rental properties for those who could not afford to buy.
  • This incentive leads to more investors and therefore a need for more houses and construction jobs. And the flow-on continues, as this stimulates the need for blinds, whitegoods, tiling, paving and furniture for new homes.
  • It can be a way for people to prepare an income for retirement. House values increase over time and at some point, an investment that is negatively geared could come to make a profit (and be therefore “positively geared”). The option for retirees is to sell (and make a profit) or use rent as an income.

CONS:

  • Investors do not get much money back through the tax deductions. For example, if a person bought a $500,000 house, they could be paying $30,000 in interest on a home loan plus repairs and other costs. But if they’re getting $500 a week in rent (or $26,000 a year), that is a total loss of only $4000. This is the amount that can be used to reduce total taxable personal income.
  • While negative gearing can make housing investment more affordable for middle income earners, tax deductions and savings tend to benefit those higher income earners who can afford many homes, therefore making the rich richer.
  • It costs the federal budget “a lot”, says Griffith University’s Professor Fabrizio Carmignani. He said it was in the billions of dollars.
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Tax News

Queensland property chiefs warn rise in land tax will hurt more than the rich

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Sunshine Coast Tax News

NEW Queensland Treasurer Jackie Trad has defended the Government’s planned “Robin Hood” property tax ahead of her first Budget update tomorrow.

Ms Trad dismissed claims from the Property Council that the planned 2.5 percent land tax on properties worth more than $10 million would hurt jobs growth and property values.

“This is a very modest increase… we think it’s fair that those that can pay a little bit more, do pay a little bit more,” Ms Trad said.

Overnight, The Sunday Mail quoted property chiefs as warning Premier Annastacia Palaszczuk’s last-gasp election tax grab would destroy jobs and wipe more than $41 billion from land values in Queensland.

A 2.5 percent extra slug on owners of land worth more than $10 million was part of a suite of tax measures in Labor’s final campaign announcement, two days before last month’s state election win.

The Premier compared herself to Robin Hood, targeting only the richest.

But the Property Council says ordinary Queenslanders will pay the price, with a risk to employment and businesses forced to pass on the cost to consumers.

The land tax measure will be included in the Mid Year Fiscal and Economic Review to be presented tomorrow by Ms Trad, who was handed the role of treasurer in last week’s Cabinet reshuffle.

It is expected to raise an additional $227 million for the state’s coffers.

“The inconvenient truth for the Government is the vast majority of properties that will have to wear this tax are commercial, retail, industrial and tourism properties,’’ Property Council Queensland executive director Chris Mountford said.

It would inevitably flow on to tenants.

“We heard all through the election campaign that business cost pressures are particularly acute because of price increases like electricity … making it tougher for businesses to employ people. Now Queensland businesses will need to add land tax to their list of concerns before they think about hiring staff.”

Economist Nick Behrens said the amount raised through land tax had risen faster than any other tax in Queensland in the past decade – up 10percentnt, compared to the 66 percent Australian average.

The new measures mean only South Australia and Western Australia will have a higher rate. That will make it harder to lure businesses to set up in the Sunshine State.

“We’re in a race to attract and retain investment. Now we’re putting lead in our saddlebags that will impede our ability to compete,” Mr Behrens said.

Ms Trad said the extra land tax would apply only to the wealthiest 850 payers of land tax.

“It does not include farms, and it does not impact on the family home. The land tax ensures that those who are benefiting most from our growing economy and rising land values make a fair contribution to frontline services in Queensland.”

Ms Trad defended the Palaszczuk Government’s employment performance, saying 143,400 jobs were created in the first term of office.

Originally Published: brisbaneinvestor.com.au

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Tax News

Tax warning on share economy

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tax news

THE October 31 tax lodgement deadline has arrived and Australians making money from the share economy are being urged to make sure they are on top of their tax obligations.

Money earned on Airbnb, Uber, Airtasker and similar platforms requires tax to be paid, according to Jason Robinson, director at accounting firm RBK Advisory.

“More clients are casually mentioning extra revenue streams,” Mr Robinson said. “I asked one client how their weekend was and found out they were earning $400 every weekend helping strangers move house.”

The government is beginning to regulate side income sources.

“Uber drivers are now required to be GST registered and hold an ABN before they can begin making money,” Mr Robinson said.

Airbnb and Stayz have become popular with landlords taking advantage of holiday locations by organising fixed leases for colder off-season months and then going short term for a bigger yield over summer, said Sandrina Postorino, managing director of Landlords Choice.

“During these months they can command much higher variable rents,” she said. “This all needs to be accounted for in their tax return.

“Another trap is when investors decide to Airbnb their main residence instead of their investment property, which means it is no longer completely exempt from Capital Gains Tax.”

Side hustles, or hobbies turned into income streams by entrepreneurial types also have tax requirements, according to Clayton Howes, CEO of fintech lender MoneyMe.

“If you make even one dollar on your side hustle that comes with tax obligations,” Mr Howes said.

Another confusing one is network marketing- think Avon and other modern incarnations- often undertaken by stay at home parents, said Katrina Haskew, managing director of Leading Advice.

“Where it can get messy is when turnover is more than $20,000, but they have consumed so much of their own products in testing, trials, or giveaways, that it is an effective loss,” Ms Haskew said. “This is extremely challenging to account for, so it’s paramount that stringent records are kept and presented to accountants.”

ATO assistant commissioner Kath Anderson said many Australians lodge their returns at the last minute and can make mistakes overlook income when in a hurry.

Catherine and Gabriel Mihalas both enjoy side hustles in addition to their regular jobs. Catherine joined Nucerity, a network marketing group in the health and skincare field, as a way to earn money in the years following the birth of son Samuel.

“The key attraction was the hope of building a future residual income where I could stop worrying about money completely, by putting in the groundwork today,” Mrs Mihalas said. “My plan is to eventually retire from nursing with this as my main income.”

Mrs Mihalas did not originally focus on what her tax obligations might be, until the company suggested during her onboarding process that she discuss it with her accountant.

“I’m still at a stage where what I’m doing is considered a hobby; I haven’t yet passed the threshold where it will be considered a business,” Mrs Mihalas said. “But I believe that when I reach that stage, the benefits of the program will outweigh the tax obligations.”

Husband Gabriel set up a side business in aerial drone photography, to combine a hobby with his background in aviation.

“It seemed like a great way to earn extra cash while doing something that I loved,” Mr Mihalas said. “I was aware of the tax implications from day one … I knew which records to keep to stay on track.

“I’d like to think it will become a significant additional revenue stream for our family.”

Originally Published:  http://brisbaneinvestor.com.au

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Investment Advice

No new State taxes for foreign property investors: Queensland Treasurer

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Sunshine Coast a Smart Choice for Investment

Treasurer Curtis Pitt has ruled out any new State taxes targeting foreign property investors in Queensland.

Mr Pitt made the pledge following news that the Victorian Government will introduce a range of new property taxes for foreign investors.

The changes announced in yesterday’s Victorian State Budget include a three per cent stamp duty surcharge for house transactions from July 1, along with a land tax surcharge of 0.5 per cent to be applied from 2016.

“In the lead up to the election we made it very clear that we wanted to provide certainty to businesses and investors, and that we would not be changing the existing revenue policy settings this term of government,” Mr Pitt said.

“Therefore, we’re ruling out any stamp duty surcharges for foreign investors who purchase a house in Queensland.

“We’re also ruling out any land tax surcharge for foreign investors in this state.”

Mr Pitt said Queensland was an attractive destination for foreign investment.

“We want to send out a very clear message that Queensland is open for business and that we welcome foreign property investment,” he said.

“Yesterday’s decision by the RBA to slash the official cash rate to a record low of two per cent is all the more reason for investors to be buying property in Queensland.”

Under the new Victorian regime, foreign investors purchasing a $600,000 home would face a surcharge of around $18,000.

Property Council of Australia Queensland Executive Director Chris Mountford has welcomed the Palaszczuk Government’s decision.

“The Property Council applauds the decisive action taken today by the Queensland Government in immediately ruling out new State taxes on foreign investors,” Mr Mountford said

“By immediately ruling out new taxes on investment and maintaining their commitment to no new or increased taxes, fees or charges, the Queensland Government will boost confidence and certainty for the property industry and investors in Queensland.

“This action will strengthen Queensland’s position on the global investment map. In particular it creates a compelling case to invest in Queensland over Victoria.

“Foreign investment is an important part of Queensland’s economy. Foreign investment in property boosts housing supply and in doing so creates jobs and provides Queenslanders with more affordable housing.”

Treasurer, Minister for Employment and Industrial Relations and Minister for Aboriginal and Torres Strait Islander Partnerships
The Honourable Curtis Pitt via mysunshinecoast.com.au
6th of May 2015

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