Understanding the Taxes, Terms, Incentives & Structures that Impact Property Investment

Understanding the taxes and government incentives that can apply to property investments can give you the confidence and knowledge to make strategic property investment decisions.

The Australian property rental system is reliant on private investors providing stock for tenants. This means there are tax structures and government incentives that can make property investment attractive.   

If you’re considering investing in property, it is worthwhile to take a moment to understand some of the key terms. 

Let’s start with the basics.

Good vs bad debt

‘Good’ debt is tax deductible (such as an investment loan for a property), while ‘bad’ debt is not tax deductible and is just an expense you need to cover (think of holiday loans or car loans for private use).

Stamp duty

Stamp duty is the purchase taxes charged by the State government when you buy a property. It is charged on every home purchased but is only charged once. The rate of the tax varies state to state.  

Income tax

This is the tax on your income, calculated over a financial year. The rate varies depending on your income bracket.

Capital gain tax

Capital gains tax is a federal tax you may need to pay when you sell a property. It is based on a percentage of the profit you make after the sale. However, it is not payable on your primary residence. 

Land Tax

Land tax is charged annually on land you own above a certain value threshold. The rate charged is set by your State government. However your principal place of residence (or the property you live in) is generally exempt from land tax. 

Rates & Utilities

Rates and utilities are also taxes. They include council rates, water rates, gas and electricity charges and are typically charged quarterly. As a property investor, some of these – such as water, gas or electricity – are paid and managed by your renters

Government approved incentives

Government incentives can help pay your investment loan and reduce the amount of tax you pay. For a property investor, these incentives are generally in the form of tax credits (both cash and non-cash) on rental losses.

Other government incentives on offer from time to time include the first homeowner cash grant, stamp duty exemptions, builder incentives and more, depending on the government of the day. Typically, these government incentives will have an expiry date and are designed to help young first home buyers purchase their first home or stimulate sales and builder activity to promote a healthier economy.

At Oli Property, we can help you identify government incentives relevant to where you live and the timing of your purchase.  

Depreciation

Depreciation is the decrease in the value of an asset over its period of use. A qualified quantity surveyor will provide you and your accountant with a tax depreciation schedule relevant to the actual cost of the build (including fixtures and fittings) over the life of your property.

This depreciation schedule will outline the yearly sum of money that is allowable to reduce the tax you pay. This could lead to a cash refund, which can be used to pay down your mortgage.

Negative gearing

Negative gearing is a tax benefit you receive when your expenses for holding an investment property are greater than your rental income.

In effect, the Australian Tax Office partially funds your investment as losses (both cash and non-cash) can be deducted from your taxable income as an investor. 

Self-Managed Super Funds for property investing

Self-managed super funds (SMSFs) are a way of saving for your retirement. This is where you manage the investment strategy of your superannuation yourself, rather than, say an approved industry superfund.  

The difference between a SMSF and other types of funds is that the members of an SMSF are usually also the trustees, which means in addition to managing your investments, you must also ensure the fund complies with the super and tax laws. 

An SMSF is a highly regulated undertaking that requires input from your financial planner and/or accountant. 

However, if you have enough money in your SMSF, you can purchase an investment property or shares, and if required you can borrow money to achieve this purchase.

As a strategy to build wealth, it may be worth considering if a SMSF is right for you. The first step is to obtain a Statement of Advice from your accountant or a qualified financial advisor. 

If you have any questions about any of these terms or would like to better understand how they might apply to you, book a discovery call with us at Oli Property. 

This marketing material and its contents is provided for general information purposes only. No part of this marketing material constitutes any advice (financial, tax or otherwise), recommendation or representation to you as to any decision which you should make. You should not use any part of this marketing material to form the basis of any investment decision made by you. Before making any investment decision, you should take independent advice from a professional adviser which takes into account your individual needs and circumstances. All information, opinions and estimates contained in this marketing material are subject to change without notice. We disclaim to the greatest extent possible all liability whatsoever for any loss howsoever arising directly or indirectly from this marketing material or its contents.