Domestic Rental Properties and the Australian Tax Office

Domestic rental property investments remain popular and continue to attract the attention of the Australian Taxation Office.

There tends to be some confusion about how rental property ownership can impact on your tax situation. With that in mind, here is a checklist of some common tax issues for you to consider (especially before you commit to buying a rental property).

If I own a rental property, am I in business? The answer to this question usually surprises people. If you simply own or co-own an investment property or even several properties, you are usually regarded by the Tax Office as an investor who is not carrying on a rental property business, either alone or with the other co-owners.

However, even if you are not carrying on a rental property business, this does not mean that you escape the tax net.

How can a rental property affect my tax?

- Acquisition and disposal costs generally are not immediately deductible (e.g., cost of purchasing the property, stamp duty on the transfer, conveyancing costs). Some of these costs may be relevant for capital gains purposes.

- When you rent out a property, the rent you collect and other rent related income (e.g., if you are entitled to retain rental bond money) is assessable for tax purposes. Against this income, you can claim deductions for a range of expenses you incur whilst this property is rented out (or available for rent).

- Where the total rental income exceeds the total allowable deductions, you will have a net assessable amount, which is added to your other taxable income. Where the total allowable deductions exceed the total rental income (this is a negatively geared property), you will generate a loss that may be off-set against your other taxable income.

- When you sell a rental property, you may need to pay capital gains tax on the net sale proceeds. You may also need to pay tax on gains made on the sale of any depreciated items that are sold with the property (e.g., where the property’s fixtures and fittings have been depreciated).

What happens if I own the property with someone else? If you own a property with someone else (co-ownership), your legal interest in the rental property determines your share of rental income and deductions.

The best place to look to work this out is the Title Deed to your property – this will usually identify what sort of legal interest you have:

- if you are a joint tenant, each of you holds an equal interest in the property (e.g., two joint tenants will each hold a 50% interest); or

- if you are a tenant in common, each of you may agree to hold unequal interests in the property (e.g., you may agree for one of you to hold a 70% interest and the other a 30% interest)

How does this type of ownership impact on my tax? If you are co-owners who are not carrying on a rental property business, you must divide the income and expenses for the rental property in line with your legal interests in the property:

- joint tenants always equally share income and expenses – you cannot vary this for tax purposes with some other agreement; or

- tenants in common share in the income and expenses in proportion to the their respective legal interests as set out in the Title Deed.

EXAMPLE John and Mary own a profitable rental property as joint tenants (a 50% interest each) and are not regarded as being in business.

Mary earns no other taxable income, so Mary and John decide it would be a good idea for Mary to receive most of the net income from the rental property and any profit on its eventual sale, so they enter into an agreement to that effect (e.g., Mary 70% and John 30%).

Because John and Mary are joint tenants, this agreement has no effect and Mary and John will still each receive 50% of the net rental income and the net proceeds on any sale of the property.

However, if John and Mary owned the property as tenants in common and the Title Deed indicates that Mary holds a 70% interest and John a 30% interest, then these proportions will usually be applied for tax purposes.

Do I have to pay PAYG on my rental income? Once you earn business or investment income (and this includes rental income), the ATO may notify you that you have to start paying your income tax in instalments (Pay As You Go (PAYG) instalments).

According to the ATO, as a general rule this installment system will apply to individuals who have shown gross business or investment income of $2,000 or more in your latest income tax return and the debt on your income tax assessment is more than $500.

PAYG instalments are usually made at the end of each quarter, but in some cases you may be able to pay an annual PAYG installment if the tax you would have paid on your business and investment income (excluding any capital gain) is less than $8,000, based on your last income tax assessment.

Non-Immigrant Visas: which are the most common?

B-1 visa: Visitor for Business:

The alien may engage in commercial transactions not involving gainful employment, such as negotiating contracts, litigation, recognition of foreign judgments, consulting with clients or business associates. He or she may also participate in scientific educational, professional, religious, or business meeting. He or she may receive no salary or remuneration other than payment of expenses incidental to his or her temporary stay.

B-2 visa: Visitor for Pleasure:

This category permits entry for tourism, social visits to friends or relatives, health purposes, social conventions, participation in amateur musical or sporting events with no remuneration.

F Visa for Students and Trainees

Academic Student:

The applicant must have a foreign residence which he or she has no intention of abandoning, be a bona fide student qualified to pursue a full course of study, and seek to enter the United States temporarily solely for the purpose of studying at a recognized school. The applicant may study only at the school he or she designates and which has been approved. The applicant must have available sufficient funds and outside financial support to ensure he or she will not become a public charge or accept unauthorized employment. He or she must be proficient in English or receive training to make him or her proficient, intend to depart the United States at the conclusion of his or her studies, and be qualified to attend the particular institution.

All students are given permission to be in the United States for “duration of status,” that is for the period of time needed to complete the educational program plus 60 days. If a student does not leave the U.S. by the end of the 60 days, he or she may be charged with criminal contempt.

At the end of the course of study a period of work authorization may be requested for the purpose of gaining experience in the field of study, known as “practical training.” If qualified, the student may also change non-immigrant status to a temporary non-immigrant work visa or adjust status to a permanent resident visa.

Business Solutions For the 21st Century Include Effective Use of Offshore Banking

In 1970 the sociologist, Alvin Toffler, published a very insightful book, “Future Shock.” Mr. Toffler predicted that changes occur in science and technology, popular culture, industry, business, and all other facets of human life. He stated that this is what has happened throughout human history. The problem that Mr. Toffler foresaw is that change is happening faster and faster.

Forty years after Mr. Toffler’s book individuals are still trying to learn how to deal with the every increasing rate of change in our lives. Business and investment practices will need to become more and more streamlined. Companies and individuals will need to use and transfer capital more and more effectively in coping with the ever increasing rate of change in the 21st Century. An integral part of coping with change in business will be the effective use of offshore banking, corporations, and other business solutions.

Where Governments are Going and Which Direction Business Needs to Go

As the world comes out of the worst recession since the Great Depression many nations have taken on unheard of amount of debt in order to maintain economic stability and promote employment. Governments are searching for more and more ways to finance the financial bailouts of the last years. This inevitably means going into the pocketbooks of individuals and companies. Taxes, fees, and restrictions loom on the horizon at a time when businesses are typing to cope with Mr. Toffler’s future shock, the ever increasing change and competitiveness in the world.

Businesses need new, more effective equipment. As an obvious example, imagine doing business in today’s fast paced world with a mechanical adding machine and a dial telephone that connects through a switchboard staffed by dozens of operators. Imagine the constriction of business if modern capital flow were restricted by elimination of the computer, satellite communications, and the like. Imagine the world without modern medicines and life saving technologies.

Now imagine the world to come where competition brings effective products on line ever faster, where workers need to constantly retrain, and where fast transfer of capital will help the wise business person outperform his and her competitors.

The days of just dealing with the home town bank are gone. Individuals and companies dealing with international producers and buyers and international investment opportunities ready access to capital. In the new world the ability to raise more capital in an increasingly effective manner may make the difference between success and absolute failure of a business venture.

Privacy is an Increasingly Rare Commodity

Your company is developing a new product. No one but your top researchers know what you are doing. However, your research project is expensive. The fact that you are transferring large amount of capital becomes known to your competitors. Once they start to look they find out what you are up to and you lose a year or two of lead time on product development. Putting your money where it is private may be a major issue in the 21st Century. Privacy is becoming an increasingly rare commodity. Setting up an offshore company and setting up an offshore bank account for that company is perfectly legal. It is often quite smart too. No one needs to know what you are doing with your hard earned money except you.

Setting up banking and other business operations away from prying eyes can help protect your privacy and your competitive advantage in business. Using the most effective means of transferring capital will likely be an integral part of 21st Century success.

Coping with Change and Creating Change

In his book Toffler talks about how there was a time when a carpenter used the same tools his entire life. In fact, some of his tools may have been his father’s. In today’s world the tools of the factory, the construction site, the doctor’s office, and the business office change constantly. The passive response is to train and retrain employees when necessary. The proactive approach is to create new business solutions and tools, use them and profit by teaching them to the world. This approach goes hand in hand with keeping your in house R&D private, your banking private, and your long term plans your own. Being a step ahead will be the best of all business solutions for the 21st century.

Where You Buy Things, Where You Have Things Made, and Where You Pay from

A huge amount of work is outsourced to Asia. India has built a huge computer software industry based upon doing back office work for the West. China habitually under prices the rest of the world with cheap labor and increasingly effective management. Successful business solutions for the 21st century will need to track where effective technology resides and where products can be most effectively, inexpensively, and safely made.

To take advantage of a world full of opportunity the business person and investor needs to thing globally, perhaps live globally, and certainly bank globally.

Saving Money in the Process

There are tax advantaged locations for off shore banking and there are tax expensive locations for banking. Perhaps you come from such a nation. It is perfectly legal in many jurisdictions to bank offshore, collect interest on your deposits, and not pay taxes until the end of the year. Many businesses with high cash flow can add additional profit from overnight deposits and the like. In an ever more competitive world every pfennig, centavo, and pence will count.

Mr. Toffler talked about people getting ulcers from trying to keep up as the world works at an ever fast pace. Getting a few things to work for you will help you avoid ulcers while competing effectively in this world of future shock. Beside looking a the VOIP phone system for placing phone calls throughout the world consider looking for an effective offshore banking solution in a tax advantaged and private location.