Camden Professionals

Should I rent out my investment property as an Air BnB

In recent years, AirBnB and Stayz has surged in popularity as a preferred option for property owners looking to rent out their residences. Leveraging your home or investment property as a short-term rental through AirBnB presents an excellent opportunity to earn supplemental income. However, newcomers often underestimate the drawbacks associated with this approach.

Advantages

Higher Yields

Renting out your home traditionally typically yields between 2 and 5% in rental income. While this rate is satisfactory for many landlords, those willing to invest additional effort can potentially double or even triple their earnings by listing their property on AirBnB for short-term accommodation.

The prospect of significantly higher income is the primary motivator for most individuals contemplating short-term rentals.

Access to Your Property

An often-overlooked advantage of Airbnb is that you can still maintain access to your property should you need it for periods of the year. Short-term rental platforms allow you to choose when your property is available and allow you to use the property as desired, without having to remove a tenant or arrange furniture on short notice.

This flexibility is a great way to either make the most of a property that is vacant for a certain period of the year or even to make some money on a property that you are still living in.

Maintaining Your Property

Although there are occasional headlines about Airbnb parties causing property damage, it’s important to recognize that such incidents are rare rather than commonplace. Renting out your property does come with some risks, but these risks are not exclusive to short-term rentals; they also exist with long-term tenants.

Moreover, since renters typically pay a cleaning fee, you can maintain your property’s cleanliness consistently throughout the year due to the short-term nature of their stays. Additionally, you can oversee the property more closely and manage tasks such as garden upkeep and ongoing maintenance more effectively compared to a traditional rental arrangement.

Disadvantages

Time

While you can make more money renting out your property on a short-term basis, there are some cons to the process, such as time spent organising the process.

To run a successful Airbnb property, you will have to manage bookings, clean the property and deal with any problems that may arise. It’s also worth remembering that on top of cleaning the house, you will also need someone to wash bedding and towels as well.

As a result, this type of income is far from passive, in comparison to having long term tenants and a property manager.

While you can hire third parties to manage all elements of your short-term rental, they also charge higher property management fees given the increased workload. This is typically around 20% of rental income, which is far higher than the cost of traditional property management.

Costs

One notable distinction with longer-term renting is the potential for increased expenses. While it’s possible to enlist a property manager to handle various aspects of property management, it’s essential to consider the platform fees imposed by Airbnb and similar services.

Additionally, there are upfront costs associated with adequately furnishing a property, including furniture, appliances, TVs, and amenities like tea and coffee provisions. An often underestimated expense is covering all utility bills, typically the responsibility of tenants but falls on the short-term rental host.

Vacancies

The hardest thing to predict with a short-term rental is just how much demand your property will have and how many vacancies you’ll encounter.

Vacancies will change between seasons as well with summer being far more popular than winter. That also means your income is not consistent over the course of the year. In addition, when you start renting out a property there will be a lot more vacancies than an established short-term rental with a track record of good reviews.

Suitability

It’s crucial to recognise that not every property is suitable for short-term accommodation. For instance, if you own a property in a popular beachside vacation destination, it’s likely to attract renters. However, if your property is located in an area with minimal tourist traffic or business travel, it may not be well-suited for short-term rentals.

Airbnb Regulations

The final factor to consider is that by renting out your property as a short-term rental, there are several regulations as outlined by Airbnb and the Australian Government which need to be followed.

Compared to much of the international regulation of the short-term rental market, Australia’s Airbnb regulations are lenient to encourage the tourism economy. That’s why buying a property in an idyllic coastal town in Australia and renting it out to holiday-goers on sites like Airbnb or Stayz can be a great way to earn extra income and subsidize some of your expenses.

But amid the nationwide housing supply crisis, state governments in Australia have announced changes to short-stay accommodation rules to limit the availability of some properties for short-term holiday rentals.

If you’re considering starting an Airbnb in Australia, it’s important to consider legal issues first and ensure you fully comply with any laws for your area at the state and city levels.

State Rule Changes

Western Australia – All short-term rental accommodation providers will be required to register their properties before being able to list and take bookings, including from online platforms like Airbnb and its alternatives in Australia. Registrations are expected to open in mid-2024, and all homes must be registered by January 1, 2025.

Victoria – In September 2023, the Victorian government introduced a state-wide 7.5% consumer levy on short-term accommodation bookings through platforms like Airbnb and Stayz. The tax on short-term rental stays is scheduled to come into effect in January 2025, and as the authorities in Victoria said, it would go towards funding more social housing.

NSW – New South Wales has been one of the first state governments to enforce Airbnb restrictions, including a 180-day limit for unhosted short-term rentals in greater Sydney. Although critics say the rules are not enforced, the 180-day cap also applies to some regional local government areas, including Newcastle, Ballina, the Bega Valley, and parts of the Clarence Valley. Most short-term accommodation hosts in NSW are also required to register their properties.

Queensland and South Australia – Currently these state governments are reviewing their positions and no decision has been made similar to the rules applying in the other states.

Tasmania – In February 2024, Tasmanian Liberals promised to introduce a 5% levy on all short-stay accommodation in the state. The levy would be paid by travellers, not the property owners, and would be used to fund a first-home buyers program.

A 5% tax announcement was made without industry consultation ahead of elections and has taken hosts by surprise. The tax is also viewed as discriminatory because it would not be applied to other accommodation types, such as hotels and pubs.

Overall, Airbnb has been a game-changer for many property investors on the hunt for higher yields. However, it is not suitable for everyone or every property. Before taking the plunge, do a detailed breakdown of costs involved, with a conservative estimate of rental income with a vacancy rate of around 20-30%.

That should give you a good idea of whether a short-term retinal will be more profitable than a traditional long-term rental.

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General Advice Warning

The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.

Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.

Although every effort has been made to verify the accuracy of the information contained on this page and on this website, Camden Professionals, its officers, representatives, employees, and agents disclaim all liability [except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this website or any loss or damage suffered by any person directly or indirectly through relying on this information.

Camden Professionals

The Tax Benefits of Rentvesting

Rentvesting, a strategy in property ownership, involves renters purchasing property in areas with high rental yields and leasing it while residing elsewhere. It’s increasingly recognized as a tax-efficient solution to counter FOMO (fear of missing out) in the face of soaring house prices. What are the tax benefits of rentvesting?

Rentvesting offers a pathway to enter the property market for those who may not immediately afford their desired home, enabling investors to initiate a wealth-building journey sooner than anticipated. Success hinges on seizing opportune moments, with the primary benefit often being the ability to enter the property market ahead of schedule.

The main benefits of rentvesting include:

Access to the Property Market: Rentvesting allows individuals to enter the property market even if they cannot afford to purchase their desired home in their preferred location. By investing in areas with high rental yields, they can start building wealth through property ownership while renting elsewhere.
Flexibility: Rentvesting provides flexibility in lifestyle choices. Renters can choose to live in areas that suit their lifestyle or work requirements while investing in properties that offer better rental returns or potential capital growth.
Tax Advantages: Rentvesting can offer tax benefits, including deductions for expenses related to the investment property such as mortgage interest, property management fees, maintenance costs, and depreciation.
Wealth Creation: Rentvesting enables investors to build a property portfolio earlier in life, potentially accelerating wealth creation. As property values appreciate over time, investors can benefit from capital growth and rental income.
Diversification: Rentvesting allows investors to diversify their property portfolio by spreading their investments across different locations or property types, reducing risk and increasing potential returns.
Mitigating FOMO: For those experiencing FOMO (fear of missing out) due to skyrocketing house prices, rentvesting offers a practical solution to enter the property market without compromising financial stability or lifestyle choices.

Overall, rentvesting provides a pathway to property ownership, wealth creation, and financial freedom, offering numerous benefits to investors seeking to navigate the challenges of the real estate market.

How it works

The rentvesting strategy works equally well for young people who might still be living with their parents while paying minimal rent. This essentially means that they can pay off the mortgage on their investment property faster. It also means you can live in an area that suits your lifestyle even if you can’t afford to own property in that postcode.

As such, established properties with land are highly valued for their growth potential and lifestyle/tenancy appeal.

The tax gains of rentvesting

According to the Australian Tax Office (ATO), you can claim the following expenses:

Water and council rates
Home insurance
Agent fees and commission
Repairs and maintenance
Tenant advertising
Depreciation deductions for general wear and tear from natural causes
Land taxes
Interest on mortgage repayments

Another tax benefit is negative gearing, that can make the cost of investing in property more affordable.

Moreover, there’s a notable advantage if you initially buy a property, reside in it for six to 12 months, and subsequently rent it out: you won’t incur capital gains tax on the property’s growth for up to six years, thanks to what experts term the “six-year rule.”

This rule allows you to maintain your former home as your primary residence for capital gains tax purposes, even after you’ve moved out.

However, analysts caution that if you don’t establish the property as your place of residence and haven’t lived in it, capital gains tax will apply from the outset of your rentvesting strategy. Should you opt not to inhabit the property before renting it out and later decide to sell it after at least a year of ownership, half of the property’s value appreciation will be considered a capital gain.

For instance, if you realize a $300,000 profit upon selling an investment property, $150,000 would be subject to taxation at your marginal tax rate.

As always, it’s essential to seek guidance from your financial advisor or lender to ensure that the rental income you receive, minus expenses, exceeds or equals the rent you pay. This diligence ensures the viability and profitability of your rentvesting strategy.

Rentvesting Strategy: A 3-Step Guide

Here’s a three-step plan to kickstart your property journey:

Save a Deposit

Saving up a deposit may pose the greatest challenge, especially in a market witnessing soaring property prices. However, it remains entirely feasible for those committed to realizing their goals.

A prudent target is to save up to 20% of the property’s value as a deposit. Recognizing that this can amount to a substantial sum, it’s advisable to begin with an investment property of lower value compared to a primary residence.

Effective strategies for deposit accumulation include:

Set a clear savings goal
Track expenses and trim unnecessary costs
Select a savings account with a competitive interest rate
Establish automatic transfers to your savings account
Continuously monitoring progress toward your goal

Identify Your First Property

This stage necessitates professional assistance. Engage the expertise of a Buyer’s Agent, Mortgage Broker, and Property Manager. A Buyer’s Agent aids in locating a property within your budget, while a Mortgage Broker streamlines lending comparisons and procedures.

Key considerations for selecting the right property include:

Location suitability
Growth potential
Low vacancy rates
Favourable rental yields.

Progress Toward Additional Properties

Rentvesting aims to expedite wealth accumulation through early entry into the property market. Consequently, the subsequent objective is to acquire additional properties.

Assuming success, your initial investment property may yield positive cash flow. Leveraging savings and equity from this property can facilitate securing deposits for subsequent investments or even your envisioned dream home.

Invest with Confidence

Initially, the concept of rentvesting might appear unconventional – why rent while simultaneously paying off a mortgage? Yet, with meticulous budgeting, informed decision-making, and alignment with lifestyle preferences, rentvesting emerges as a logical choice.

For instance, you might be a single individual aspiring to enter the property market, with your desired home currently beyond financial reach. Alternatively, you might relish your current rental situation but foresee a move in the future. Or, you could be entrenched in urban living but anticipate a shift to a more spacious locale down the line.

Ultimately, rentvesting offers a flexible and strategic approach to property ownership, catering to diverse circumstances and aspirations.

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General Advice Warning

Camden Professionals

Understanding Property Taxes In Western Australia

When you own property in WA, you also often have to pay taxes, duties or levies.

Transfer Duty

Transfer duty is also known as stamp duty and is levied by the state government on property purchases. In WA, it is often the biggest tax most property owners need to pay. Transfer duty generally falls due when the property changes hands, typically at settlement. The amount is calculated based on the property’s purchase price or market value, depending on which is higher.

Do You Need to Pay Transfer Duty?

Transfer duty applies to most property buyers in Western Australia, including investors and owner-occupiers. However, the rates vary. Investors usually pay a higher ‘General rate’ while owner-occupiers pay a lower ‘Residential rate’.

That said, first-time homeowners often benefit from discounts or exemptions.For instance, first-time homebuyers purchasing a property valued at less than $430,000 are exempt from stamp duty. There are also concessional rates for properties valued between $430,001 and $530,000.

For vacant land, first homeowners pay no stamp duty if the land is valued at less than $300,000. Discounts apply for values between $300,001 and $400,000.

To apply for concessions, you’ll need pre-approval, available through the WA Department of Finance website.

Stamp Duty is one of the biggest obstacles to purchasing property.

Capital Gains Tax (CGT)

CGT is levied by the Commonwealth government and is a tax on the net profit – or capital gain – that you receive when you sell or dispose of an asset such as property. The gain is essentially the difference between what you paid for the property and what you sold it for. If the property sells for less than what you paid for it, this results in a capital loss. CGT is critical because it can significantly impact how much profit you make from selling a property.

Do you need to pay CGT?

In general, investors who sell their property for a profit are liable to pay CGT unless they acquired the property before September 20, 1985. Whether you’ll need to pay CGT when you sell depends on whether you owned the property as an investment and also whether there was any “gain.”

The “gain” refers to the difference between the selling price and the purchase price of the property. If you sell the property for less than you bought it, it’s considered a “capital loss.” CGT is not a separate tax but rather part of your annual income tax return, so any gain will be taxed subject to your marginal rate.

If you have owned the property for more than a year, you might be eligible for a 50% CGT discount. To make sure you’re across your CGT liability, you should always speak to your tax adviser before selling an investment property.

Land Tax

Land tax is a state levy based on the total “unimproved value of all owned land”. In other words, it applies to the value of the land without any dwelling or improvement rather than the value of the property. Each year, the WA Valuer General assesses the value of all land in the state with a view to calculating land tax liabilities.

Do You Need to Pay Land Tax?

If you own properties that aren’t your primary residence, you’ll likely have to pay land tax if their combined land value is more than $300,000. This includes multiple land holdings added together, even if no single property meets the taxable threshold.

Your primary residence is usually exempt.

You may also be required to pay the Metropolitan Region Improvement Tax (MRIT) if your land has a land tax liability. The MRIT is imposed at 0.14 cents for every dollar exceeding $300,000 for public facility maintenance within the Perth metropolitan area.

You can calculate your land tax and MRIT liabilities using the online tool on the WA Office of State Revenue website.

Council Rates

Council rates are essential payments to local council for maintaining local services and infrastructure like waste management, road upkeep, and local government amenities. Every property owner, whether an owner-occupier or investor, must pay council rates.

In WA, these rates also encompass charges for an Emergency Services Levy, which provides funding for fire and other emergency services. You can find out more about council rates on the website of your local council. As an investor, you may be able to claim council rates as a tax deduction.

Owning a property comes with a number of responsibilities, including the need to pay various taxes. You should make sure you’re across these to avoid the risk of potential fines. And, if in doubt, always speak to your tax adviser.

What Taxes Are Required When Buying a Property in Perth?

The process of buying a home may be very stressful, and it’s a significant investment. It is not only the actual cost of the property you need to pay, but different taxes applied to it.

Key takeaways:

Always calculate stamp duty and all the extra costs involved in property purchase beforehand.
First home buyers do not need to pay any stamp duty if the property is worth $430,000 or less.
A property worth more than $430,000 in Western Australia has different ranges of stamp duties

Annual property tax rates

Are you planning to rent an apartment in Perth? Let’s analyse the annual property tax rates in Australia. According to PwC Australia, the annual tax rates are $400 plus 0.3% of unimproved land value. This rate is for owner-occupied land. On the other hand, for a residential property, the rate is $1500 plus 1.1% of unimproved land value.

We should move towards the other fees you must pay when buying a property in Perth. One of these fees is government fees.

Transfer duty

Transfer registration fee, also known as “Stamp Duty”, is the type of tax directly levied by the current government. All associated costs in transferring the property to the buyer are included in the fee. Once the fee is paid, the process of transferring the property title will begin.

In Perth, the stamp duty depends on the market value directly. The greater the property’s market value, the higher the transfer fee. No transfer fee applies to properties worth $430,000 or less. However, property worth more than $430,000 in Western Australia has different ranges of stamp duties.

According to a stamp duty calculator, the WA stamp duty ranges from $1.90 per $100 or part thereof to $19,665 + $5.15 per $100 or part thereof above $500,000.

Another type of government fee is the Mortgage registration fee. The fee applies when you have borrowed a home loan from any bank to support your property purchase. The bank uses this mortgage for the security of the loan.

In simpler words, the bank uses the mortgage as a safety and security option. If you cannot pay your loan, the bank has the right to sell or own your property. The rules will be the same even if you have taken a loan from any other financial organisation. The possession, also known as Title Deed, will remain intact until you have repaid your loan.

The charges that the mortgage fee covers are the origination fee, application fee, underwriting fee, administrative, and processing fee. Other than this, another important payment that is required is called Points. The cost of borrowing money from a financial institution or bank is expressed in terms of points. This fee is paid upfront to the lending organisation or bank.

Mortgage registration is different throughout the states. Different states have different fees. For instance, the mortgage fee in NSW is $143.50; in VIC, it is $119.70, etc. For WA, the mortgage fee is $174.70, which will be applied to the property in Perth.

Mortgage discharge registration

Another type of fee is mortgage discharge registration. It is to clear the title of the property. Once your mortgage is discharged, the mortgage discharge registration fee is recorded.

Mortgage discharge is documentation that your lender provides. It is written proof that your previous mortgage has been paid off. The fee for this document is comparatively lower than the other fees.

Australia’s mortgage discharge registration fee ranges from $50 to $600. Once the fee has been paid, the property title can be transferred to the borrower completely, and the buyer can receive a duties assessment notice.

So, these were some taxes required when buying a property in Perth. In addition, you’ll have to pay for a few extras if you want to make use of our full range of services. For instance, a real estate fee will be applied if you are trying to buy a property by selling one.

You will need to pay the agent’s fee if you are seeking consultancy from a professional property agent in your settlement process. In addition, if you are a foreigner, you will also need to pay the foreign buyer’s duty.

Another type of fee is the lender’s mortgage insurance fee. In short, the more services you receive, the more you have to pay.

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Camden Professionals

NDIS Property Investment Guide

The National Disability Insurance Scheme (NDIS) has opened up fresh avenues for property investors seeking to support disability housing while capitalizing on the burgeoning market in Australia.

Through its Specialist Disability Accommodation (SDA) scheme, the NDIS allocates funding for specialized disability housing. This has generated significant demand for purpose-built dwellings designed to cater to the requirements of individuals with disabilities.

However, the current supply falls short of meeting this demand, resulting in a notable gap between supply and demand. This presents an appealing investment opportunity for Australians. To address this shortfall, the government actively encourages private investment to help bridge the gap and address the shortage of accessible housing.

Fortunately, there are numerous incentives available to incentivize investors in SDA properties, making the prospect even more enticing. In this guide, we will navigate you through the realm of NDIS property investments, outlining how potential investors can assess the risks, returns, and complexities associated with entering this niche market.

NDIS as Property Investments

When assessing potential returns, aim for realistic projections based on actual development costs and fees. A lot of claims flood the airwaves that you can get rental yields of 10-25%. However, after accounting for expenses such as vacancy periods, landlord insurance, and maintenance, the net yields could average only 8-15%.

Study local market demand dynamics through research and expert advice on SDA housing in Australia. During this process, target areas that face an undersupply of approved NDIS dwellings. Obviously, there also has to be a high demand as well, and the location needs to have good infrastructure to support local residents.

We recommend educating yourself on NDIS investment property rules and guidelines relating to:

Housing types
Accessibility requirements
Modifications
Policy changes and trends.

Note that all properties need to comply with a number of these factors, in order to be eligible for NDIS and SDA funding.

How to Purchase an NDIS Investment Property

Investing in an NDIS or SDA property remains a lucrative avenue for securing robust rental returns, factoring in expenses, all while contributing to the vital need for housing among NDIS participants.

Now that you’ve completed your risk assessment and due diligence, how do you initiate the process? Here are some pointers for acquiring an NDIS property:

Research Rental Market Trends and Growth: Dig into comprehensive research to grasp the dynamics of demand and supply for NDIS properties across various locations. Concentrate on areas experiencing undersupply, as they typically boast higher occupancy rates, growth potential, and yields. Additionally, analyze prevalent disability types in the area to ensure alignment with local participant needs.
Engage with Specialists: Collaborate with reputable NDIS-approved property firms or specialized real estate agents to identify suitable listings and gain insights throughout the transaction. They offer guidance on regulations, construction requirements, financing options, and more.
Consider Off-the-Plan Purchases: Opting for an NDIS housing investment or a land package tailored for SDA properties allows for customization of accessibility features. However, anticipate potential delays, particularly due to recent challenges in sourcing building materials in Australia.
Secure Suitable Financing: Explore specialized NDIS property loans catering to both acquisition and construction expenses. Prepare for larger deposits, sometimes up to 30-35%, and consider stamp duty valuations and concessions applicable to disability accommodation across different states.
Strategically Choose the Location: Select a location that provides access to local amenities and services, enabling residents to actively engage in community life. Exercise caution with regional towns possibly encountering oversupply issues.
Optimize Management for Success: Enlist an accredited NDIS property manager to source approved tenants, manage paperwork and compliance, and oversee maintenance. Quality tenants are essential for consistent rental income.

With meticulous planning and preparation, NDIS property investments can yield strong financial returns while making significant social contributions. However, conducting thorough due diligence is imperative to mitigate risks effectively.

General Advice Warning

Camden Professionals

What are Discretionary Trusts and why you may need one

What is a Discretionary Trust?

When you establish a discretionary trust, the trustee will legally own an asset(s) for the benefit of one or more other people. A discretionary trust can also be called a family trust if the members/ beneficiaries are part of your family.

What is a Trustee?

The trustee is the person or entity who administers the Trust and is also the legal owner of the assets of the trust. The trustee decides on the income and capital which will be distributed to the beneficiaries of the trust. A trustee can be an individual or a company. The trustee distributes assets at their discretion, hence the name discretionary trust.

What is a Beneficiary?

A beneficiary is a person who benefits from the trust, e.g. the family of the trustee. Your trust may name one or more beneficiaries. They do not all have to be members of your family.

Why set up a Discretionary Trust?

You may decide to establish a discretionary trust as a way to distribute income because:

It makes sense for tax purposes
It is a strategy to manage family wealth
It is a way to protect your assets
You can use your trust for estate planning
You want to allocate resources and income to family members
It makes sense as an investment strategy

Many business owners face a degree of risk in owning a business, for example if the business fails, they may be sued personally or put at risk of bankruptcy. Similarly, those in partnerships, particularly those with bank debts, can face similar risks. Assets that are within a family trust are protected from creditors, so even if a claim is made against you, the assets are not in your name and therefore cannot be accessed in these circumstances.

Tax Advantages

Operating your business from a family trust and having the company act as trustee means you can retain the limited liability benefits of a company structure while taking advantage of the tax flexibility benefits of a family trust. When set up correctly, there are clear family trust tax benefits for individuals and businesses. Because the trust itself does not pay tax, beneficiaries are taxed based on the amount of income placed in their name (as well as any other income they may have from other sources).

The drawbacks of Discretionary Trusts

There are costs involved with establishing and operating a trust. It makes sense to manage it with the help of a professional and this is likely to incur fees. However, you may find you can immediately offset this cost from the tax benefits achieved. When beneficiaries have assets in a trust, if the trust experiences a loss in capital or revenue, it can’t be offset against their regular assessable income.

What are the steps involved in setting up a Discretionary Trusts?

These are the general steps required to establish a trust:

Speak to your accountant or financial planner about why a trust makes sense for you or your business
Determine which of your assets will be allocated to the trust and who will be the trustee/appointor/settlor/beneficiaries
Work with the relevant parties (including a legal professional) to establish the trust deed and have it signed by the appropriate parties. All signatures need to be witnessed. The trust is officially formed on the date that the Deed is signed
Stamp duty may be payable on the trust deed
Apply for a Tax File Number (TFN) and an Australian Business Number (ABN) if necessary
Open a bank account in the name of the trustee (but clarifying that this person is the ‘trustee of the trust’)
Deposit the initial amount of funds (settlement sum) into the trust bank account
Meet with a professional regularly to ensure the trust is being operated effectively and that it is compliant with current regulations

Whether you’re looking to keep your family home in the family or want to stagger inheritance distribution to ensure it’s not all spent at once, a family/discretionary trust prevents Will contests and secures assets. Assets held within the trust do not form part of a deceased estate preventing contests to a Will or your child’s spouse claiming their share of an inheritance.

A discretionary trust can provide long term financial support for your children or grandchildren, allowing you to invest in their long-term education and distribute family assets to future generations. A family/discretionary trust can also be a great way to protect vulnerable beneficiaries who may make poor spending decisions if they were to control their own assets.

General Advice Warning

Camden Professionals

What is a Depreciation Schedule: A Beginner’s Guide

Did you know that 70% of investors in Australia don’t buy a tax depreciation schedule for their investment properties?

Depreciation schedules are one of the most effective but underused tools available to a property investor to maximise their returns. When you think about the fact that depreciation is the second-highest tax deduction on your property after interest on your loan, it’s unbelievable how much investors are leaving on the table.

But what is a depreciation schedule exactly? And how can you benefit from it?

We’ll break down everything you need to know about tax depreciation schedules so that you can maximise the tax benefits available to you through your investment property.

What Is Tax Depreciation?

Before delving into what is a tax depreciation schedule is, it’s important to understand property tax depreciation. Depreciation is a non-cash deduction that allows you to claim a portion of the cost of your property over its useful life. To claim depreciation, you need to order a depreciation schedule from a quantity surveyor.

As a building gets older, its structure and the assets within the building are subject to general wear and tear. In other words, each year, the value decreases and thus, depreciates.

The Australian Tax Office (ATO) allows property investors, who generate income from their investment property, to claim the property depreciation as a tax deduction.

Put simply; depreciation is the decrease in an asset’s value over time due to natural wear and tear. Property depreciation can provide a significant tax benefit for investors, as the Australian Taxation Office (ATO) effectively allows you to offset the cost of this wear and tear against rental income.

What sets a depreciation claim apart from other rental expense tax deductions for your investment property is that it is a non-cash deduction – you don’t have to spend any money to claim it.

The structural component of a building usually depreciates at a fixed rate over a long period of time—usually 40 years. In contrast, plant and equipment assets depreciate according to their effective lives as they generally wear down faster than the building itself.

There are two main types of property depreciation: capital works deductions (Division 43) and plant and equipment (Division 40) deductions. Investors can claim a capital works deduction for the building itself, as well as plant and equipment depreciation deductions for assets within the building, such as furniture, fittings, and appliances.

Division 43 – Capital Works Deductions

Division 43 Deductions refer to the depreciation of the structure of the building. The structure of a residential building, if constructed after September 1987, generally has an effective life of 40 years. You can claim a capital works deduction on construction costs, too.

Division 40 – Plant and Equipment

The term “plant and equipment” refers to the fixtures and fittings that are found within the building. Plant and equipment depreciation on these easily removable assets includes items such as carpets and air conditioning units.

What Are Tax Depreciation Schedules, and How Can They Change Your Tax Return?

Simply put, depreciation schedules are reports detailing the tax depreciation deductions you can claim on your investment property. Claiming these tax-deductible expenses involves identifying the value of an investment property, what you estimate construction costs to be, and all its fittings and fixtures.

The purpose of a tax depreciation schedule is to outline the value of both your Division 40 and Division 43 assets as well as how much it has depreciated and will depreciate. This will give you a clear idea of how much you can claim for tax depreciation.

A tax depreciation schedule provides a breakdown of the depreciation deductions you can claim for an investment property and eligible plant and equipment assets. It includes the original value, the estimated effective life, and the depreciation rate for both the structural components and the plant and equipment assets.

Example

In February 2020, Noel purchased his first investment property for $375,000 and immediately rented it out. Based on the tax depreciation schedule he obtained from the quantity surveyors at Duo Tax, the construction of his property commenced in March 2003 and was completed in November 2003. The cost of construction was estimated to be $225,000.

The property depreciation schedule outlines that Noel can claim a capital works deduction at a depreciation rate of 2.5% per annum, as the construction of his investment property commenced after 15 September 1987.

In his first year of owning the property, Noel was only able to rent out the property from 1 February 2020 to 30 April 2020, so he can claim a deduction for 90 days:

($225,000 x 2.5%) x (90 days of 366 days in 2020) = $1383.20.

Thus, Noel can claim a capital works deduction of $1383.20 in his 2019-2020 tax return.

As the property was built in 2003, Noel’s tax depreciation report will highlight the capital works deductions he can claim until 2043, provided that he still owns the investment property and it’s being used to produce income.

The tax depreciation schedule report also charts the loss in value of his plant and equipment assets, such as his air-conditioning unit, over its effective life. So, Noel can claim tax deductions for these assets too.

What Does a Tax Depreciation Schedule Include?

Based on Noel’s example above, a tax depreciation schedule generally includes the following components:

an introduction to the schedule with a glossary of terms to help you better understand how the schedule works for depreciation purposes,
a detailed 40-year estimate showing all Division 43 (capital works) depreciable items,
Examples of both the prime cost and diminishing value methods of depreciation to help you decide which method is best for your individual circumstances,
the effective life and prescribe depression rate for all Division 40 (plant and equipment) assets, and
a breakdown of the assets that belong to low-value pools as well as those that qualified for an instant-asset write-off.

Do I Need a Depreciation Schedule Every Year?

A single tax depreciation schedule covers a specific investment property and is valid for up to 40 years, which means you can claim tax deductions each year with the same report. When you purchase another investment property, you will need a separate depreciation schedule for that investment property.

However, if you are looking to sell your investment property, then you will need to have a property valuation carried out by a quantity surveyor to calculate capital gains tax.

General Advice Warning

Camden Professionals

What you need to know before buying a house and land package

Acquiring a house and land package presents a convenient and potentially more economical path towards realising the dream of constructing your own home. However, unforeseen challenges such as delays and unexpected expenses can disrupt this process.

To mitigate such issues, it is crucial to equip oneself with pertinent information. This includes understanding what to scrutinize prior to signing any contracts, discerning which builders are reputable, and exploring available financial assistance options, which can significantly influence the outcome.

Since World War II, housing estates have experienced a surge in popularity, primarily fuelled by the soaring costs of real estate. This trend prompted first-time homebuyers, especially those with growing families, to seek refuge from the inner city and pursue properties with ample space, colloquially referred to as ‘quarter-acre blocks’.

Over time, notable advancements have occurred, widening the appeal of house and land packages beyond just young families with modest financial means. Presently, the emphasis within housing estates has shifted from mere density to prioritizing the development of aesthetically pleasing and habitable communities.

These contemporary estates boast an array of amenities including sprawling parklands, meandering waterways, picturesque walking trails, and lush greenery-lined streets. Moreover, they are often strategically situated in close proximity to transportation hubs, educational institutions, and retail centers, enhancing their appeal and convenience to residents.

Who benefits most from house and land packages?

People who can benefit most from a house and land package are investors and those building or entering the housing market for the first time.

Having the house and land package combination minimises the work people have to do, and everything is packaged upfront, making it as easy and as stress free as possible for those looking to build.

McDonald Jones Homes, the largest home builders, has adapted its designs since the pandemic to accommodate demand for flexible living spaces, home offices and study nooks, and solar/electric vehicle chargers in garages. Open-plan living, an alfresco area for entertaining and a home theatre are now common design features in today’s floorplans.

House and land buyers are also looking for plenty of natural light within the home and a central kitchen with an island bench and butler’s pantry.

6 Steps you need to know about house and land packages

Check what’s included in the package price – landscaping, driveways and fencing are not usually covered.
Find out what grants and subsidies you may be eligible for and when they expire.
Use a well-established company with transparent costs and itemised inclusions.
Build in a buffer to allow for delays and unexpected costs.
Check that the builder is registered and has domestic building insurance.
Don’t hand over the final payment until all defects have been remedied.

What can go wrong with house and land packages

While house and land packages provide plenty of benefits – a seven-star eco home oriented to the block, a streamlined building process (no need to deal with council approvals) and more affordable pricing than a knockdown-rebuild or buying/renovating an existing home, there can be downsides.

Matt Turner, managing broker at GSC Finance Solutions, says the high cost of land and building materials means house and land packages do not currently provide as much value for money as they did before the pandemic, but this situation will likely be temporary.

Doing your due diligence will prevent some of the problems that can arise between signing the contract and moving in, but Turner cautions that some issues will always be out of your control.

The builder could go bust. Although builders are required by law to take out domestic building insurance to protect their customers in case of liquidation, it doesn’t always happen.
Fixed costs aren’t always fixed. Contract clauses can allow builders to pass on increases in the cost of materials to customers.
Delays can drain your bank account. If you’re paying rent as well as making mortgage repayments on the land and the first stages of your new home build, but the promised completion date comes and goes, it can be costly as well as stressful.
Promised infrastructure and amenities don’t always eventuate. Although developers have to deliver on the amenities outlined in their planning application to council, occasionally government funding is withdrawn for anticipated schools or infrastructure.
Zoning laws can be changed. Changes to floodlines or zoning laws can mean your planned home falls through, which may not leave you out of pocket, but will set you back to square one. “We’re not seeing many really positive experiences with house and land packages lately – there’s been some huge delays – but I don’t think that’s going to be endemic of the industry going forward,” says Turner.

General Advice Warning

Camden Professionals

How to buy your first investment property in 7 Steps

How Property Investing Works

Investing in property is often perceived as a secure and relatively low-risk option compared to volatile alternatives like the stock market. This stability contributes to its popularity among investors. While real estate values in Australia have consistently risen, as evidenced by Vanguard’s 2023 Index Chart indicating an annual growth rate of 7.3% since 1993, profitability isn’t guaranteed.

Numerous factors, including location, economic trends like mining, immigration patterns, and media influence, can affect property values. Success in property investment hinges largely on the location of the property and its inherent quality.

The primary objective of an investment property is to generate profit, whether in the short term or over the long haul. It’s crucial to approach property purchases with a rational, numbers-driven mindset rather than letting emotions dictate decisions. Unlike buying a personal residence, the key consideration should be which investment aligns best with your financial objectives and offers the most promising returns.

Step 1: Know Your Financial Goals

Determine your affordability: Assess how much you can invest.
Establish desired returns: Define the level of returns you aim to achieve.
Set a timeline: Determine when you need to see these returns.
Evaluate potential impact: Consider how property investment aligns with your overall wealth and financial goals.
Define financial goals: Ask yourself why you want to invest in property.
- Long-term wealth and stability: Are you seeking stability and wealth over time?
- Building a property portfolio: Is this the initial step toward building a property portfolio?
- Immediate passive income: Are you aiming for immediate additional income through rental yields?

Understand the importance of these foundational questions in guiding your search, financial structuring, and level of involvement. Identifying your ‘why’ serves as the fundamental starting point in your investment journey.

Step 2. Understand Your Property Investment Strategy

Investing in property is usually for several different financial benefits, capital growth, income from rent, or taxation advantages. Let’s break down your strategy options.

Capital Growth

Capital growth happens when your property increases in value over time. This is the primary goal of most property investment, whether the investor is looking to sell in the future, draw on the equity, or simply benefit from the increase in foundational wealth that the property adds to their portfolio. Capital growth is a long-term strategy; Corelogic reported that the average property that sold for a profit in 2022 was owned for 9 years.

Location is absolutely critical, because capital growth is not guaranteed. Many investors find themselves in a situation where the house does not appreciate. If rental income also doesn’t cover the costs, they experience a net loss year on year.

Rental Income or Cash Flow

When considering property investment for ongoing income, the focal point is rental yield or cash flow. To assess this, utilize a simple formula: (weekly rent x 52) / property market value x 100 = rental yield percentage. For instance, if a property earns $550 weekly and is valued at $865,000, the calculation is ($550 x 52) = $28,600 / $865,000 x 100 = 3.3%. This helps compare yield potential across properties.

However, this figure overlooks associated costs, so for a more precise evaluation of profitability (positive gearing), factor in all expenses related to purchasing and owning the property. If the net income falls short of expenses, the property is negatively geared, resulting in a loss. Continuously negative gearing should be avoided unless substantial capital growth is anticipated.

Tax Benefits

Tax benefits are another incentive for property investment. The Australian Government offers deductions like depreciation, management, maintenance, insurance, borrowing expenses, and interest on investment loans. While typically advantageous for high-income earners, these tax offsets are accessible to most investors.

Negative Gearing vs Positive Gearing

Negative gearing occurs when the expenses of purchasing and maintaining an asset, including the interest on your loan, exceed the income generated by the asset (creating a net ‘loss’). With negative gearing, you’ll have to be able to afford to hold an asset that isn’t ‘earning you income’, but the benefit you get is the ability to offset your ‘losses’ against your taxable income, increasing your tax deductions.

Positive gearing is the opposite – you’re making a profit on your investment, but you’ll also be paying tax on that profit. This is often more affordable for an average or lower income, as the additional cash flow outweighs the tax implications. But for those who are earning a higher income, this could mean you pay more tax (some high-income earners choose a negatively geared property as a tax offset). However, all investors will want their property to become profitable at some point, rather than being an ongoing drain on cash flow.

Step 3. Calculate Your Budget & Your Cashflow

If you’ve purchased a property before, you’ll have a good understanding of the process and paperwork. With an investment property, your finances will be slightly different, and you may have a few options you didn’t have before.

Buying an investment property with equity

If you’ve paid off a chunk of your current mortgage, or your existing property has increased in value, you might have equity available to draw on. Equity is the difference between what you still owe and the current value of your property. A lender will usually allow you to borrow around 80% of the value of your property, less your outstanding mortgage.

Calculate usable equity: (80% x property value) – outstanding mortgage = usable equity

Calculate it this way:

if you own a property worth $900,000, and your remaining home loan is $300,000, you’ll be able to access equity of $420,000. To calculate your usable equity, follow this formula: (80% x $900,000 = $720,000) – $300,000 = $420,000.
Your equity can go towards a deposit for your investment property. You can also use your equity in a debt-recycling strategy.

How much deposit do you need for an investment property?

When purchasing an investment property, it’s best to save up a deposit that is 20% of the property’s value to avoid Lenders Mortgage Insurance (LMI). This one-off payment protects the lender in the event that you can’t meet your loan repayments, and it is usually required if you have a loan to value ratio (LVR) over 80%. LMI is often higher for an investment property.

If you want to check your LVR, there are many calculators available. To illustrate, I checked an investment home loan of $800,000 against a property worth $900,000 (with a deposit of $100,000). The LVR is 88.8%, and the lender’s mortgage insurance estimate was $17,200 (for a first home with the same LVR, the LMI was $15,600). While LMI can be a beneficial tool to purchase a house even without a full deposit, try and avoid this additional expense.

Understand your borrowing capacity

The most important thing is, of course, what can you afford? I recommend getting a clear idea of your borrowing capacity before you start looking for a property. Lenders will calculate how much they are willing to lend you based on your financial situation and history, particularly your assets and liabilities:

What is your salary or income?
Do you have any dependents?
What debts do you have?>
What are your household expenses?
What’s your credit score – i.e. your track record with other debt?
What are your other financial obligations?
How much is your deposit?
Do you have other assets or income?

Owning an existing property with equity can significantly improve your borrowing power, but keep in mind that lenders are required to add an interest rate buffer of 3 percentage points to your loan interest rate. This reduces borrowing power by about 5% for most people.

As you’re building your budget, consider your cash flow. If your property changes from earning money to costing you money, even temporarily, will you be able to afford it? Include upfront costs like stamp duty and upkeep costs like maintenance or body corporate when calculating the affordability of your investment. I recommend ensuring you have a cash flow buffer when taking on an investment debt to ensure you can weather the ups and downs.

Step 4: Find the Right Loan

Investment property loans are also usually more expensive than standard home loans, both in borrowing costs and investment rates. This is because lenders see increased risk in an investment property. You’ll have to spend some time finding the best home loan for you. This includes your interest rate and comparison rate, as well as comparing loan features such as:

an offset account
redraw facilities
extra mortgage repayments

Your financial situation and structure is the foundation of a lot of these decisions. Should you choose a fixed or variable loan? Do you suit an interest-only repayment plan for a period of time? I recommend seeing a mortgage broker or financial advisor to discuss your options.

Consider getting conditional pre-approval

Pre-approval is when a lender has agreed to lend you a certain amount of money, subject to conditions. Pre-approval is usually valid for 3-6 months, so you have some time to look for a property or enter an auction. Generally, you need to remember two primary things with pre-approval:

You don’t need to stay with the bank that granted you pre-approval. However, if you request pre-approval again from a different lender, you can harm your credit rating (something you definitely want to avoid at this point in time!). So it’s best to be fairly confident in the bank and home loan product before applying for pre-approval.
Pre-approval is conditional. In principle, you will be able to borrow a certain amount, but this can be affected by your property choice or your financial information changing.

Step 5: Finding the Right Property

This is when the fun part begins – shopping! It’s also where a lot of the hard work preparing your strategy can pay off. What you want to achieve by the time you’re looking seriously for a property is:

Knowing what you want the property to do for you, i.e. your strategy, like rental yields or capital growth
Knowing if you will live there yourself at some future time
Knowing what your cash flow requirements are

If you have a clear understanding of these questions, then you’ll know how to evaluate the properties that you are interested in.

I can’t emphasise enough how important research is. It will provide you with good grounding in what to look for, and help you be on your guard against property ‘gurus’.

Location, Location, Location!

This old saying exists for a reason. The location of an investment property can make or break profitability, and it is often the most deciding factor in the purchase. There are some tried and true standards for property which I go back to:

The most valuable property factor is capital growth, so the area should have a good outlook for growth
The best areas for capital growth are within 15 km of the CBD of a capital city
Consider cash flow potential from tenants: is the vacancy rate low? Usually, around 3% is a good average
Is there good infrastructure or approved planning for infrastructure?

Finding an investment-grade property outside a capital city requires more rigorous research, as regional areas often have less data and less clear trends.

Property Condition: Choosing New, Renovated or Fixer-Upper?

The property condition can tie directly into how much impact you have on the value of the property. If you choose a fixer-upper and renovate, you might be able to quickly score an increase in value. However, if you’re not interested in renovating, then rule out old or un-renovated houses.

Small properties usually require less maintenance and will allow you to dip your toes in the waters of being a landlord. A new house or apartment lowers the risk of ending up with lots of maintenance to do. Therefore, if you want to build up your experience as a landlord, consider keeping your first rental property small and new.

Property Type: Residential or Commercial?

Residential properties are best for a first rental property. However, there are a variety of types of property you could choose from.

Residential

The most common type of real estate, residential properties are dwellings such as houses, apartments, or vacation homes. 12-month leases and changes to rent prices annually are fairly standard. You’ve probably had experience renting, so this is a good place to start.

Vacant Land

If you want to buy unimproved or cleared land, make sure it is in the right place that will see demand in the future. Vacant land requires little upkeep, but it also provides no income. This is best for people who can wait to use the land in the future and don’t need to see immediate returns.

Commercial or Retail

Suitable for more experienced investors, commercial real estate comes with higher costs and maintenance. Secure tenants provide a stable income due to multi-year leases, but financial risk is greater if the property becomes vacant. Long fixed-price lease periods mean you can miss out on improving rental yield.

Industrial Real Estate

Industrial warehouses, manufacturing facilities, long-term storage units, and carwashes all fall under the industrial real estate title. It can be harder to predict the rise and fall of industrial property value due to external factors, such as large retailer activity.

Make a list of all the factors that are important to you in selecting the property. Maybe your real estate agent or buyer’s agent can identify quality properties that fit your initial criteria. Then go through the list and evaluate based on your needs:

Is this one a fixer-upper when you want something new? Strike it out.
An apartment with a huge body-corporate? Strike.
An okay house in a terrible area? Strike.

Step 6: Do Your Due Diligence

We’ve discussed location and property types, and now you’ve shortlisted some investment property options. Now it’s time to evaluate each property itself as well as the area or suburb where it is located. Due diligence is the cornerstone of a successful investment, ensuring that you minimise risks and maximise returns.

Local Market Conditions

What’s happening in the suburb or the neighbourhood of the property you’re considering? Start with the more obvious things such as crime rates, good schools, and zoning. Check for infrastructure plans or development in the area that might impact capital growth.
Check the demographics of who is currently living in the neighbourhood. For example, if it’s close to a university, it might be more suited to students than as a rental for families. The demographics of the neighbourhood can tie into your rental yields and vacancy rates.

It’s valuable to research the employment trends and median disposable income for the suburb using CoreLogic and ABS databases. Areas with high employment with higher income often see better capital growth and higher rental yields.

Generally, property travels in a cycle, both on a local and national level. Research purchase price trends, auction clearance rates, and demand to supply ratio (DSR) or days on market (DOM) to see if the suburb is experiencing demand.

Buying as the suburb is growing is ideal, but if you are planning to sell the property within a year or two, you don’t want to buy at the peak time. Look out for over-inflated prices; research what similar properties are selling for in the same area and if the median sale price for the area is increasing or decreasing.

Property Details

Review the condition of the property thoroughly with the help of a professional property inspector and make a note of any maintenance needs or improvements required. Questions to consider include:

Does the property contain hazardous materials like asbestos?
Is the property in a flood zone? If so, is it resilient or insurable?
How much value can be added to the house through renovation?
Does the house have any desirable or distinctive features?
If the house needs some renovations, do you have the budget for that?
If the property already has tenants, review existing lease agreements, security deposits, and rental history. Check for any ongoing disputes or issues with tenants. Once you’ve got a thorough understanding of the properties’ good and bad points, you might have an opportunity to negotiate repairs or purchase prices.

Calculate Your Cash Flow

An absolutely vital step is making sure the cash flow of the property will suit your strategy or financial situation. A property that generates positive cash flow is ideal for most real estate investors. If the cash flow won’t cover all your expenses, you’ll need to plan for covering costs and for the future of the property. You should also think about an exit strategy, particularly if your return on investment doesn’t improve.

Calculate your cash flow by subtracting your total expenses from the total rental income. If a property is already tenanted, you could also request the rental history of the property to learn about income trends and vacancy rates.

When calculating your expenses, don’t forget to include things like utilities, property management, landlord insurance, strata or body corporate fees, property taxes, legal costs and advertising costs. These can be overlooked but will dent your profits.

Once you know how much the property will make over the year, take that number and compare it to your budget. With negative cash flow but in a growing area, the property could still pay off for you in the long term. But can you afford to cover the cash flow gap now?

Step 7 – Find the right help

Accountant

It’s helpful to get professional advice before investing in a large-scale asset. Speaking to an accountant help you avoid expensive mistakes like buying in the wrong location or not getting your cash-flow right (and having to sell at a loss). Just as important, you can get help with coordinating your property strategy with your tax, your family goals, your savings and your retirement plan.

Mortgage Broker

Your mortgage broker can help you accurately gauge your borrowing capacity before applying, advise on preparing your financial records to get the best chance for approval, as well as researching loan options and completing your application. They can also negotiate your interest rate and your borrowing capacity on your behalf. Start strong by speaking to a few mortgage brokers early in the process.

Buyers Agent

A buyer’s agent will do the heavy lifting of research and local sourcing to find a property that fits your needs and budget. With insider connections, buyer’s agents will use your financial and strategy requirements to identify suitable properties both on and off the market.

Real Estate Agent

A real estate agent can be your main source of property information. They can provide you with a list of suitable assets, arrange inspections for you, prepare any contracts, and liaise with the seller on your behalf.

You need to be able to trust your real estate agent. Make sure your agent is working for you, not just for the seller, and beware of property groups and spruikers that make huge commissions from selling low-quality properties to you. Your agent should focus on your priorities, know the market well, and be honest and direct.

General Advice Warning

Camden Professionals

Strategies for Broadening Your Real Estate Investment Portfolio

Embarking on the exciting journey of investing in real estate often involves encountering the term ‘portfolio diversification.’ But what exactly does this mean? Essentially, it refers to the practice of investing in multiple types of properties to minimize risk and balance potential losses.

The Significance of a Diverse Real Estate Portfolio

Diversifying your real estate portfolio is crucial for risk management. By incorporating various types of investment properties, you can mitigate the impact of underperforming assets. For instance, if rental properties experience a downturn, the positive performance of other non-rental investments can offset overall losses.

A well-rounded real estate portfolio typically encompasses diverse property types or locations. The objective is to avoid closely related investments and instead select properties with different growth trajectories. This ensures that if one investment faces challenges, others can provide support.

Methods for Diversifying Your Real Estate Portfolio

Understanding the importance of diversification, let’s explore the strategies to achieve it. The right approach depends on your investment goals and financial situation.

Vary Property Investment Strategies:
- Balance risk by incorporating different property investment strategies.
- Include long-term, short-term, high-return, and low-return property investments.
- Diversify beyond rental properties, exploring avenues like house flipping, buy-and-hold, and build-and-sell.
Explore Different Real Estate Sectors and Classes:
- Look beyond residential properties to commercial, retail, industrial, and mixed-use spaces.
- This provides resilience against market-specific challenges.
Diversify Through Different Suburbs:
- Capitalize on the uniqueness of each suburb by expanding your investment locations.
- Leverage suburb reports to understand local market dynamics before making investment decisions.

By embracing these diversification strategies, you can build a robust real estate portfolio that is resilient to market shifts and provides a steady income flow.

General Advice Warning

Camden Professionals

Can my SMSF invest in property development?

Australians love property and the lure of a 15% preferential tax rate on income during the accumulation phase, and potentially no tax during retirement, is a strong incentive for many SMSF trustees to dream of large returns from property development. We look at the pros, cons, and problems that often occur.

An SMSF can invest in property development if trustees:

ensure the investment complies with the rules
The ‘sole purpose test’ is met.
need to ensure the fund is maintained to provide benefits for retirement, ill health or death.

By its nature property development is high risk and fund trustees need to ensure that the SMSF is not simply a handy cash-cow for a pipe dream, particularly when the developers are related parties.

There are multiple ways an SMSF can invest in property development if the investment strategy of the fund allows:

Directly developing property
An ungeared unit trust or company (the parties can be related)
Investment in an unrelated entity
A joint venture

Directly developing property from fund assets

An SMSF can purchase land from an unrelated party and develop the property in its own right. Common issues that often arise include:

Acquiring the land from a related party – An SMSF cannot purchase land from a related party (unless it is business real property used wholly and exclusively in a business). This means that the lovely block of land inherited by one of the members, or owned by a family trust, that is perfect for development cannot be purchased by the SMSF.
An SMSF cannot borrow to develop property – An SMSF can borrow money to purchase land using a limited recourse borrowing arrangement but it cannot use a loan to improve the asset. That is, borrowings cannot be used to develop the land. And, where the SMSF has borrowed to purchase land, it cannot change the nature of that asset until the loan has been repaid. That is, no development.
Who will develop the property? – Problems often occur when the property developers are related to the fund members. Whilst it is possible to engage a related party builder to undertake the work, there are strict rules that mean that the work and materials must be acquired at market value. That is, there is no advantage from “mates rates”. If you are using a related party builder, ensure that the paperwork is pristine, any transactions are at market value, and all interactions are documented.
GST might apply – Goods and services tax might apply to the development and the sale of any developed property. If the ATO considers that an SMSF is in the business of developing property or is undertaking a one-off development in a commercial manner then GST could potentially apply.

If your SMSF is not undertaking a property development project in its own right, there are a few ways for an SMSF to invest in property development projects:

Related ungeared trust or company

An ungeared company or trust is often used (under SIS Regulation, section 13.22C) when related parties want to invest in a property development together. The SMSF can invest in a company or trust that is undertaking a property development as long as the company or trust:

Does not lease to a related party (unless business real property)
Does not borrow money or have borrowings (must be ungeared)
Does not conduct a business
Conducts any dealings at arm’s length
And, the assets of the unit trust or company:

o Do not include an interest in another entity (i.e., cannot have shares in a company)

o Do not have a charge over them (i.e., mortgage over any asset)

o Are not purchased from a related party (or was ever an asset of a related party) unless the asset is business real property acquired at market rates.

Profits from the company or trust are then distributed to the SMSF according to its share.

Section 13.22C Regulations

Using the provisions of 13.22C means that the SMSF can invest in property development with a related party without the development being considered an in-house asset. However, if the criteria are not met (at any point), the in-house asset rules apply, and the SMSF might have to sell the units in the trust or shares in the company to return to the maximum 5% in-house asset limit. Generally, this means the sale of the underlying property or a significant restructure.

Problems arise with 13.22C arrangements where the trust or company:

Needs more money to complete the development and borrows money, or issues more units and sells them (is in business)
Accepts a loan from a member of the SMSF
Overdrafts (may be considered loans and breach 13.22C)
Uses a related party builder who either under charges for the work completed or overcharges and strips the profits that should have been returned to the SMSF.

Warning on conducting a business

One of the criteria for the exemption in 13.22C to apply is that the trust or company cannot not be conducting a business. This requirement may prevent short-term property developments that are built and sold for profit.

Typically, 13.22C arrangements are used for long term investments where the development enables the creation of an asset that is then leased by the trust or company. This could be commercial premises leased to a related or unrelated party (e.g., premises for a child care centre or manufacturing), or residential premises leased to unrelated parties (e.g., townhouses or small developments).

Unrelated property developments

Investing in unrelated entities for a property development is attractive as there is no limit to how much of the fund’s assets can be invested (subject to the investment strategy and trust deed allowing the investment), and unlike ungeared entities, the entity is able to borrow money/place charge over the assets.

Where related parties are investing in the same entity, there are rules governing the percentage of ownership the SMSF and their related parties can hold. To meet the definition of unrelated entity for in-house asset purposes, the SMSF and their related parties must not own more than 50% of the units available. This is because the SMSF cannot control or hold sufficient influence over the entity and remain an unrelated entity. If the ATO considers the entity is related to the SMSF, then it would become a related party and the investment an in-house asset.

Joint venture arrangements

An SMSF can potentially invest in a joint venture (JV) property development, but the criteria are necessarily strict and there are a range of issues that need to be considered carefully. One of the issues that needs to be considered up-front is determining the substance of the arrangement between the parties, because the term JV can be used to describe a variety of arrangements. The ATO confirms that care must be taken to ensure that arrangements with related parties are true JVs.

Under a JV, the SMSF invests in and has a share of the property being developed (not the entity undertaking the development). Each party bears the costs (time and/or money) of the JV and receives this same proportionate contribution from the returns. If the arrangement is not structured properly then the SMSF’s stake in the JV could be treated as an investment in or loan to a related party and be treated as an in-house asset. For example, this could be the case if the SMSF only provides a capital outlay for the arrangement and has no rights other than a contractual right to a return on the final investment.

It is also necessary to consider whether the arrangement between the parties could be treated as a partnership for tax, GST and legal purposes. For example, this could be the case if the arrangement involves the sharing of income, sale proceeds or profits, rather than sharing the output from the project.

It’s essential to get advice well in advance – tax, legal and financial – before pursuing a JV.

Is your SMSF the best vehicle for property development?

Trustees need to carefully consider any investment decisions and have a sound rationale for the investment. Any advice on a property development needs to be from a licenced financial adviser. A lawyer should be used for any contracts or agreements between parties. And, compliance assistance from a qualified accountant.

General Advice Warning

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Should I rent out my investment property as an Air BnB

The Tax Benefits of Rentvesting

Understanding Property Taxes In Western Australia

NDIS Property Investment Guide

What are Discretionary Trusts and why you may need one

What is a Depreciation Schedule: A Beginner’s Guide

What you need to know before buying a house and land package

How to buy your first investment property in 7 Steps

Strategies for Broadening Your Real Estate Investment Portfolio

Can my SMSF invest in property development?