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Negative Gearing Myths

Negative gearing is a hot topic in Australia — and not just among property investors. It’s regularly debated in political circles, often mentioned in discussions around housing affordability, and widely misunderstood by first-time investors.

Despite its popularity, many Australians still don’t fully understand what negative gearing is, how it works, or who it benefits. As a result, they may be making investment decisions based on misinformation.

In this post, we unpack what negative gearing really means, clarify some of the most common misconceptions, and outline key factors to consider before using this investment strategy.

What Is Negative Gearing?

Negative gearing occurs when the expenses associated with owning an investment (like loan interest, rates, repairs, and maintenance) exceed the income it generates — typically rent or dividends. This results in a net loss, which investors can offset against their taxable income.

Example:

Let’s say your rental property earns $25,000 in rent per year, but your costs total $35,000. That’s a $10,000 loss. You can use that $10,000 to reduce your total taxable income for the year — lowering your tax bill.

While it’s most common in the property market, negative gearing can also apply to investments like shares.

Common Misconceptions About Negative Gearing

“Negative Gearing Is Only for the Wealthy”

This is one of the biggest myths. While high-income earners may benefit more from the tax deductions, negative gearing is not exclusive to the wealthy. What matters is:

Your ability to borrow money to invest.
Whether you have sufficient income to fund the loss.
If your taxable income is high enough to make use of the deduction.

Many middle-income Australians use negative gearing — particularly those looking to build wealth over the long term.

“It Guarantees a Profit”

Negative gearing is not a guaranteed moneymaker. The strategy assumes that the capital value of your investment will increase over time, eventually offsetting your losses. But if the value falls — or even stays flat — you may end up worse off.

Plus, you need to be able to sustain the cash flow losses year after year. If interest rates rise, or the property sits vacant, that can be a serious financial burden.

“You Get an Instant Tax Refund”

No — you don’t get a cheque from the ATO the day you lodge your BAS or tax return. Negative gearing reduces your taxable income, which in turn reduces the amount of tax you owe at the end of the financial year.

It’s a delayed benefit, not an immediate cash injection.

“Negative Gearing Is Always a Good Idea”

Wrong again. While negative gearing can be a useful long-term wealth-building strategy, it isn’t suitable for everyone.

You need to assess:

Your financial stability and income reliability.
Your investment timeframe — it’s typically not suitable for short-term investors.
Your risk tolerance — especially in a rising interest rate environment.
Whether the property or asset is likely to grow in value.

Negative gearing is a high-risk approach that requires careful planning and advice.

Frequently Asked: What Should You Consider Before Negative Gearing?

Before committing to a negatively geared investment, ask yourself:

Can I afford to cover any shortfall between income and expenses?
Do I understand the risks of rising interest rates, property vacancies, or market downturns?
Am I investing for long-term capital growth?
Have I sought advice from a qualified financial or tax adviser?

Many people assume that if everyone is doing it, it must be safe. But that’s rarely the case in investing. Negative gearing involves borrowing money to make a loss today, in the hope of gaining tomorrow. That’s not a strategy to enter lightly.

What About Housing Affordability?

Negative gearing is often criticised for giving investors an edge over first home buyers. Critics argue it drives up property prices by increasing demand and reducing affordability, especially in major cities.

Research from institutions like the Grattan Institute suggests that while negative gearing contributes to investor activity, it’s not the only factor affecting housing affordability. Supply constraints, population growth, and interest rates also play a role.

Still, it’s an important consideration in the broader economic context — especially for policymakers and younger Australians trying to enter the housing market.

Final Thoughts for Business Owners and Investors

Negative gearing is a legitimate investment strategy in Australia — but it’s not a guaranteed path to wealth, nor is it a loophole only accessible to the rich. The key is understanding the true nature of the risks and rewards.

We recommend:

Doing your homework
Assessing your financial situation honestly
Seeking tailored advice from a licensed financial adviser or tax professional

Whether you’re investing in property, shares, or another asset class, understanding how negative gearing works — and clearing up the common myths — will help you make smarter, more informed financial decisions.

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If you have any questions or would like further information, please feel free to give our office on 08 9221 5522 or via email – info@camdenprofessionals.com.au or arrange a time for a meeting so we can discuss your requirements in more detail.

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.

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Understanding the Tax Consequences of Sharing Your Home

Homeownership often comes with opportunities to generate extra income, whether through renting out a room, offering short stays via platforms like Airbnb, or accepting payments from family and friends. However, these arrangements can have significant tax implications that homeowners must navigate carefully. Understanding how these various scenarios affect your assessable income and allowable deductions is essential for staying compliant with tax laws and maximizing your financial outcomes.

Types of Home Sharing Arrangements

Homeowners can share their homes in several ways:

Renting Out a Room: This could be a long-term rental agreement or a short-term arrangement.
Short Stays via Airbnb: Many homeowners opt to list their properties on short-term rental platforms.
Board from Friends or Family: Accepting payments from relatives or friends who need a place to stay.

Each of these arrangements has different tax consequences that affect how you report income and what expenses you can claim.

Income Reporting

Regardless of the type of arrangement, any rent received must be declared as assessable income when you lodge your tax return. This includes not only direct rental payments but also associated amounts such as bond money and booking cancellation fees. The tax implications apply whether you rent your entire home or just a part of it, and for any duration, from a single-night booking to an ongoing lease.

This means that if you engage in home sharing, you should maintain accurate records of all income received to ensure compliance with the Australian Taxation Office (ATO) requirements.

Claiming Deductions

Homeowners can claim deductions for certain expenses related to their rental income. There are two categories of deductions:

Immediate Deductions: Some expenses can be claimed in the year they are incurred, such as advertising for tenants or cleaning fees.
Depreciation: Other expenses, like the cost of renovations or improvements, need to be claimed over time through depreciation.

It’s important to note that deductions can only be claimed when your home is either rented out or genuinely available for rent. If you are renting out only a portion of your home, deductions can only be claimed for expenses related to that specific area. For example, if you rent out a room, you cannot claim deductions for the entire mortgage or utility costs—only for the portion attributable to the rented space.

Domestic Arrangements vs. Rental Income

When it comes to family members or friends paying for accommodation, the situation changes. If they pay for board and lodging to cover their food and accommodation, this arrangement is generally considered a “domestic arrangement” rather than a rental one. As a result, you don’t need to declare these payments as assessable income, and you also cannot claim deductions for related expenses.

However, caution is warranted. If you have a more formal arrangement with friends or family where you intend to make a profit—such as consistent payments that resemble a commercial tenancy agreement—then merely labeling these payments as “board and lodging” will not exempt you from tax implications. In such cases, it’s essential to declare the income and related expenses accordingly.

Seeking Professional Advice

Given the complexities surrounding tax implications of home sharing, it’s advisable to seek professional advice if you’re unsure about your specific situation. Tax professionals can provide tailored guidance on how the ATO may view your arrangement and ensure compliance with current regulations. This can help you avoid potential pitfalls, including unexpected tax liabilities.

Conclusion

Sharing your home can be a rewarding way to supplement your income, but it also comes with important tax considerations. From understanding what constitutes assessable income to navigating the complexities of deductions and domestic arrangements, homeowners must be diligent in their record-keeping and compliance efforts. By staying informed and seeking expert advice when necessary, you can effectively manage the tax consequences of sharing your home and optimize your financial outcomes.

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Tax Tips for Property Owners Renovating Investment Properties

Creating wealth through buying an investment property is a well established practice in Australia. In fact, there are approximately 9 million residential dwellings in this country and almost 25% of them are rented from private landlords.

According to the Australian Tax Office there are just over 23 million people in Australia of which just under 8% of the population (1,811,174 individuals) own an investment property. According to the ATO data, 72.8% of individuals that owned an investment property owned just a single one. Meanwhile, 18% of individuals owned 2 properties and just 0.9% of individuals owned 6 or more. Clearly, negative gearing is a part of our DNA and it is fuelled by the tax incentives, our population growth, historic low interest rates, growth in property values and use of investment vehicles like self-managed superannuation funds.

Ultimately, the only way investors make money from their property investment is through capital growth. Accordingly, it’s no surprise to find a lot of investors renovate their investment property in a bid to increase the value. Unfortunately, for tax purposes, there is a big distinction between a repair and a renovation. In fact, there can be both income tax and capital gains tax implications when renovating a property.

Renovating investment properties can be a lucrative way to increase their value and rental income, but it also brings complex tax considerations. For property owners in Australia, understanding how to manage these tax implications effectively can help maximize financial returns and ensure compliance with tax regulations. Here are some essential tax tips for property owners undertaking renovations.

Understand Deductible Expenses

One of the primary tax benefits for property owners renovating investment properties is the ability to claim deductions for certain expenses. Generally, you can claim a deduction for the costs of repairs and maintenance that directly address wear and tear. This includes things like fixing leaky taps, repainting, or repairing broken fixtures.

However, it’s important to distinguish between repairs and improvements. While repairs are immediately deductible, improvements or renovations that enhance the property’s value or extend its useful life are classified as capital works. These costs cannot be claimed as an immediate deduction but can be depreciated over time.

Separate Repairs from Improvements

Correctly categorizing expenses is crucial for maximizing tax benefits. Repairs are generally considered necessary to keep the property in its current condition, while improvements involve upgrading or altering the property. For instance, replacing an old kitchen with a new, modern one is an improvement, while fixing a leaking sink is a repair.

The Australian Taxation Office (ATO) requires that repairs be deducted in the year they are incurred, while improvements must be capitalized and depreciated over several years. Proper documentation and categorization of expenses can help avoid issues during tax time.

Claiming Depreciation

For improvements or capital works, you can claim depreciation over the effective life of the asset. Depreciation allows you to write off the cost of the renovation or improvement over time, typically over 40 years for capital works. This can include structural improvements such as adding a new room or installing new roofing.

To maximize depreciation claims, keep detailed records of all renovation costs and consult with a qualified quantity surveyor. They can provide a depreciation schedule that outlines the deductions available for various assets and improvements.

Consider the Capital Gains Tax (CGT) Implications

Renovations can also affect your capital gains tax liability when you sell the property. While the costs of renovations can potentially reduce your capital gains tax liability by increasing the property’s cost base, it’s important to keep accurate records of all renovation expenses. This includes invoices, receipts, and contracts.

If the renovation improves the property significantly, it may increase its market value, which could lead to a higher capital gain when you sell. However, these increased costs can be added to your property’s cost base, potentially reducing your taxable capital gain.

Utilize the Instant Asset Write-Off

For smaller-scale renovations and new assets, the instant asset write-off can be advantageous. Under current regulations, businesses and property owners can claim an immediate deduction for the cost of depreciable assets up to a certain threshold. This can apply to items such as appliances or furniture purchased during renovations.

Ensure you check the current threshold limits and eligibility criteria, as these can change based on government policy and budget updates.

Keep Detailed Records

Maintaining thorough and organized records of all renovation-related expenses is crucial. This includes not only the costs of materials and labor but also any associated administrative costs. Accurate records support your claims for deductions and depreciation and are essential in case of an ATO audit.

Seek Professional Advice

Tax laws and regulations can be complex, and what applies to one property owner might not apply to another. Consulting with a tax professional or accountant who specializes in property can provide tailored advice and ensure you are making the most of available tax benefits while staying compliant with all regulations.

Conclusion

Renovating investment properties can offer significant financial rewards, but it comes with various tax implications. By understanding what expenses are deductible, properly categorizing repairs versus improvements, claiming depreciation, and staying on top of capital gains tax considerations, property owners can optimize their tax outcomes. Keeping detailed records and seeking professional advice will further ensure that you navigate the tax landscape effectively and make the most of your renovation investments.

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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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How to reduce your Capital Gains Tax – The 6 Year Exemption Rule

Investment property can be a lucrative way to set your family up for a future nest egg. However, if you’re looking to maximise the value of your property investments, you need to be aware of the costs that come along with it.

The biggest cost you’re likely to face comes from capital gains tax (CGT), which occurs when you sell your property. The good news is that there are several exemptions available for CGT which reduce the amount of tax you’re required to pay. In this article, we look at the six-year exemption rule on CGT, and what this means for your investments.

What is capital gains tax?

A capital gain refers to the profit you make on the sale of an asset. And, because your property is considered an asset, you’re required to pay tax on the profit you make from this sale. This is your Capital Gains Tax. It is worth noting that capital gains tax is not a separate tax and is included in your annual income tax return.

How to define your ‘main residence’

Your main residence, or principal place of residence (PPOR), is the property you live in full time. If you buy a property to rent out as an investment, this is considered a rental investment property.

How the ATO defines your principal place of residence (PPOR)

The Australian Taxation Office (ATO) exemptions consider that your property is your main residence. That’s why it’s important to understand what it actually means for a property to be your main residence, and how you achieve this.

The ATO considers several factors during their review of your property, and there’s no single criterion that is the determining factor.

The ATO will typically determine that a property is your principal residence when:

You and your family live there, and you keep your personal possessions there
This is your main residential mailing address
You’re enrolled on the electoral bill at this address
Your property has all the usual utilities connected, in your name

If you only satisfy some of these criteria, then the ATO will need to review your situation individually to make a qualified decision.

Determining when your home stops being your main residence

When you stop satisfying most of the main residence criteria mentioned above, a property is no longer considered your main residence. Typically this will happen the day you move out for an extended period of time.

Does the 6-year CGT exemption apply to your main residence?

The six-year exemption rule applies to your main residence and reduces the CGT you pay upon selling it.

Whichever category your property falls into, you may still be required to pay CGT when it comes time to sell. And if your property has increased in value, your CGT will also increase.

Does the 6-year CGT rule apply to investment properties?

Yes. The ATO’s six-year CGT exemption rule applies to investment and rental properties.

What is the 6-year capital gains tax exemption?

A common question surrounding CGT on property investment is around when a property’s main residence status starts and finishes. When you stop living in your house, then sell it at a later date, how does this get treated? This is where the six-year CGT exemption rule comes into play.

Once your property no longer meets the ATO’s main residence criteria, you can still claim it as your principal place of residence for up to six years. This is known as the six-year absence rule or six-year exemption.

The CGT exemption period can vary depending on how you utilise the property after you leave:

If you’re renting it out, it can remain your main residence for up to six years
If you don’t rent the property, it can remain considered your main residence indefinitely

The six-year CGT exemption for the main residence is counted on a daily basis; if you get to six years minus one day and stop renting the property out, you can continue to own and treat it as your principal residence indefinitely.

Further, there’s no hard limit on the number of times you can access this exemption. See an example of how this works in practice below.

Example

You buy a property in 2005 and live in it for four years. In 2009, you get a new job interstate, so you move out of your home and rent it out. You rent the property until 2013, but then you return to Victoria and move back into your original home.

You stay here until 2016 when you see another job appear interstate. You’re allowed to move out again and access another six-year absence period.

Throughout this entire time, your property has been classified as your main residence for CGT purposes, so you’re completely exempt from paying CGT on its sale.

In this second time away, your property would be considered your main residence up until 2022, or until you buy a new property that’s considered your main residence during this time.

It’s best to get a thorough market valuation of your property at the close of this six-year period. This provides you with an accurate price and clear documentation outlining the capital gain you’ll make during the time your property isn’t your main residence.

When you move back into your property, the ATO doesn’t have a clear answer as to when it technically becomes your main residence again. However, common sense would consider a period of six months or more to be a good starting point. And the longer you live on your property, the better.

Can you have two primary residences in Australia?

Yes, you can, but things can get complicated when you own more than one property. This gets even more complicated when you live in more than one property for an extended period of time.

Does the ATO 6-year rule apply to two main residences?

While you may functionally have two principal residences, you can only designate one as your principal place of residence for CGT purposes.

For example, say you’ve lived in one property and then moved into a second property for an extended time. Under the six-year absence rule, both properties could technically be considered your main residence for the first six years after you move out of the first property. This leaves you with the dilemma of determining which property is considered your main residence for CGT purposes when you sell either property.

You don’t actually need to make this decision until you’ve sold your property and lodged your tax return. In this case, you have the chance to determine the capital gain on both properties and decide which one will have the most benefit of being considered your main residence.

Can foreign residents benefit from the 6-year CGT rule?

Recent rulings from the government affect the ability of foreign residents to claim this exemption.

Under this new ruling, from 1 July 2020, if you’re classed as a foreign resident, any sale will be fully taxable, even if it’s technically classed as your main residence during this time.

So, if you’re looking to sell your home but are likely to become a foreign resident in the near future, you should consider the CGT implications.

6 facts about the 6-year primary residence exemption rule

When claiming a six-year principal residence exemption on your CGT, you can only do this under your individual name. Properties that are held within trust or company structures aren’t able to access this exemption.
As an individual, you can only have one main residence at a time. The exception to this rule is when you’re moving house. In this instance, certain provisions are in place that allow you to have two main places of residence. However, this is only available for a six-month period.
If you use your main residence to derive income, you might be disqualified from claiming the exemption, or may only be eligible for a partial exemption. So if you rent out your property, or run a business directly from the premises, you may not qualify for the exemption.
Operating from a home office is different, as you’re not actively running a business or deriving income from your home. In this case, you can still claim the exemption. But as soon as you use your property as business premises — such as a workshop, garage, or salon — you’re likely to receive only a partial exemption.
Another thing to be aware of is that the main residence exemption is only available for land with property. You can’t claim the principal residence exemption on a vacant block.
‘Main residence’ only accounts for up to 2.5 hectares of land. If your property is greater than 2.5 hectares, then you can only receive an exemption on your home and the surrounding 2.5 hectares.

The final word: how to apply for the 6-year CGT exemption

Navigating CGT can be confusing at the best of times, so it’s crucial to understand when exemptions of any kind come into play.

Capital gains tax exemptions in Australia

The six-year exemption isn’t the only way to minimise your main residence CGT obligations. Here are a few more tips and tricks that you might like to read up on:

Remember the date of purchase – properties acquired before 20 September 1985 are exempt from CGT.
Purchase properties using your super fund – if you have a self-managed superfund and have owned your property for at least 12 months, you can claim a CGT discount if you’re still in your super accumulation phase. If you’re retired and claiming your pension, you won’t have to pay CGT at all.
Increase your asset cost base – the cost base is the amount you pay to purchase, own, improve and sell your property: the higher your cost base, the lower your CGT obligations.

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We offer a 10-minute no obligation consultation to existing property investors, first home buyers and small business owners who are looking at property investments, business and asset protection. To Book an Appointment simply click here and pick a time and date.

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The tax implications and pitfalls of small-scale subdivisions

You’ve got a block of land that’s perfect for a subdivision. The details have all been worked out with Council, the builders, and the bank. But, one important aspect has been left out; the tax implications.

When you undertake any subdivision of land that is not part of a property development business, even if it includes your family home, you need to understand when:

any gains or losses are treated as a gain or loss of income or capital
an activity is considered to be carrying on an enterprise for ABN and GST purposes

This is not applicable if you are involved in property development and purchased land in the course of your business.

Tax treatment of the subdivision

Subdividing land

The tax treatment of even a small subdivision can become complex very quickly and tax applies according to the circumstances. You cannot simply assume that just because it’s a small development, any profit from the eventual sale will be taxed as a capital gain and qualify for CGT concessions.

In general, if you own a property personally, it has been held and used for private purposes over an extended period, you subdivide it and sell the newly created block, then capital gains tax is likely to apply to any gain you make.

If a property is initially owned jointly but the property is subdivided and the lots split between the owners, then this will normally trigger upfront tax implications even though the land hasn’t been sold to an unrelated party yet. Arrangements like this (referred to as partitioning) can be complex to deal with from a tax perspective.

Developing a property – What happens if you develop the land?

It’s not uncommon for people to decide to subdivide and develop their block by building a house or duplex and then selling the new dwelling.

When someone develops a property with the intention of selling the finished product at a profit in the short term, there is a risk that this will be taxed as income rather than under the capital gains tax rules.

This limits the availability of CGT concessions (such as the 50% CGT discount) and will often expose the owners to GST liabilities as well. This can be the case even for one-off property developments.

The ATO has provided guidance on the tax implications of this type of subdivision in the example below.

Example: Claude’s one-off profit-making subdivision activity

Claude purchased his home on a single title from a private seller on 1 July 2001 for $300,000. The house was situated on the front portion of an 800m² block. Claude wished to remain in this home however maintaining the big backyard became a burden.

On 1 July 2020, Claude began detailed research and spoke with multiple local real estate agents to understand if he could subdivide his backyard to build a new house and sell it.

Claude’s registered valuer valued the entire property at $600,000 split 60% | 40%:

original house and land – $360,000
newly created subdivided lot – $240,000

Claude decided to subdivide, build a house, and sell the newly created subdivided development. To do this, he:

lodged an application for subdivision and received council approval
engaged a project developer to:
- prepare and submit a development application
- build the new house.

Claude funded the development expenses of $440,000 (GST inclusive) through a bank loan and expected the sale of the new house to pay the loan out in full.

He engaged a local real estate agent to sell the new house. He sold it via a contract signed on 1 July 2021 for $1,210,000. There is no agreement to apply the margin scheme to the sale.

Income tax outcomes

Once the backyard got its own title, it became its own asset and was no longer part of Claude’s home as a domestic asset. Because Claude’s transaction is more complex than just selling the vacant lot, his activities amount to a development activity.
The sale of the backyard became a profit-making activity once Claude made the decision to embark on that activity.

The net profit from that activity will be included in his assessable income.

Claude made an overall gain (net profit plus capital gain) of $580,000. This will be the assessable income he pays tax on.

The overall gain is calculated as follows:

Proceeds of sale ($1,100,000 – ex GST) minus development expenses ($400,000 ex GST) plus the original cost attributable to the newly subdivided lot of $120,000 ($300,000 × 40%) equals $580,000.

The increase in the value of the newly created subdivided lot from when it was originally acquired (1 July 2001) up to when the profit-making activities began (1 July 2020) should be treated as a capital gain.

The original cost, attributable to the newly created subdivided lot was $120,000 (40% × $300,000) on 1 July 2001.
The value of the newly created subdivided lot at the time Claude began to undertake profit-making activities on 1 July 2020 was $240,000.

As Claude has held the subdivided block for greater than 12 months, he is entitled to a 50% CGT discount, hence there is a discounted capital gain of $60,000.

The increase in the value of the newly created subdivided lot from when the profit-making activities began up to the time of sale should be treated as ordinary income.

The net profit ($460,000) will be based on the GST exclusive sale proceeds ($1,100,000) minus the GST exclusive development expenses ($400,000) and the value of the subdivided lot ($240,000).

If Claude is not carrying on a business, he cannot claim a deduction for the development expenses as they are incurred. They will be considered in determining the net profit on sale. If Claude finished the development but decided not to sell the property, then this would complicate the income tax and GST treatment. We would need to explore what Claude plans to do with the property.

Do you need to register for GST?

If you are an individual who is subdividing land that has been held and used for private purposes then you might not need to GST, although this will depend on the situation.

However, if you are engaged in a property development business or a one-off project that is undertaken in a business-like manner, then it is more likely that you would need to register for GST.

In Claude’s scenario, because the projected sale price of the developed land was above the GST threshold of $75,000, he will probably need to register for GST. This will mean that he:

Has a ‘default’ GST liability of $110,000 on the sale price of the developed block, although it might be possible to reduce the GST liability by applying the GST margin scheme
Needs to provide a notification to the purchaser of the amount at settlement to be withheld and paid to the ATO
Is able to claim $40,000 credits for the GST included in the development expenses (subject to the normal GST rules), and
Must report these transactions by completing business activity statements.

The tax consequences of subdivision and other property projects can be complex. If you are contemplating undertaking a subdivision and any property development activities, please contact us and we can help walk you through the scenarios and tax impact of the project.

Source: ATO – Tax consequences on sales of small-scale land subdivisions

General Advice Warning

Camden Professionals

Property Investor Tips for the new Financial Year

2023 is already shaping up to be quite a challenging year for property investors and landlords, with the impacts of interest rate rises beginning to bite and economic uncertainty dampening the market. There are, however, tried-and-tested ways for investors to get ahead. Get the latest tips for property investors.

Recalibrate your investment strategy

Investors who want to succeed this year must focus on strong capital growth areas with high rental demand. With immigration opening up in Australia, the government expects some 235,000 immigrants so focus on areas with strong population growth potential and look for properties with high rental returns. With vacancy rates at an all-time low around the country, high rental yields can offset any potential rises in interest rates.

Learn from mistakes

Time is an investors’ biggest asset, and one mistake investors should avoid over the next year or two is buying into big projects with two to four-year sunset clauses.

With banks constantly changing their lending criteria and developers uncertain of market conditions there is a considerable risk that some developments may not proceed. When this happens your deposit money is tied up and you lose years of potential compounding capital growth.

Another mistake is zeroing in on mining towns where mining is the only industry. With changes in government and new energy all the rage, mining towns could become a thing of the past, severely affecting property prices and rent returns.

Tap the right people – brokers, agents, and managers

While it is not impossible for one to succeed in the property investing space without tapping agents and brokers, it still pays to have the right people on the team. First Brick Property Buyers Agency director Kyrillos Mansour said there are merits to getting a mortgage broker, especially for investors who are starting to build their portfolio.

A well-informed mortgage broker can significantly benefit investors — they can compare hundreds of loan products and find the best-fit solution for the investor’s individual situation and needs. With a mortgage broker, the arduous task of speaking with multiple banks can be eliminated, reducing the hassle of the loan application process. Buyers agents are as important for investors – Mr Mansour said a knowledgeable and data-driven agent can immensely help investors decide where to purchase.

In scenarios where the investor is proactive and has a data-driven approach, bbuyers’agents may not be necessary, but their experience in negotiating and transacting hundreds to thousands of properties can still aid in securing a better deal. They can help investors make informed decisions, free from emotional biases. This is one of the advantages of investors who tap buyers agents over those who take the do-it-yourself route.

Meanwhile, those with established portfolios are highly encouraged to get a property manager.

Here are some of the other benefits of getting a property manager.

Professional management. With their professional background, managers can ensure that properties are well maintained and running smoothly, maximising the return on investment for the investor.
Compliance. Property managers are knowledgeable about various laws and regulations.
Tenant relations. With property managers, investors are able to secure quality tenants. Managers also handle the lease negotiation and any disputes that may arise.
Financial management. Investors can stay on top of the financial performance of their properties with the help of managers who take over the jobs of rent collection, bookkeeping, and preparation of financial reports.

Improve the marketing of the property

In a competitive market, improving the rental listing is key to ensuring that the property stands out. Consider the following strategies:

If the property is newly bought, ask the selling agent for existing professional photos, floorplan, and videos of the property.
For existing properties, spend some money on professional photography for the listings. Add lifestyle shots showing nearby amenities to boost the appeal of the listing.
Show the property during the daytime and early evening.
Have advertised openings with pre-qualified applicants.
Be flexible to allow the maximum audience to see the property.
Pay for a premium listing to highlight online.

Retain quality tenants

Maintaining a good relationship with tenants is a must. First, fix any problems in a timely manner.

investors must understand that losing a good tenant can dent their finances. For example, if a good tenant cannot pay an extra $50 a week to bring it to a market rent of $600 per week and you decide to list the property for rent on the open market, the costs to re-let the property could be up to $2,400 to the landlord. You may lose a good tenant and obtain a bad one, you just never know. Do your calculations and ensure it is worth the risk.

Think of green upgrades

Energy efficient upgrades can be attractive to potential renters as they can see a reduced electricity bill benefit and result in a tenant occupying the property longer and therefore reducing vacancy.

However, not all upgrades can provide bang for your buck. For instance, investors must weigh the pros and cons of solar panels. Solar panels can cause roof leaks and future maintenance or replacement costs but if the landlord is paying for the electricity, this can be a way to increase cash flow. You need to weigh up the cost of installing the devices against the savings to determine viability.”

Keep in mind that it takes time, energy, and fossil fuels to create these green upgrades, which also have a limited shelf life. Still, there are some practical green upgrades that are not as costly and can be easy to do, like having energy-efficient appliances. Sealing windows and doors is also a good upgrade, as it can help reduce airflow inefficiencies and improve the overall quality of air inside the property.

Get the property insured

A study from the Insurance Council of Australia showed that only around three in five rental properties across the country are covered by landlord insurance. There is no denying the importance of landlord insurance, which protects investors from potential lawsuits, any potential loss due to damage, and other risks.

When choosing landlord insurance, make sure the policy covers accidental damage caused by the tenants as well as loss of rent. Shop around or engage a good insurance broker to do the work for you. Make sure you choose an insurer who specialises in landlord insurance.

A landlord insurance policy usually covers the dwelling itself and other structures within the property. However, it might also be useful to add some optional coverage to the policy including vandalism, burglary, renovation, and building codes.

Take advantage of tax breaks

Investors must also learn to not just keep all the receipts for works done on the property but to also record all fees, including interest and bank costs.

You may also want to consider buying the property through a family trust or even a self-managed superannuation fund (SMSF). If you don’t already have one, seek out a qualified accountant who understands property investment and can recommend the best purchase structure according to your situation. Use a depreciation schedule to help increase your tax deductions.

A new home will give greater depreciation benefits than an older home. You only have to get a schedule done once and give it to your accountant who will use the depreciation to reduce your taxable income.

Conduct a home loan review

Given the changes in interest rates over the past months, investors must revisit the terms and features of their home loans. Interest-only payments is something worth considering on the back of rising rates. This will free up more cashflow and ensures lower repayments. As long as the total value of the property increases during your time as owner, you will see good capital growth with this option.

Taking advantage of an offset account is also a good route to take, as it can help provide a safety net for when unexpected maintenance costs arise.

It’s also a good idea to increase your frequency of repayments. Over time, this limits the amount of total interest owed on your property.

Checking your tenancy agreements

When finalising the tenancy agreement, landlords must:

Have everything clearly laid out in writing to avoid any future complications
Prepare for the worst and reduce your risk to achieve the best
Include all necessary clauses
Seek professional advice from the property manager and/or solicitor before signing the agreement
Always keep a copy of the signed agreement for your records and future reference
Know when all appliance warranties expire to ensure they are not replacing something that is under warranty – this also creates future replacement expectations

Know the people you are renting to

Confirm the tenant’s identity by cross-checking with government IDs
Understand their level of employment and ensure their ability to pay rent
Ask what their future plans are – how long do they intend to stay?

Prepare for the worst-case scenario

Determine the appropriate number of days you must give the tenant to vacate the property after giving them notice
Know your rights to the bond payment in the event of damages
Know what actions you need to take if a tenant decides not to vacate the property and ensure the property manager has experience in these situations

General Advice Warning

Camden Professionals

Granny Flat Arrangements and Capital Gains Tax

A granny flat arrangement is a written agreement that gives an eligible person the right to occupy a property for life. Ordinarily, an arrangement like this may trigger CGT because it is the creation of a contractual or other right (CGT Event D1).

From 1 July 2021, capital gains tax (CGT) may not apply when a granny flat arrangement is created, varied or terminated.

A granny flat arrangement typically happens between an older person and their adult child. However, the parties in a granny flat arrangement do not need to be related. A granny flat arrangement can be entered into with any party, including family or friends.

Granny flat interest

An individual has an eligible granny flat interest if they have a right to occupy a property for life under a granny flat arrangement. A granny flat interest can be held in any type of property, provided it is a dwelling. This includes the owner’s main residence or a separate property. It is not restricted to what is commonly referred to as a ‘granny flat’. The interest may be in part or all of the property.

For a granny flat arrangement to be exempt from CGT, the person with the granny flat interest must either:

have reached pension age
require assistance for day-to-day activities because of a disability

A granny flat arrangement is exempt from CGT if:

the owner or owners of the property are individuals
one or more eligible people have an eligible granny flat interest in the property
the owners and the people with the granny flat interest enter into a written and binding granny flat arrangement. This arrangement must not be commercial in nature.

The exemption only applies to creating, changing or terminating a granny flat arrangement. Other CGT events that are not related to a granny flat arrangement, or sit outside the arrangement, are subject to normal CGT rules and may be liable to CGT. For example, the sale of a property that was used in a granny flat arrangement, which has since terminated, is subject to the normal CGT rules.

The ATO have provided the following examples.

Example 1

Mary is 70 years old. She lives in her own house, which is currently valued at $400,000. Her daughter, Isabella, lives with friends in a different house.

To secure her house for her daughter’s inheritance, Mary:

transfers the ownership of her house to Isabella
creates a granny flat arrangement with Isabella under which Mary retains a right to accommodation for life.
After taking ownership of the property, Isabella moves in and lives with her mother.

When Mary transfers her home to Isabella there is a CGT event. However, Mary is entitled to the main residence exemption on the transfer of her home, so there is no CGT liability. The requirements of a granny flat arrangement have been met. Therefore, Isabella will have no CGT liability for granting her mother a right to accommodation for life. As Isabella moves into the home once she owns it, she will be entitled to the main residence exemption from CGT if she later sells it.

Example 2

Jim and Joan are of pension age. They live in a home on a large block, which they are struggling to maintain. They decide to sell their home and buy a 6-bedroom home in their son, Isaac’s, name. The home can accommodate themselves and Isaac’s family.

Jim and Joan:

sell their old home for $800,000. The sale is exempt from CGT under the main residence exemption
buy a new home for $600,000 in Isaac’s name
transfer the additional $200,000 to Isaac
create a written granny flat arrangement with Isaac

All the requirements of a granny flat arrangement have been met. Therefore, Isaac will have no CGT consequences for granting the granny flat interest to Jim and Joan. Some years later, Isaac and his spouse separate. Isaac sells the 6-bedroom family home and buys another home not too far away.

Isaac is entitled to the main residence exemption on the 6-bedroom home, so there is no CGT when he sells it.
Jim, Joan and Isaac move into the new family home and vary their written granny flat arrangement so that it covers the new home.
As Jim and Joan are still eligible to enter a granny flat arrangement, there are no CGT consequences for Isaac when the arrangement is varied.

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Frequently Asked Questions

Negative Gearing Myths

Understanding the Tax Consequences of Sharing Your Home

Tax Tips for Property Owners Renovating Investment Properties

Understanding Property Taxes In Western Australia

How to reduce your Capital Gains Tax – The 6 Year Exemption Rule

The tax implications and pitfalls of small-scale subdivisions

Property Investor Tips for the new Financial Year

Granny Flat Arrangements and Capital Gains Tax