To avoid disputes, with the birth of every SMSF it pays to think about death



When commencing any self managed superannuation fund (SMSF), there is one over-riding expectation that an adviser will most likely drum into newby trustees again and again - that their fund must meet the sole-purpose test. This is not only to maintain access to the various tax concessions available, but to avoid possible civil or even criminal penalties.

 

This "sole purpose" is that the fund has been established with the core expectation that it is there to save and make money for each members' retirement savings. Or, to quote the regulator of SMSFs (the ATO), the fund "needs to be maintained for the sole purpose of providing retirement benefits to members, or to their dependants if a member dies before retirement".

 

Newly minted SMSF trustees will likely be focused on the first part of the above statement, but it is the last few words - or their dependants if a member dies - that can take on greater importance as time goes by.

 

While no-one really wants to think about it, it is important that SMSF members/trustees have the facts before them from the outset - that way there'll be less surprises (and hurdles) if the unthinkable happens and a member dies.

 

As an example, consider Peter Podd and his wife Peta. They set up an SMSF, the Ps-in-a-Podd Super Fund (PIAPSF), which is a typical two-member fund with individual trustees. But what happens if Peter dies?

 

A legal personal representative (LPR) may be appointed as trustee for Peter to look after his interest in PIAPSF for a limited time (until benefits are paid to beneficiaries). This is only possible when the trust deed governing the fund allows for such an appointment (many SMSF trust deeds do).

 

Then Peta must make sure PIAPSF still meets the definition of an SMSF.

 

Technically, after the death benefit payment is made to the beneficiaries, the LPR will have to be removed and the surviving trustee/member (Peta) will have to adopt one of the following options to ensure the SMSF will remain complying:

(1) ask someone else to become the second individual trustee, or (2) set up a corporate trustee (with the single member becoming the sole director of the company).

 

Note it is possible to ask the LPR to join the fund as soon as the death benefit commences to be paid in which case he/she becomes the second individual trustee of the SMSF in their own capacity, not as LPR.

 

Another viable option would be to transfer PIAPSF's balance to another fund and wind up the SMSF.

 

Peter's death benefits must be dealt with as soon as possible. If the fund has limited cash available, assets may need to be sold to pay the benefits.

 

Death benefit nominations

SMSF members can nominate who will get their benefits when they die.

 

A binding death benefit nomination directs the trustee to pay the benefit to a legal personal representative or a dependant. Without a binding nomination, the remaining trustees will decide how the benefits are distributed by considering the trust deed and super laws.

 

The trust deed must be followed, even if it is different to the member's will.

 

To understand how death benefits can be paid you need to know who is a dependant. A dependant is generally a spouse, or someone in a close personal interdependent relationship. Or a child who is under 18, has a disability or is aged between 18 and 25 and is financially dependent on the deceased.

 

In regard to tax, any sum paid to a dependant of the deceased is tax free. It's not assessable income or exempt income. The SMSF doesn't withhold tax from the payment and the recipient doesn't include it in their income tax return.

 

A dependant can be paid a lump sum or an income stream. A non-dependent can only be paid a lump sum. If the death benefit is paid as an income stream, or is paid to a non-dependent or the trustee of a deceased estate, there may be tax to pay.

 

Lump sums can be paid in cash or non-cash form, for example, shares or property.

 

The trustee may need to withhold tax from a death benefit. Working this out can be complex and will depend on a number of factors. If a trustee has to withhold tax, they must register for PAYG withholding and complete some other ATO forms.

 

It's wise to plan ahead. If there is a dispute over the payment of death benefits which can't be resolved, it may lead to costly court action. Clear guidelines in the trust deed will help prevent problems.

 

# # # # # # # #clarkemcewan #superadvice #smsfadvice

4 Things to consider before buying a holiday home



With summer fading from the horizon, you may be dreaming of a few lazy days at the beach or escaping to a country cottage. Perhaps you're considering buying your own piece of paradise.

Buying a holiday home is not too different from buying a family residence or investment property. Location, price and the property itself are important, but there are extra details to consider when you're on the hunt for a weekender.

1. Location

Proximity to schools and employment hubs may not be essential for your regional retreat, but you'll probably want access to some amenities. A petrol station or local shop where you can pick up the basics would be useful. Is it really absolute seclusion you crave, or would you rather have cafés and restaurants nearby?

If you plan to retire to the property in the future, consider distances to hospitals, shops and a local community.

Consider how easy it is to get to the area you've selected. You'll want to be close to highways and maybe airports – but not too close. Much more than two hours' travel from home might make you think twice about that weekend getaway.

2. Features

When looking for a full-time home, you should decide on features such as how many bedrooms you need and how big you want the kitchen and living areas to be. Do the same for your holiday home.

Also, ask yourself how important it is to have views. Do you mind being close to the neighbours? How much land can you manage? Consider maintenance requirements: you want to relax at your weekender, not spend time making repairs.

Remember you won't be around all the time, so think about security. Check whether the property could be at risk of fires or floods, and what you could do to protect it.

3. Costs

As with any housing purchase, make sure you budget for all the costs. These may include a deposit, stamp duty, mortgage insurance and solicitors' fees.

Get inspection reports, ideally by people who are experts in the local area. Regional properties may face different issues from those you're used to in the city. Noxious weeds, for example, are unlikely to concern you if you live in central Melbourne or Sydney, but they can be a major problem in the country.

Factor in furnishing costs. Some holiday homes are sold with furniture and appliances. If not, you'll have to find money to fit out your retreat. And don't forget transport costs to get there.

4. Tax and investment

A holiday home is not your primary residence, so you may be subject to capital gains tax when you sell. You may also have to pay land tax.

If you plan to rent out your weekender when you're not using it, you'll have to pay tax on any income earned, although you may be able to claim deductions for expenses. You should always seek professional advice on financial and tax-related matters.

Remember, when you're considering buying your own slice of heaven, it's the little details that will make all the difference to your weekend getaway.

We are happy to advise on all the above matters prior to entering into a contract. We love to see people realise their dreams.  Contact us now for an obligation free consultation. about securing that cabin-at-the-lake or beach house.

Help secure your capital with fixed income ETFs

Australian investors have not traditionally been big users of fixed income, but the asset class is increasingly coming to the fore. Investors are becoming more aware of the need for diversification in their portfolios, the income flow, stability and certainty that bonds can provide, and how crucial these attributes can be when planning a self-funded retirement. 

Steady and reliable income

Bonds are classified as 'income assets' as they provide a steady and reliable stream of income. Fixed income is generally considered to be a defensive asset class, but bond values can fluctuate due to changes in interest rates. Bonds have a lower risk profile than shares, which means they don't offer the same capital growth potential.

The spectrum of bonds available ranges from practically risk-free (if held to maturity) Commonwealth government bonds, to semi-government bonds (issued by state governments) to corporate bonds (issued by companies). This bond menu offers a wide range of yields, and therefore meets a range of investor needs and risk appetites.

Corporate bonds do not have as high a credit rating as Australia's sovereign credit rating – or those of the states – so they are higher-yielding than government bonds, but consequently riskier. However, investing in investment-grade rated corporate bonds in both the Australian and global markets is generally safer than investing in the same companies' shares, as they are higher up the capital structure.

Easy, cost-effective access to the broad Australian bond market can be established by buying the iShares Core Composite Bond ETF (ASX code: IAF), or the investor can target only the "sovereign" (that is, commonwealth government bond) sector using the iShares Treasury ETF (ASX code: IGB). Income-oriented investors unwilling to accept the risk of inflation eroding their returns can specify their bond allocation into the Australian inflation-linked bond sector using the iShares Government Inflation ETF (ASX code: ILB). 

Fixed income securities can give an investment portfolio an element of capital stability and a consistent flow of interest income. Moreover, bonds typically show a low correlation with shares, meaning that they can protect a portfolio against capital loss.

Simple diversification through ETFs

Historically, fixed income has been a difficult asset class for Australian retail investors to use. Most bonds were sold in prohibitively large minimum investment parcel sizes, which effectively locked retail investors out of the market, confining them to unlisted bond funds. But in 2012, the first fixed income exchange traded funds (ETFs) were listed in Australia. These gave local investors the ability to lock-in exposure in one ASX listed stock to a fixed income portfolio comprising investment-grade securities, Australian commonwealth government bonds and state government bonds. 

As has happened in the equity space, the addition of global fixed income ETFs has allowed Australian investors to gain exposure to international sovereign bonds, bonds from 'supra-national' issuers (for example, the World Bank) and foreign companies. The global bond ETFs also add high-yield bonds (corporate bonds that are not rated investment-grade) and emerging market bonds to the local menu.

For example, the iShares Core Global Corporate Bond (A$ Hedged) ETF (ASX code: IHCB) offers a simple, low-cost exposure to global investment-grade corporate bonds, spanning multiple countries and sectors. The iShares JP Morgan US$ Emerging Markets Bond (A$ Hedged) ETF (ASX code: IHEB) does the same for the US$-denominated global emerging markets bond market.

Some hedged international bond exposure can potentially reduce a portfolio's overall volatility. Like shares, investors have the choice of hedging the currency exposure of global bonds back into the Australian dollar. If hedged, this allows the investor to earn foreign market income and take advantage of potential foreign bond price appreciation, without being affected by currency fluctuations. (All of the iShares international fixed income ETF range is hedged to Australian dollars, to remove the currency risk for the Australian investor).

Redressing equity bias

Historically, Australian investors have shown a strong bias towards shares, particularly domestic shares. This has been cemented over the last few decades by the strong attraction of the dividend imputation system (introduced in 1987) – stemming from the subsequent boost to returns provided by franking credits – as well as a series of government privatisations and de-mutualisations of large insurance companies that served to swell the ranks of shareowners.

This bias towards shares has extended into retirement funding portfolios. According to the Australian Association of Super Funds (ASFA)¹, Australian super funds hold 48% of their assets in listed investments, with Australian shares their single largest allocation, at 23% of assets, followed by international shares at 21%. (Real estate investment trusts, or REITs, fill out the listed portion, accounting for 4% of total assets.)

However, this predilection for shares puts Australia out of step with international practice. In most of Australia's peer group of developed countries, bonds are by far the dominant asset class in retirement funding.

According to data from the 2015 OECD Pensions in Focus² report, the average pension fund (in a sample of 31 developed countries) holds 51.3% of its assets in bills and bonds, and 23.7% of its assets in shares. The same report puts Australian pension funds' allocation to bills and bonds at 8.8%, while 50% of the assets are held in shares.

Australia's growing army of self-managed super funds (SMSFs) diverges even further from the normal preponderance of bonds in pension funds. According to Australian Taxation Office (ATO)³ statistics, as at March 2016, Australian SMSFs held $6.7 billion in debt securities, or just 1.2% of the $570.6 billion in SMSF assets. In contrast, SMSFs own $172.1 billion worth of shares, or 30.2% of their assets. 

The upshot of these statistics is twofold. Firstly, the asset allocation of the Australian pension system, being much lower in bonds, is not as conservative as that of its OECD peers – that is, it is arguably more risky. This applies particularly to Australian SMSFs.

Secondly, Australian SMSFs' minuscule collective holding in bonds means that these funds are not well-diversified as a group. Using selected domestic and global bond ETFs can redress this asset allocation anomaly by cost-effectively establishing a portfolio holding in fixed income.

¹ Source: http://www.superannuation.asn.au/resources/superannuation-statistics

² Source: http://www.oecd.org/finance/private-pensions/pensionmarketsinfocus.htm

³ Source: https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/Statistics/Quarterly-reports/Self-managed-super-fund-statistical-report-March-2016/?anchor=Assetallocation#Assetallocation 

Disclaimer: This is a sponsored article by BlackRock Investment Management


 

From the 2018 financial year onwards, travel expenses related to inspecting, maintaining or collecting rents for a residential property can no longer be claimed as a tax deduction by investors. The restriction applies to all transport costs (regardless of the mode of transport used), meals, and accommodation expenses incurred in relation to residential rental properties.

There are however some exceptions to these changes as follows:

Firstly, the rules will not prevent a deduction from being claimed if the expense is necessarily incurred in carrying on a business. This means that you can continue claiming travel deductions if you carry on a business of property investing, or a business of providing retirement living, aged care, student accommodation or property management services.

The distinction between someone merely investing in passive property investments and someone carrying on a business of property investing is a matter of fact. The ATO will look at the characteristics of the business including:

  •  the total number of residential properties that are rented out
  • the average number of hours per week you spend actively engaged in managing the rental properties
  • the skill and expertise exercised in undertaking these activities, and
  • whether professional records are kept and maintained in a business-like manner.

The fact that a taxpayer has multiple properties does not necessarily mean that they are in business. It will really depend on whether you can prove that you actively manage the properties like a business. In a recent case, the Administrative Appeals Tribunal found that a taxpayer with 9 rental properties was considered to be carrying on a business of property rental largely because the taxpayer actively supervised the real estate agent employed and managed issues associated with the properties (thus having a discernible pattern of trading to their activities), the capital employed was significant and they had conducted property rental activities for a number of years.

Also, the rules do not apply to certain entities including:

  • Companies;
  • Superannuation funds that are not  an SMSF;
  • Public Unit Trusts;
  • Managed Investment Trusts;
  • Unit trusts or partnerships (but only if all unit holders or partners fall within one of the categories above).

In addition to the rules that prevent a deduction from being claimed, the changes also ensure that travel expenses cannot be included in the cost base or reduced cost base of a property. This means that they cannot be used to reduce a capital gain or increase a capital loss made on sale of the property.

For all taxpayers with investment properties the message is now very clear – unless you are in the business of property investing – No More Travel Deductions are allowed!!

If you're unsure whether you can legitimately claim travel expenses related to your residential investment property, please give either of our offices a call on Sunshine Coast 07 54754300 or Brisbane 07 38423128 or email us with your queries to info@clarkemcewan.com.au

#rentaldeductions #propertytaxadvice #Taxadvice #ATOchanges www.clarkemcewan.com.au

Start with the cure. The cure for affluenza. 

Clarke McEwan recently attended a number of sessions with presenter  at the 2018 Byron Bay Writers Festival.   Richard is the author of Econobabble and Curing Affluenza, and co-author of Affluenza.  He is chief economist at the Australia Institute.

Richard's book takes an honest look at the economy we support. It's home truths can help us recognise the symptoms in ourselves of this modern disease.  He maintains that we have been trained to love things not for their material function, but for the symbolic act of acquiring and possessing them. 

Below is an edited extract from Curing Affluenza: How to buy less stuff and save the world

"Affluenza has not just changed the world, it has also changed the way we see the world. Short of money? Borrow some. Caught in the rain? Buy an umbrella. Thirsty? Buy a bottle of water and throw the bottle away.

Our embrace of "convenience" and our acceptance of our inability to plan ahead is an entirely new way of thinking, and over the past seventy years we have built a new and different economic system to accommodate it. There is nothing inevitable about this current way of thinking, consuming and producing. On the contrary, the vast majority of humans who have ever lived (and the majority of humans alive today) would find the idea of using our scarce resources to produce things that are designed to be thrown away absolutely mad.

But the fact that our consumer culture is a recent innovation does not mean it will be easy to change. Indeed, the last few decades have shown how contagious affluenza can be. But we have not always lived this way, which proves that we don't have to persist with it. We can change – if we want to.

I define consumerism as the love of buying things. For some, that means the thrill of hunting for a bargain. For others, it is the quest for the new or the unique. And for others still it is that moment when the shop assistant hands them their new purchase, beautifully wrapped, with a bow, just as though it's a present.

But the love of buying things can, by definition, provide only a transient sense of satisfaction. The feeling can be lengthened by the "thrill of the chase", and may include an afterglow that includes walking down the street with a new purchase in a branded carry bag. It might even extend to the moment when you get to show your purchase to your friends and family.

But the benefits of consumerism are inevitably short-lived as they are linked to the process of the purchase, not the use of the product. So while consumerism is the love of buying things, materialism is the love of the things themselves – and that's an important distinction. " 

Salespeople and psychologists are well aware of this phenomenon. The term buyer's remorse refers to the come-down that follows the thrill of buying something new. For many, the cold hard light of day takes the gloss off their new gadget, their new shoes or their new car. For some, this can be so overwhelming that they return the item. For a minority, the thrill of buying new things is so great, and the disappointment of owning new things so strong, that they make a habit of buying things they know they will return.

For those interested in the impact of consumption on the natural environment, it is crucial to make a clear distinction between the love of buying things and the love of owning things. While consumerism and materialism are often used interchangeably, taken literally they are polar opposites. If you really loved your car, the thought of replacing it with a new one would be painful. Similarly, if you really loved your kitchen, your shoes, your belt or your couch, then your materialism would prevent you rushing out and buying a new one.

But we have been trained to love the thrill of buying new stuff. We love things not for their material function, but for the symbolic act of acquiring and possessing them – the thrill of anticipating a new thing, of being handed it by a smiling shop assistant, of pulling up at the golf club in an expensive new car. For many, if not most, consumers, it is the symbolism of a new handbag or new car, its expensive logo proudly displayed, that delivers happiness, rather than twenty years of using a material object.
It makes no sense to conflate materialism and consumerism. Indeed, our willingness to dispose of perfectly functional material goods and gadgets is the very antithesis of a love of things. The process of buying new things and displaying new symbols might provide status or other psychological benefits, but the pursuit of such symbolic objectives is largely unrelated to the material characteristics of the products being purchased and disposed of.

Symbols matter, and psychological benefits matter. The fact that people are willing to spend their own time and money to show they fit in or to make sure they stand out should be of little or no concern to others.
But for those who are concerned with the impact of 7.5 billion humans' consumption decisions on the natural environment, the choice of such symbols matters enormously. Whether people choose to signal their wealth by spending money on huge cars or antique paintings is arbitrary, but that does not mean the environmental consequences aren't highly significant.

Put simply, if we want to reduce the impact on the natural environment of all of the stuff we buy, then we have to hang on to our stuff for a lot longer. We have to maintain it, repair it when it breaks, and find a new home for it when we don't need it any longer. If we want to cure affluenza, we have to get more satisfaction from the things we already own, more satisfaction from services, more satisfaction from leisure time, and less satisfaction from the process of buying new things.

If people loved their things, cared for them, maintained and repaired them and then handed them on to others who did likewise, the global economy would be transformed, as would the impact of human activity on the natural environment.
But if people continue to embrace the benefits of "convenience" and pursue the symbolic appeal of novelty then, as billions more people emulate the consumption patterns of today's middle-class culture, the impact on the natural environment will be devastating. "  

We hope you enjoyed this extract from Curing Affluenza: How to buy less stuff and save the worldIf you would like assistance with setting up a budget or a financial plan, contact us now.    

New restrictions have been imposed by the ATO on travel expenses and depreciation as part of the 2017-18 Budget relating to claims made by taxpayers owing residential rental property.

 

Travel

Travel undertaken in relation to a rental property is a legitimate expense and has been claimed by many property owners, however the Government is concerned that some taxpayers have not been correctly apportioning their travel expenses when the travel was combined with another activity, such as a holiday. As a result of this exploitation of the rules, new legislation will now disallow any travel related to visiting rental properties. 

Deductions such as the cost of repairs conducted while onsite may still be claimed, or a visit to the tax agent.  The Government also makes the point that inspection costs undertaken by third parties will be permissible, meaning that inspection costs are seen as legitimate, but only if genuinely incurred for pure inspection purposes.   

Depreciation 

Depreciating assets in a residential rental property, such as carpets, blinds, a hot water system, a cook top, an oven, furniture, were previously eligible for depreciation under Division 40 of the ITAA 1997.  These claims will no longer be deductible under new criteria.  Any deduction claim is essentially dependent upon the acquisition date of the relevant asset, and whether the asset is new or "previously used" i.e. second hand.

From 1 July 2017, the Government will limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate properties. Plant and equipment items are usually mechanical fixtures or those which can be 'easily' removed from a property such as dishwashers and ceiling fans. Investors who purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim a deduction over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property.

Top 6 things you need to know about how the 2017 plant and equipment depreciation changes will affect you (Source: www.capitalproperties.com.au )

  1. If you've purchased a brand new residential construction, you're not affected by the changes to depreciation deductions on plant and equipment items.
  2. If you've purchased a commercial property, you are not affected by these changes.
  3. If you've bought a residential property after 9 May 2017, from a previous owner, you are affected by these changes. You can now only claim capital works related depreciation deductions.
  4. If you've bought a residential property after 9 May 2017, from a previous owner, and you've had to buy new fixtures and fittings, you'll be able to claim depreciation deductions on any fixtures and fittings you've bought yourself.
  5. If you've bought a residential property before 9 May 2017, from a previous owner, you are not affected by these changes.
  6. If you've bought a pre-1987 residential investment property after 9 May 2017, you can only claim capital works deductions on renovation work, not on the original structures.

Disclaimer

The purpose of this article is to provide a brief overview of how recent tax changes may affect residential property investors. It is not intended to be relied on instead of professional advice.  Contact us so that we can determine how these changes may affect your specific situation.

SMSFs get inactive low-balance account concession

The bill enacting the 2018 federal budget proposal to have all inactive low-balance (under $6000) superannuation accounts transferred to the ATO has taken into account the concerns of SMSFs running deliberate multiple-fund strategies.

The measure had the potential to jeopardise SMSF trustees who strategically retain a small asset balance in a public offer fund to maintain the risk insurance cover they received via the larger fund.

Speaking at the 2018 SMSF Professionals Day, co-hosted by SuperConcepts and selfmanagedsuper, in Adelaide yesterday, SuperConcepts technical services and education general manager Peter Burgess told delegates: "The [Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018] that has now been introduced into Parliament had a new section inserted which said if the account is being used to maintain insurance cover, then that will not be considered to be an inactive low-balance account.

"That seems to have been inserted to get around the situation where we've got self-managed super fund members who have these low balances that they maintain in these APRA (Australian Prudential Regulation Authority) [regulated] funds to keep insurance."

Burgess did, however, point out SMSF trustees using this strategy still needed to perform one task to ensure their inactive low-balance account would be left alone.

"The one thing to note though is that in order to trigger this clause, SMSF members, if they've got these low-balance accounts in APRA funds, still need to opt in for insurance in that APRA fund," he said.

The onus for this procedure, though, was not entirely upon SMSF trustees, he noted.

"The way we understand it's going to work is in the lead-up to 1 July 2019, APRA funds will be writing to their members who have low-balance inactive accounts alerting them to the fact that they're going to need to opt in if they want insurance," he said.

#compliance #superannuation #insurancecover

 

If you intend to claim a tax deduction for personal contributions you make to your superannuation, don't forget this one crucial step: 

You will need to advise your superannuation provider of your intention BEFORE lodging your 2018 tax return.

This includes people who get their income from:

  • salary and wages
  • a personal business (for example, people who are self-employed contractors, or freelancers)
  • investments (including interest, dividends, rent and capital gains)
  • government pensions or allowances
  • super
  • partnership or trust distributions
  • a foreign source.

The contributions that you claim as a deduction will count towards your concessional contributions cap. When deciding whether to claim a deduction for super contributions, you should consider the super impacts that may arise from this, including whether:

  • you will exceed your contribution caps
  • Division 293 tax applies to you
  • you wish to split your contributions with your spouse
  • it will affect your super co-contribution eligibility.

If you exceed your cap, you will have to pay extra tax and any excess concessional contributions will count towards your non-concessional contributions cap.

Plenty of lucrative deductions available for investors

New legislation,  New opportunities for investors

Changes announced as part of the 9th of May 2017 federal budget have now been legislated after being passed by the Senate on the 15th of November 2017.

For many property investors the new rules, outlined in Treasury Laws Amendment (Housing Tax Integrity) Bill 2017, have made what was already a complex topic a little more difficult to understand.

The new rules do not affect capital works deductions at all. The amended legislation only restricts property investors from claiming depreciation deductions for the decline in value of 'previously used' depreciating assets (plant and equipment) within second-hand residential investment properties.

An incorrect assumption some property investors have made after hearing about the changes is that they are no longer eligible to make a claim.

***  It's important to note that the new legislation only applies to investors who exchange contracts on a second-hand residential property after  7:30 pm on the 9th of May 2017. Even in cases where investors are affected by the change, there are still thousands of dollars to be claimed, particularly as capital works deductions typically make up between 85 to 90 % of the total claim. The new legislation provides opportunities for investors in the following scenarios as it does not impact them:

Investors who purchase a brand-new residential property

Investors who exchanged contracts on a residential property prior to 7:30pm on the 9th of May 2017

Investors who add new plant and equipment assets to their property after purchase and directly incur the expense

Investors who purchase properties which are considered to have been substantially renovated by the previous owner

Non-residential and commercial properties

Any deductions that arise in the course of carrying on a business

Any residential property held in a superannuation plan (other than Self-Managed Super Funds)

Investors who hold residential property in corporate tax entities, including company entities

  Home owners who turned their primary place of residence into a rental property prior to the 1st of July 2017 ***

 For affected investors, it's important to note that the changes only impact the existing plant and equipment depreciation deductions found within a second-hand residential property.  These are the easily removable fixtures and fittings such as carpets, hot water systems and air conditioners. Any brand-new plant and equipment assets added to the property after purchase are depreciable.

The capital works allowance, which is the component investors can deduct for the building structure, is unchanged. Examples include walls, the roof, doors, kitchen cupboards and more. These deductions can be claimed at a rate of 2.5 per cent per year for a maximum of forty years for any property in which construction commenced after the 15th of September 1987.

Often older properties have been renovated and qualifying capital works completed by a previous owner can be claimed by the new owner for any years that remain in the forty year period.

The table below provides an example of common capital works items which the owner of a second-hand residential investment property could claim.

Capital works deductions

 

Item

Capital works rate

Remaining effective life (years)

First full financial year deduction

Five year cumulative deductions

Original structure and fixed items

2.50%

25

$6,250

$31,250

Kitchen cupboards

(replaced 5 years ago)

 

2.50%

 

35

 

$289

 

$1,445

Kitchen benchtop

(replaced 5 years ago)

 

2.50%

 

35

 

$72

 

$360

Outdoor pergola

(installed 7 years ago)

 

2.50%

 

33

 

$240

 

$1,200

Plumbing (updated 5 years ago)

2.50%

35

$68

$340

Tiling (updated 5 years ago)

2.50%

35

$130

$650

Total

$7,049

$35,245

 

In this scenario the investor exchanged contracts on a fifteen year old, four bedroom, two bathroom house after 7:30pm on the 9th of May 2017.

 

The previous owner of the property had completed renovations which included updating the kitchen through installing new cupboards and benchtops five years ago and adding an outdoor pergola seven years ago.

 

As the example shows, the investor would be eligible to claim $7,049 in capital works deductions in the first full financial year, or $35,245 in cumulative deductions over five years.

 

The investor would also be eligible to claim depreciation for any brand-new plant and equipment assets they chose to purchase and add to the property themselves.

 

Any plant and equipment assets that were installed by the previous owner can be excluded from the depreciation schedule and included in a capital loss schedule. This schedule can be used by the owner to offset any Capital Gains Tax liabilities should they choose to dispose of any assets or sell the property in future.

 

There are still substantial deductions available for any investors affected by the new legislation. It's always worthwhile consulting with a Quantity Surveyor to discuss what deductions can be claimed.

 

If you are venturing into the investment property mine-field, be sure to consult our practice for further advice.

 

 

 

Smart saving for your household

 Imagine always having spare income to add to your investment so that your money is constantly working harder for you? According to Simple Savings' Jackie Gower, it's not a pipe dream with these common sense tips for cutting expenses.

Curtailing your spending is no easy feat, especially if you have a family. But there are some simple ways to cut back that may mean a bigger investment portfolio.

Food

Usually the biggest bill in any household, but luckily, it's one of the easiest to diminish. As the TV chefs always say, cooking at home is the key. "We know of families who've reduced their weekly food bill by as much as 50% as a result of menu planning," Jackie reveals. Also, look beyond the supermarket. "Taking the time to shop around your local butcher and greengrocer can result in valuable savings.

Utilities

The answer to saving here, Jackie says, is to review and compare. Do your research and check out deals from different providers. This is not the most exciting task, but Jackie estimates one to two hours on the phone or online could save you several hundred dollars a year.

Petrol

Potentially another large household expense. "The best way to cut-back on petrol is not to use it. Walk, ride or use public transport whenever possible. Car-pooling is also a great cost-saver. Make a list of your errands over a fortnight and try to get them done in the same area at once.

Entertainment

Everyone automatically reaches for their wallet here, but fun can be reasonably priced, or even free. Check out exhibitions, markets, walks and local fairs. Host a movie or games night, or pack a picnic and head to the beach or a national park. And, instead of buying new toys, join the local library or toy bank if available. The kids can play with exciting 'new' toys as often as they like - for free," she adds.

More thrifty hints...

If you're terrible with money, downloading an app to track spending could be your salvation. "One tried-and-true app is Track My Spend" our expert says.

Finally, if you really struggle with self-control, many banks offer accounts with online-only access, or require you to go in to make a withdrawal. This can prevent you going on mad sprees with your EFTPOS or credit card.

The important thing is to take the first step, as Jackie affirms, "Aim as big or small as you like. Any saving is a good saving."

Disclaimer

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