Australia is one of the few countries with negative tax (Negative Gearing Tax Return). As the name suggests, negative tax, if applied properly, not only results in a lower, and often negation of tax, but also means that you are eligible to pay for tax compensation. However, there is a premise that must be fulfilled – investment purposes.

In order to encourage the investors to invest in real estate, the ATO introduced negative gearing as a method of personal rental, which generates taxable income (Assessable Income). This taxation change usually arises when there is a ‘net rental loss’ in your investment.

This method of negative tax reflects the principle within accounting called “Accrual Accounting”. Accrual accounting refers to the recognising of economic events regardless of when cash transactions occur. The general idea is that economic events are recognised by matching revenues to expenses at the time in which the transaction occurs rather than when the payment is made (or received). This method allows the current cash inflows/outflows to be combined with future expected cash inflow/outflows to give a more accurate picture of the investment.

By applying this principle, rather than receiving straight cash income or revenue, you may use your investment into a property to reduce tax. Although your investment will appear on the book to be depreciation, this is not the fcase when everything is calculated.

For example:

Your salary for this year is $80,000 and after tax you are left with $62,453.

This is calculated as followed: Tax: ($80,000 – $37,001) x 32.5% – ($37,000 – $18,201) x 19% = $17,547

Suppose last year you purchased a new home worth $600,000. 80% of the cost would be attributed to loans granted by the bank, with a loan interest rate of 5.5%. Depreciation of the house in the first year is $18,000.

Take into account the other expenses, which may include:

  • Municipal fee (council fee)
  • Water (Water fee)
  • Property management fees (Strata)
  • Loan interest (mortgage interest)

The income that you would receive would arise from the rent, and rental rates in return (ROI) would be 5.2%.

Therefore, your income would be calculated as below:

Income – expenses = $600 x 52 (one year’s rent) – 5.5% x $480,000 (interest on loans) – $500 (water) – $1200 (property fee) – $600 (municipal fees)

This may appear negative, as you receive nearly no income from the property (as the house is depreciating by $18,000 a year). This is where negative gearing works towards the investor’s advantage. If we recalculate the amount of tax this year:

Investment losses are included in the year’s taxable income.

$80,000 – $18,000 = $62,000

Tax = ($62,000 – $37,001) x 32.5% – ($37,000 – $18,201) x 19% = $11,697

It can be seen therefore that you can receive more money from the ATO through taxes.

($17,547 – $11,697) = $5850

Your first step is to find out how much you can borrow and apply for an approval in principal loan. You should do this before you start seriously looking for a property.

1 Find out how much you can borrow.

Your first step is to find out how much you can borrow and apply for an approval in principal loan. You should do this before you start seriously looking for a property.

2 Get conditional approval.

Make your full application and all being well, banks will provide conditional approval on the spot. This means banks will approve your loan once they verify the information you’ve given and you pass.

3 Verification.

Bank check that they have all the documents they need, that your information is correct, and that you pass a credit check (through a reporting agency).

4 Valuation and getting ready for settlement.

If you’re buying a new home, you’ll need to provide bank a copy of your ‘Contract of Sale’ and, if you have it, the ‘Transfer of Land’. We’ll also need contract details for your solicitor or conveyancer.

If you’re buying a new home banks might need to complete a valuation on it. If you’re refinancing an existing property banks will arrange a valuation.

5 The formal approval and signing of the contract.

Banks will let you know that they have formally approved your loan. They prepare the loan documents for you to sign (either in a store or at home) and you’ll also get a copy to keep. If you’re eligible, banks will help you apply for the First Home Owner Grant (FHOG).

6 Settlement day.

Banks will have arranged a settlement date with your solicitor or conveyancer. Settlement completes the sale, so you get possession of the property and your home loan takes effect. On settlement day you’ll get the keys to your new home!

It’s best to start your search with a fairly clear picture of what you want – a unit or house, 2 bedrooms or 4, near public transport or schools, a quiet or bustling neighbourhood.

1.Research Properties

It’s best to start your search with a fairly clear picture of what you want – a unit or house, 2 bedrooms or 4, near public transport or schools, a quiet or bustling neighbourhood.

2.Determine your budget

You’ll need to take into account the other costs associated with buying a house:

  • Loan set up costs
  • Conveyancing/legal fees
  • Stamp duty

3.Choose the right home loan

Once you have an idea of the type of property you are looking to buy, your budget and which loans could work for you, it’s time to apply.

4.Property inspections & legal advice

While you are getting your finances sorted and searching for the perfect home, it’s a good idea to engage a solicitor or conveyancer.

5.Make an offer

  • Exchanging contracts
  • Paying your deposit
  • Property Valuation

6.Finalise your loan

Once the valuation has been complete and you have paid your deposit it is time to finalise your loan documentation.

7.Settlement

The date of settlement is the date you take legal ownership of the property. The balance of the purchase prices must be paid this day. Settlement is usually 6 weeks and can be negotiated as part of the contract of sale documentation.

In Australia, the government has always considered the real estate industry as a major pillar of support in the country, and have taken many great measures to ensure and support it’s development each year. The FIRB is one of the keys to this.

In Australia, the government has always considered the real estate industry as a major pillar of support in the country, and have taken many great measures to ensure and support it’s development each year. As part of this support, the government encourages overseas buyers to purchase property in Australia as a part of a personal portfolio. Buyers overseas may enjoy the same policies in Australia (for investment property) as those currently residing within the country do. To regulate this, the FIRB was created, and approval is required from them before anything may happen.

The FIRB (Foreign Investment Review Board) handles, in accordance with the current regulations, foreigners (i.e. those that do not yet have permanent residency status in Australia) whom want to buy a house within Australia. They must first receive FIRB approval.

The FIRB approval reviews specifically whether this house or piece of land may be sold to this particular investor, whether the investor can afford the house, and whether it’s appropriate.

There is often the misconception that those investing in new developments do not need to undergo or apply for FIRB approval. This is not the case however, as developers have usually gotten pre-approval from the FIRB to sell to foreigners. The FIRB would then have determined the rate at which the real estate development may be sold to foreigners (e.g. 80% of the building can be purchased). The individual foreign purchaser therefore need not apply for an FIRB, giving he misconception that you need not apply with the FIRB before purchasing. Second hand dwelling must also be approved by the FIRB.

The FIRB views the applications of specific houses, so it is not viable to apply with the FIRB before having a specific property in mind.

Below are some little tips about the FIRB policies:

  • If you are in a relationship with one party being an Australian citizen, and the other not a citizen or permanent resident, as long as you are purchasing residential real estate in both names as joint tenants, you do not need to apply for FIRB
  • If you are in a relationship with one party being an Australian citizen and the other not a citizen or permanent resident, and one party holds more than 50% of the title, then you must apply with the FIRB (e.g. one tenant holds 20%, the other 80%)
  • If a company of trust buys the piece of land, and the main beneficiary is an Australian Citizen or permanent resident, and they account for less than 85% of the shares, there is no need to apply for the FIRB
  • The FIRB approval letter is valid for one year
  • You can submit more than one application at a time for FIRB, however each property must have it’s own application submission.

Why is Australia’s property more favourable by domestic investors? Why are Australian properties, despite fierce competition in the investment community, still on the list? GIT realty will summarise some of the reasons as to why.

Country

China

Australia

Property

Limited to a 70 year tenure, with uncertainties

Freehold

First home forward payment

With a contract, the first payment is made under the property category of 20% – 50%

When in a unified contract, the payment is 10%

Forward Home Loan

Paid immediately after the loan contract, loan procedures are complex

Immediately after the contract without repayment, submitted after the start of the loan formalities, simple process

Repayment Method

Repayment pressure heavy as it contains interest

There may be more than a certain number of loans available to the customer, and the interest is not only of principle, but rather often using a regular payment style

Forward House Financial Risks

Developers often have trouble and unexpected occurrences with residential flats, therefore rendering the first payment unpredictable/unreliable

The first payment is from the trust account of the government regulation custody, submitted before the fact.

Marketing and Legality

Pristine, new policies that have yet to be tested. Often large fluctuations within the field

Market is stable, especially the real estate market which has matured and standardised over a century of history.

Legal Protection

Sale of real estates are often without the presence of a professional lawyer involved

Professional lawyers are involved in the legal process in order to safeguard the fundamental interests of the owners

Property Price

There is often a difference in price advertised between the developers and agents

Uniform pricing, the liability to pay privately is regulated

Housing facilities

Most of the houses are rough, and need renovation after submission or purchase

Furniture is often ready to live in, decorations included

Rental Market

The brokers only play mediator between the landlords and tenants. They do not follow up once the contract is complete

Brokerage firms regularly collect rent on behalf of the owners, alongside managing and dealing with any issues. Follow up is essential and there is a firm resolve to help

Lease Management

Rents are managed by the owner themselves

Brokerage firm owners will deposit the rent in your account which may be viewed at any time

Real estate vacancy rate

Lack of strict rental management, and there is low profit/cash return

Strict management over the property, vacancy rate is very low. The owner of the rent may replace at their will

Tax Status

Investment property rental incomes are required to pay a tax

Investment properties may be deducted through depreciation and negative gearing. Part of the income tax may be used to raise room prices

Property Acquisition

After 1-3 years of application submission

Acquired whenever the home is ready

Uncertainties and Future Risks

Possibility of facing property tax, inheritance tax (for personal real estate especially)

Full market economy, no inheritance tax, no property tax, and no real estate tax

Sale Taxes

Deed: Paying back 1.5% of stamp duty; paying back 0.1% sales tax; paying back 5.5% of personal income tax

Not confirmed, however within one year of sale, the sale price will increase 100%. Part of the value is added tax, however those that hold more than a year will be reduced to 50%. There are a variety of manners in which this tax may be deductable.

If you want to learn more about Australia’s real estate investment information, please contact your GIT realty on 02 8011 1988.