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Even the savviest investors make property blunders, and they too require tax and strategic advice with property. The reluctance of some investors to trust a financial planner presents big opportunities for their trusted adviser – an accountant.
As professional advisers are well aware, many property buyers are falling short of obtaining the appropriate taxation advice to properly plan their investment strategy.
The myriad of legislation and strategic pathways around investing can be confusing for even the most experienceds investors, and it is not uncommon for clients to make errors related to property and tax.
While accountants are generally across property taxation issues, there are opportunities for them to further their knowledge base, and allow new and existing clients to tap into their expertise.
Principal of Chung Lawyers, Antony Chung, is a solicitor and conveyancer who specialises in property developments and commercial leasing. All too often, he comes across clients who do not seek professional advice before buying a house.
He says clients often only get professional services – whether this is from an accountant or a lawyer – to action work after they’ve made a decision to purchase. However, in some cases, this turns out to be too little, too late.
“As a result, accountants and lawyers are provided with a contract from the clients asking, ‘I’ve bought something, is it good or not?’ which often is too late or we have to go through the trouble of getting things changed around,” Mr Chung says.
“People spend $100 to get a car checked out, but they won’t spend $1,000 for a half a million-dollar investment. Everyone is surprised by that, but that’s just the nature of what people do.”
Why do some property buyers fail to see the necessity of seeking pre-purchase legal or taxation advice when they are dealing with such large sums of money? Mr Chung attributes it partly to a lack of awareness and partly to the way clients are billed.
“Traditionally, law firms and accounting firms bill by time so your work is reflective of the time you spend on the transaction,” he says.
“That creates a relationship where people are reluctant to spend the time to discuss things because it immediately costs money.”
Mr Chung says alternate methods of billing, such as a value-based model, are becoming more common among practitioners who want to encourage investors to work closer with an advisor from the very beginning of the purchase journey. He suggests that accountants who are considering furthering their work and expertise in this field should reconsider, and eventually revamp, their billing model to secure long-term clients.
“It’s about developing the closer relationship with your client so that they tell you things, so that they don’t feel scared that you’re going to charge them for the time that you spend with them,” Mr Chung says.
Considering the need for pre-purchase guidance and investment strategy, the opportunities available for professionals who specialise in property tax advice is apparent, and understanding individual client needs will go a long way in avoiding commonly made mistakes.
Where do clients go wrong?
When it comes to property tax advice, there are some areas where clients regularly get wrong. These gaps of knowledge in clients’ planning and strategies represent an extensive advice opportunity, given the long-term nature of property investment.
A closer look at negative gearing
Among the tax breaks available for property buyers, negative gearing is a commonly used, but often misunderstood, area of taxation.
A uniquely Australian rule regarding property, negative gearing has been around for a long time. So long, that Peter Adams, managing director of accountancy training firm Augmentor, believes property buyers have become accustomed to utilising negative gearing as an investor entitlement.
While negative gearing can deliver a tax benefit in terms of deductions, Mr Adams flags new tax laws that have altered the way the losses are treated. Many clients are completely unaware of this when they are searching for property and even after they have settled.
In the last couple of years, taxation laws have changed to calculate negative gearing losses as part of adjustable income.
“What becomes important now for accountants is that not only do they have to manage the taxable income of their clients to pay less tax, but they now also need to manage the client’s adjusted taxable income,” Mr Adams says.
The incorporation of negative gearing losses into income testing means that calculations for adjusted taxable income may be higher than the client expects, he says.
With the increase in adjusted taxable income, people may lose rebates such as health insurance benefits or incur higher rates for payments like child support. Where this is problematic is when clients are basing their expectations on negative gearing as a pure tax deduction and subsequently missing out on the assumed benefits of the losses.
Managing director of property buyers’ agency Momentum Wealth, Damian Collins, says an over-reliance on the tax benefits of property investment, such as negative gearing, is where many buyers go wrong. A practicing accountant, as well as founder of the full-service property firm, Mr Collins has come across buyers who purchase property in order to reduce their taxable income.
“The issue with that is, while negative gearing does reduce your tax, people need to realise that before depreciation comes into it, when you make a loss on a property, that’s real cash out of your pocket,” he cautions.
When over-prioritising the tax benefits of a property purchase, buyers end up discounting the quality of the investment.
“In residential property, negative gearing only makes sense if the property is going to go up in value,” Mr Collins says, adding “If you negatively gear a dud property and it doesn’t go up in value, you’re actually losing money.”
He advises investors to look for the best quality investment as a first priority, with any tax benefits they get “a bonus, but they shouldn’t be the driving force in your reason to buy an investment property”.
“The tax should be secondary, it’s the wealth you’re going to create first.”
The lack of due diligence when seeking quality investments is an error seen regularly by real estate agent Craig Tweed.
Mr Tweed, managing director of Tweed Sutherland, has worked in real estate for more than 40 years. During this time, he has witnessed investors making overpriced purchases without even inspecting the properties.
“They might have bought them for say $300,000 and 12 months later, they might get a bit sick of it or they lose their job. Then they decide to sell it and the property is only worth $260,000 because they haven’t done their homework,” he says.
Mr Tweed also encourages investors to prioritise quality properties over potential tax benefits. He says this is a crucial message that needs to get through to clients looking to make what is often the biggest investment decision of their life.
“Advisers may say to you, ‘You need to buy this property because you’ve got this tax problem’ and you’re not aware of the fact you’re buying it because they’ve been set up by these builders to sell these properties,” he tells investors.
Nuances of capital gains tax
Common problems around capital gains tax (CGT) arise from the small nuances of the calculations. This particular area of taxation provides advice opportunities for accountants, as even shrewd clients find it hard to get their head around how to incorporate CGT into their planning.
Mr Collins says many property buyers miss minor details in the technicalities around CGT, resulting in costly errors. Although it seems obvious, one often overlooked aspect of the tax by investors is the date of the financial year it falls under.
“Capital gains tax is based on the contract date, not on the settlement date. People need to be aware of that,” Mr Collins says.
“You might sell a property on the 29th of June and not settle for a long time after that, but it’s still going to be a tax liability in that particular financial year.”
Another calendar technicality is the need to own a property for 12 months to be eligible for the 50 per cent CGT discount. This technicality is well known to accountants, but often missed by property investors.
Again, this is calculated from contract date as opposed to settlement date. Mr Collins has seen property sellers miscalculate the length of their ownership tenure due to this.
“I see people selling properties at 11 months because they think that because they’ve been on the title for longer than 12 months,” he says.
“But because CGT is based on the contract date, they end up getting no discount on their capital gains.”
Another CGT common error occurs when individuals or couples misunderstand the tax implications of their purchase intention.
Mr Adams points to the fine line between ‘ordinary’ assessable income and capital gains, saying there is much confusion about property purchase for development and property purchase for rental.
“You have mums and dads who aren’t property developers but they have a bit of capital. They decide to buy property, develop it, put two townhouses on it and are going to sell that for a profit,” he says.
“People generally trip up in how they structure these things for capital gains tax purposes.”
What’s in a name?
One common mistake that routinely takes lawyers by surprise is when the buyer, under pressure to sign on the dotted line, overlooks the importance of the name that goes on the property title.
Mr Chung notes that property buyers, especially those who do not seek professional guidance, often give little thought to the entity in which the purchase is done.
“It can be something as simple as whether or not to put their partner on title,” he says.
The decision on entity is a crucial factor prior to settlement for considerations such as CGT, negative gearing and stamp duty.
Mr Collins recalls situations where he has seen couples assign a property title 50/50 while one partner is not working. He says if one partner is not earning an income, it can result in the benefits of strategies such as negative gearing diminishing.
“The other thing I’ve seen is people buying in company names, which [can be] a bad structure for property investment,” he says.
“If you buy in your own name but then you want to put it in your family trust, that’s considered another transfer and that’s potentially double stamp duty.
“It’s just again not seeking the right advice upfront from their accountants about which is the right entity.”
The right credentials
There are clearly prevalent and pervasive advice gaps in the marketplace, and as a consequence, plenty of room for trusted advisers to expand their services to clients who are eyeing, or already hold, property investments.
Just as it’s important that investors are up-to-date on their knowledge, professionals should ensure they are too before they explore a property advisory arm for their practice.
Mr Adams, who runs accounting training and mentorship programs at the IPA, helps accountants stay up-to-date with best industry practice.
While accountants are expected to have a grasp on the nuances of property taxation, specialised information requires training.
“I’m teaching property seminars and all the attendees are accountants. I’m talking to them about these things and they don’t necessarily have a handle on all these elements. It’s about having that knowledge base to be able to do it,” Mr Adams says.
“I think part of my role with accountants is to provide that special counsel to them in terms of specialist expertise on these issues so they can serve their clients better.”
Mr Adams believes this knowledge and expertise will enable accountants to become more involved in the pre-purchase stage of property buying.
“There’s opportunities for accountants not just to be tax return preparers, but to actually add value to their clients,” he says.
“To be on the front foot and proactive as and when their clients engage in these transactions, not at the back end of something that has already happened.”