Frequently Asked Questions

In Australia there is no gift duty so the actual transfer of the value of a property from spouse to spouse does not attract a direct charge. This is true even when you transfer to your children, relatives or even friends.

What you need to be careful about though, is the taxation and stamp duty issues.

Capital Gains Tax

Under our Federal Laws when an asset is transferred to another person for whatever reason. Where the transfer is done to a relative for little or no consideration, the law provides that a taxable sale has occurred at the market value of the asset regardless of what is paid.

So if you do transfer property to your wife (or family) then you will be taxed as if it was sold normally. This could be an expensive and unnecessary cost.

There is an exception if the property is the family home at the time of transfer and is transferred from spouse to spouse. This effectively eliminates the Capital Gains Tax on the transfer that would otherwise have been payable.

Note this is only if you are living in the house at the time and relates to the transfer of up to one half from the sole holder to their spouse, so the only time it is sensible to transfer a share of the property to your spouse is when you are actually living in it.

Stamp Duty

Each State of Australia levies a transaction charge, referred to as Stamp Duty, on the transfer of property.

This includes real estate transfers and there is usually a fee of 2-6% of the value of the transaction. Similar to the Federal Capital Gains Tax, this will be levied at the market value for related parties regardless of the amount of the actual transaction.

All states have a similar exemption from duty available when transferring from one spouse to the other, some even allowing a 100% share to be transferred, and they usually require the property to be the main residence at the time however some States do not require this to be a pre requisite.

You will need to have a solicitor or settlement agent handle the transfer and they should be able to confirm if any duty is payable in your situation.

You also need to remember to gain the approval of any lender that may have a mortgage on the property as they will need to give their consent and you will likely need to re apply for a new loan as the names will be changing from the original mortgagee which will incur additional costs and fees as well.

If you are considering transferring a portion of your property you should be sure to take professional advice as each case is different and may have inadvertent implications including the tax and stamp duty implications. In the great majority of cases the transfer would be unnecessary and should not be undertaken until at least you are living in the property as your home to ensure the exemptions are available.

A Buyers Agent is an increasingly popular way to find a property in Australia.

They are usually qualified Real Estate Agents that have moved away from “selling” property and instead have chosen to work independently representing the buyer by seeking out property specific to the requirements and specifications of the buyer.

This can be very beneficial for overseas based investors and property seekers as they can have a dedicated professional looking for them even though they may not have the time to visit their chosen purchase location.

This is especially true in Sydney and Melbourne where the large size of these cities means it helps to have someone on the ground and connected to the industry.

As with all things, this service does have a cost and it is usually around 2% of the final purchase price. Most Buyers Agents are very aware that they need to justify their fee and will negotiate aggressively to ensure they acquire the property at a price lower than you could do yourself so they cover the additional cost of their service.

From a tax perspective the Buyers Agent fee is seen as a capital cost of the purchase and therefore it can not be claimed against your income tax.

The only exception to this would be if you bought property in Canberra and rented it out as if the property was leasehold title, so purchase costs (including a Buyers Agent Fee) can be claimed against the rental income.

For all other states it would be a full capital cost and as such you will gain some tax benefit, not against your income tax but it will be able to offset future Capital Gains Tax on eventual sale of the property. This is not as attractive as if it was an income tax deduction, but at least it does have some tax benefit.

When a property is sold, all the purchase and sale costs come off the sale price to establish a Net Capital Gain and only this surplus is subject to tax.

In this way a Buyers Agent fee is treated in the same way as other acquisition costs such as Stamp Duty and Legal Fees.

If you do not intend to sell the property in the immediate future, then the benefit is maintained but a long way off being able to be seen as only on sale is any Capital Gains Tax payable and the cost would not be offset until that time.

If you are acquiring the property as your intended family home on return to Australia, then the cost may not have any tax benefit as the house may not be subject to Capital Gains Tax under the primary residence exemptions.

As such, when using a Buyers Agent the primary issue is value for service. Make sure that the Agent you use is able to understand and fulfil your requirements and is capable of finding and negotiating on the right property for you.

They should be able to achieve a better result than you could have done yourself, and in most cases they will.

Many people do not realize that once you have substantial equity in a property, it can be access by other ways than just the sale.

There are substantial financial and tax benefits from deferring the sale and using appropriate lending to purchase your next property. As in most cases, if there is enough equity in the existing property you may be able to borrow the full purchase price of the next property.

The downside of selling the property now is:
• Once a property is sold any potential future profit is lost,
• You will incur selling fees reducing the equity available,
• Any Capital Gains will become taxable at time of sale further reducing available funds.

Obviously if you borrow, you will incur additional interest expenses, but these will be fully tax deductible and may become very valuable in reducing the Capital gains tax on either property later on when a sale occurs, perhaps even eliminating the tax cost completely.

This will also allow you to accelerate the build up of valuable tax credits that can offset future Australian income if you return to Australia and have not sold the property.

Being able to act now rather than wait for the existing property to be sold can also enhance your negotiating power and allow you to act on a quality property immediately, without having to wait for yours to be sold and possibly miss the opportunity.

This is particularly true if you are trying to buy in a quiet market and take advantage of low prices, when selling is not as easy or lucrative. Simply buy the other property now, and then sell yours later in more favourable market conditions.

Perhaps the best reason to keep your property rather than sell it is in the fact that you now have two properties growing in value rather than just the one.

If the second property had been more expensive than the first at time of purchase, it is likely that the original property will continue to grow in value, and that one day it can be sold for a higher price, hopefully equivalent or greater than the new property.

In doing so, you can pay out the mortgage on the second property with the greater proceeds available and have a greater equity now built up.

The tax savings alone can amount to many thousands of dollars and makes the cost of interest well worth the trouble.

Australians have always had a good regard for property investment which has been well founded due to the long term reliability of the Australian market.

Negative Gearing is the practice where you borrow to acquire an investment asset, and the interest cost is greater than the income derived from the asset creating a loss. Obviously a loss is not a desired outcome when investing, so the main consideration of negative gearing is the belief that the future capital gain in the asset will be greater than the holding cost and result in an overall profit over time.

In Australia, this loss is allowed as a full income tax deduction each year, which makes it attractive (and legal) to undertake negative gearing as a sensible tax planning strategy.

You can negative gear any type of asset such as shares, business, managed investments or property.

Property has always been the most popular for a number of reasons including the availability of finance, safety of the market, general acceptance and understanding as well as the emotional comfort of a physical asset.

Almost 2 million Australians have taken this path and it is a very common and accepted practise however the continuing poor state of Australia’s Federal Budget has meant that anything that might increase government revenue is being considered and there has been a stronger focus on negative gearing as an easy target.

This is somewhat concerning as landlords are an important element of a sensible property market, with approximately 30% of Australians being renters. The tax incentive has meant that many landlords are more willing to accept a deficit of rent versus expenses and keep rents at reasonable levels, so there is genuine concern that removing the ability to claim may push rents up further.

The property industry is also a very important element of the economy, so any actions to discourage investment there could prove damaging and need to be carefully considered.

We are yet to see the formal policy options for the current Turnbull Government, however it has been leaked that they may consider limiting the claims to a certain amount of properties, perhaps up to 5 per person and may be stop allowing it as a tax deduction. We will have to wait until the May Budget to see what, if anything happens there.

The Labor Opposition has been more upfront stating that it will change the current system from 1st July 2017 to only allow negative gearing to be claimed on newly constructed property while at the same time reducing the current Capital Gains Tax discount on investment property owned by Australian tax residents from 50% to 25%. The former Labor Government already removed the Capital Gains Tax discount for non-resident taxpayers (including expats) in May 2012.

Labor has confirmed that anyone currently with negative geared properties will not lose their entitlement to claim for properties owned prior to 1st July 2017, so if you are thinking they may win the election and bring this policy to effect, you may want to consider buying an established property sooner than later.

Regardless of what changes may occur, the simple fact remains that any property acquisition should be made on the merit of the property and the income and growth prospects it offers. The tax benefits are only just a consequence of the decision and should never be the main reason to act.

Australia’s property market remains under-supplied in most areas and the strong population growth provides stability. We look forward to keeping you informed of any changes that actually occur.

When you own an Australian property that is income producing, for example with a tenant paying a weekly rental, then you are entitled to claim any costs incurred against the income to reduce any potential income tax payable.

This includes interest on any loan that was used to help purchase the property.

Many people make the mistake in assuming that as long as the loan is secured against the property, or was originally used to buy the property, that all future changes to this loan will also be a tax deduction. This is simply not the case.

In order to claim an interest expense, you must be able to show that when the loan was advanced it was used solely for the purchase of the income producing property.

A major problem occurs when the loan is paid down or increased, and new funds are drawn against it for another purpose. It is the new purpose that will determine if the new loan is allowed as a tax deduction.

For example, if you withdraw A$20,000 from your home loan to go on holiday, this portion of the loan would not be considered as part of the claimable home loan, rather a “holiday loan” that is just secured against the house. The interest cost of the $20,000 new loan would not be allowed as a tax deduction against the rental income, also as the holiday was a private expense, the interest cannot be claimed in any case.

Many property owners withdraw some of these new loan funds to help towards the purchase of another income producing property. In this case the new loan advance would be allowed as a deduction against the new property, not the old one, as the funds had been used solely on the new property at the time the bank gave you the funds.

If the loans are combined in the original account and not separated, then the allocation of interest is on a proportional basis.

It is important to understand this, as you can get into problems when trying to claim the interest.

This is especially true when you consider that one day you may move into one of the properties as your personal residence. If so, any interest cost would no longer be a tax deduction as there is no longer an income on the property.

As such, any loan reductions that you could make need to be applied to the loan that was solely related to the purchase of the home you now live in. So you would want to identify that and direct any funds to that loan only.

If the loans are combined, it is essential that you separate them prior to any repayment, as the tax office considers the loans to be paid down proportionately if still combined, which is not in your best financial interests.

Debt management is a very important aspect of investing. Ensuring you try and only have debt on income producing assets to ensure tax deductions can be claimed and the cost of personal debt is minimised to improve your overall after tax cash flow and reduce personal living costs.

Whenever you decide to withdraw available loan funds or increase debt on a property you own, you should be mindful of the use and tax consequences in both the short and long term.

There are some key principles to remember when it comes to debt:
• Try to always borrow solely for assets that are income producing and avoid debt on private expenses;
• If you must reduce loan, pay off the loan on the property you are most likely to live in;
• Avoid reducing loans on rental properties that you never intend to live in, pay off your personal home first;
• Consider using “offset accounts” where you deposit your funds into a cash account linked to your loan to reduce the interest cost, rather than actually paying down your loan. This achieves the same result but keep your future flexibility if you need the funds later for personal expenses.
• Where possible, separate your loans so that you can easily track what the actual use and purpose of the funds drawn was.

The Australian Tax Office is very vigilant on tracking these claims so be very careful to not try and claim more that you are entitled.

Under Australian Capital Gains Tax rules, the family home (referred to as the Principal Place of Residence) is free of Capital Gains Tax.

It is a common misconception that if you have a property that was not your residence and had been rented out, that if you move into it for a period it can become tax free under the PPR rules.

This is completely not true. Regardless of how long you may actually live in the property in later years. Instead, the tax free status is allowed on a pro rata basis, so for the period of time it was actually your home that portion is tax free but the rented period remains taxable regardless.

For example if you own a property and rent it out for 4 years then move back in for 1 year prior to selling, only 1/5th of any gain would be tax free while the remainder would be taxable. Importantly you would still be entitled to the normal 20% tax free allowance on the taxable portion once you have owned the property for more than 12 months.

There is no minimum time to what constitutes living in the property, however you should genuinely have it as your home and this would be evidenced by such things as electrical accounts, removalists invoices, licence address and electoral roll address.

There may be some further concessions available to this rule is if you had lived in the property prior to moving abroad or renting it out, in which case there are some special rules that treat the property as if it has remained your home for up to six years, even though it was actually rented during this period.

In these situations, you are meant to obtain a valuation when you originally moved out, and that valuation amount becomes your new cost base for tax purposes. Therefore any capital gains from the original purchase price up to the new valuation will remain tax free for up to 6 years.

If the property is sold within the six years then no tax is applicable.

If sold after the six years after moving out, then it will be pro rata from the time of leaving to time of sale. This may be minor, so you should not sell just to protect against potential tax issues.

Importantly, you must have actually lived in the property while being a resident for Australian tax purposes, so you can’t nominate the property as your home unless you had physically lived in it.

If you move back in to the property then it will increase the pro rata tax free period even further.

Notwithstanding that there may be tax issues that may not be welcomed there are many ways to protect against Capital Gains Tax through sensible planning while living abroad including further acquisition and debt management.

You should not be afraid of the effect of Capital Gains Tax as rates of tax in Australia have reduced significantly over the recent past so even the full tax cost may be far less than you thought it might be, but obviously if you can legally reduce the potential cost, then this should be investigated and considered.

If you are fortunate enough to have some spare funds to reduce the loan on your Australian property you should resist the temptation to actually pay off the loan. Not because it is a bad idea, but it can have consequences later that are very disadvantageous.

These include:
• Trapping your equity in that particular property so that if you want it back later (perhaps to buy your future home) the lending would be likely to not have a tax deductible status if it was used for private expenses such as your residence.
• Debt in the wrong place is a big concern in Australia and greatly impacts on your cash flow and tax status. Loans for investment property are fully tax deductible whereas loans for private property that you live in (now or in the future) or land are not an income tax deduction. As such you need to reduce loans only for property that you intend to live in not ones that you don’t as any dollar you pay off a pure investment property loan is one that you may have to borrow back to buy your family home.
• Diminishing your tax deductions as the interest cost now reduces. This can greatly impact on the investment performance as well as the tax cost of your property. Remember when living abroad your starting tax rate is 30% of any profit on your rental, so this is quite high and if it can be legally reduced through sensible debt levels then it should be encouraged.
• Future Tax Protection from the build up of annual tax losses will reduce, which may lead to greater capital gains tax cost or higher taxes on return to Australia.

If you have spare funds and are determined to reduce the interest cost, a much better option is to consider an “Offset Account”. This works in a similar way to reducing the loan, but instead of actually paying the money off the loan you pay it into a separate savings account and the bank links the savings account to your loan and only charges interest on the net balance.

So if you have a loan of A$300,000 and have A$40,000 in your Offset Account then you only pay interest on A$260,000. Effectively as if you had reduced the balance.

Importantly though, if you want your money back for whatever reason, the loan remains intact so if you take out funds from the offset it will just increase the net balance and result in a higher interest cost that is fully deductible against the rental property that the loan was originally used for.

Building up funds in your offset will ensure you pay the least interest. Logically you would keep the money there unless you feel you could achieve a better return than the actual interest saving without too much risk. If you had an investment opportunity that would outperform the interest saving, simply take the funds from the Offset Account and invest them, if not leave the money there and enjoy the savings.

Offset Accounts are available with all Australian Banks and are a very simple and effective solution to managing your money during time of investment uncertainty.

You can quickly assess the merits of reducing your loans by comparing different borrowing levels and you will be very surprised at how the reduction of your loans quickly becomes disadvantageous. You do want to eventually be debt free on your home, but not until you move actually move in, so save up for this as much as you can and use the Offset Account as a valuable tool in preparation of this.

If your property is in need of some work, it is always a good idea to get it done whilst it remains a rental property.

Normally this will assist your tax, as all expenses will be a tax deduction in some way.

Items that are maintenance or repairing are fully deductible. This would include painting, general handy work, gardening and landscaping.

Other items like new carpets or structural improvements, will be allowed as a deduction over a few years as depreciation.

Usually any renovation will also increase the property value and weekly rental so financially it is also a good decision. It will also make your property more attractive to potential renters so vacancy rates would also diminish.

You should consider increasing your loan to fund the property improvements rather than using cash savings as this can also improve your tax and investment benefits.

The easiest rule to help you decide if the costs are warranted, is to use the interest cost as the yardstick. If you require to spend say $10,000 on your property and the bank interest rate is 6.0%pa, then you need to get an increased rental after renovation of at least $600, or $11.54 per week to justify the expense.

Your agent can give you an estimate of the potential increase as a result of your repairs, which should be favourable. It is common to expect the value to go up by one and a half times the amount spent.

When deciding how much to spend, do not forget that it is a rental property, so you should be relatively conservative on budget and ensure that it improves the livability factor of the property from a tenants perspective.

The best time to do repairs is in between tenants, or to keep a very good tenant that will not mind the inconvenience of tradesman whilst they live in the property.