Negative Gearing for Tax

Negative gearing can have significant tax benefits but don't let it be your only motivation for buying an investment property. The property you choose needs to stand on its own merits so that it has the potential to make money in the long term through capital gains.

What you want to achieve is a situation where tax rebates and your rental income are used to pay off your home loan, and down the track when your property has increased in value you can sell it at a profit or keep accumulating multiple properties.

Indeed, one of the main advantages of negative gearing is that it may let you invest in a more valuable property than you would otherwise have been able to afford using only your cash savings.

When using negative gearing, it's important to be prepared for unexpected impacts on your cash flow, such as interest rate rises, unforeseen repairs in your rental property or a period of vacancy. In these situations you need to be in a financially strong enough position to be able to repay the shortfall and continue servicing your home loan.

You can overcome many of the risks of negative gearing by doing some homework and selecting your investment property with care. When you're ready to invest your mortgage adviser can help you find a loan that suits your needs.

What you can claim on tax

As a property investor seeking a tax benefit you should always look for the greatest amount you can claim in expenses on your rental property. Keep in mind that the Tax Office takes a close look at rental property claims so it's essential to keep good records of all expenses.

Expenses for which you may be entitled to an immediate deduction in the income year you incur the expense include:

• advertising for tenants

• body corporate fees and charges

• cleaning

• council rates

• gardening and lawn mowing

• insurance ( building, contents, public liability)

• interest expenses

• land tax

• pest control

• property agents fees and commissions

• repairs and maintenance

• travel undertaken to inspect the property or to collect the rent

• water charges.

Expenses that may be claimed over a number of income years:

• borrowing expenses

• amounts for decline in value of depreciating assets, such as carpet, furniture and appliances

• capital works deductions, i.e., certain construction expenditure.

Did you Know? 

You can't claim these on tax:

• acquisition and disposal costs of the property - these are usually included in the property's cost base for capital gains tax purposes

• expenses not actually incurred by you, such as water or electricity charges paid by your tenants

• expenses that are not related to the rental of a property

• GST credits for anything you purchase to lease the premises

For more information about common mistakes made when claiming rental property expenses, see 'Rental Properties - avoiding common mistakes'.

http://www.ato.gov.au/content/00131327.htm

Negative gearing or positive cash flow?

There's no easy answer to the much-debated question: do negatively geared or positive cash flow properties make the better investment choice?
There are many investors who swear by negative gearing, which is when the cost of the property, including interest on the loan used to buy it, outweigh the returns it generates. This loss can be claimed on tax, which is where the appeal of negative gearing lies.


Others strongly believe having a positive cash flow is a wiser choice because it means you have more income than expenses and cash in your pocket every week. This is achieved either through positive gearing - where your property's rent returns are high in proportion to the purchase price and cover all the expenses. Alternatively you can achieve a positive cash flow with a property when its outgoings (loan interest, body corporate fees etc) are lower than the income you earn through rent and tax deductions (from claiming expenses and depreciation).
The reason for the divide in opinion is that there is no shortage of successful investors who can vouch for one or other of the strategies or those who have even used a combination of both. Much of the success of property investment depends on individual choice, circumstance and goals, which means that while something works for one, it may not for the next.

The beauty of a positive cash flow property is that it won't burn a hole in your wallet but you'll have to work hard to find one that also delivers good capital growth.
Keep in mind that any profit you make on the rental income is likely to be subject to capital gains tax (after depreciation and other tax deductions), so it's wise to put aside a component of your rent return to meet the tax bill.
Positive cash flow properties are suited to investors who are looking for a conservative investment strategy and are keen to use the extra cash in the pocket to pay down debt and/or increase their equity to make room for further investment.

Here are 10 top tips for finding positive cash flow property:

1. Buy a property that generates a strong rental yield (the return your property generates compared to the property's market value).

2. Know your statistics. Look for indicators that will drive rental prices upwards like a low tenant vacancy rate or suburbs with a shortage of properties for sale/lease.

3. Look for market cycles that are ready - places which have not grown for a while and get in at the right time.
4. Look for property that you can add-value to through renovation.

5. Regional areas are great places to find positive cash flow properties, but make sure your property is exactly what the market wants otherwise it won't make any capital growth. Thoroughly research both property and town: look for high employment rates, a spread of employment sectors and a growing population.

6. Look to buy in places where huge infrastructure spends are being projected.

7. Borrow as little as possible to fund the property. The interest cost on an investment loan can be one of the more significant expenses of a rental property, so the less you borrow, the lower the interest cost.

8. Don't give up on capital growth. In areas that command high rental yields, it's harder to find properties with good capital growth, but not impossible. It's still worth looking for locations where there are factors in place to support property price growth like shops, restaurants, transport links and job opportunities.

9. Buy new. A new property is more likely to provide a positive cashflow than an older dwelling due to its depreciation benefits.

10. Seek advice. Talk to real estate agents, property managers and other investors. The more advice you seek the more you will learn about growth areas and tenant demand. Contact us to find out how the right loan can play a key role in generating positive cash flow for your property.

Self Managed Super: A Growing Trend

Self Managed Super: A Growing Trend

Lenders continue to launch new loan products to cater for the soaring popularity of self-managed super funds (SMSFs).
With many of the features of regular home loans, these products entitle trustees to borrow within their SMSF to buy residential investment property or refinance an existing SMSF loan. The loans are repaid from rental incomes and contributions paid into the funds.

Since the laws were changed in 2007 to allow SMSFs to borrow funds to acquire residential property, this type of property transaction has become increasingly popular. Currently more than 800,000 Australians invest around $280 billion of superannuation through the SMSF structure and this is a trend that is expected to accelerate. SMSFs make up around one-third of the overall superannuation sector and have an asset value of $14.87 billion.

One of the many attractions of a SMSF is that is puts you in the driving seat and allows you to do something pro-active about your financial future. As the trustee of the fund, within the boundaries of the law, you have the flexibility to decide how your funds are invested and how the fund is to operate. Unlike the ups and downs of the share market, property investment provides the security of yielding positive returns for investors, especially if it is a long term investment.

Better tax management is another attraction as investing in an SMSF has numerous tax advantages. There is also the ability to pool funds with up to four members, which means family members can pool their savings to buy a property that would otherwise be beyond their reach.

Data from the Australian Taxation Office shows that more than 3,000 SMSFs are set up every month and that the sector is growing at a rate of 10% a year. In the four years to 30 June 2012, the SMSF sector grew by $109 billion, which makes it the strongest growing sector of the superannuation industry.
The statistics show that SMSFs have truly positioned themselves as one of the most popular forms of superannuation savings. If you are tempted to join this growing trend, speak to us today about how we can help you set up your own SMSF.

NEED HELP ?
Give Premium Broker a ring and we can help with getting the finance approved for a SMSF and even put you in touch with specialists if you need to set one up.

Newsletter - July 2012

Hello

July 2012

Please find your Jul/ August newsletter below. If you have any questions or changes please email john@powerport.com.au There is a lot of media hype about out-of-cycle interest rate movements but little in the way of explanation. We have fielded many questions from clients about why lenders are moving their interest rates out of cycle with the RBA and what it means for home owners. Our page two article attempts to answer these questions by explaining the case for both sides of the argument. To understand more about this topic, your mortgage broker is always a good person to turn to for reliable unbiased advice. In this issue we also look at how to build equity in your home loan quickly - page 3 - and the changing face of the Aussie household - below. Our page 4 article explores the topic of empathy and how important it is for effective relationships and communication. Kind Regards, Robert Ward & John McLennan Directors - Equitimax Pty Ltd

Equitimax Pty Ltd PO Box 929 Chatswood NSW2057 Tel: 02 9411 5322 Mob: 0417 448 691 Fax: 02 9411 5200

1. A Typical Home In Profile 2. Out-Of-Cycle Rate Hikes 3. Book Review 4. Useful Tips When Purchasing A Property 5. Finding Empathy

A Typical Home In Profile The stereotypical Aussie family home made up of mum, dad and a couple of kids is on the wane, as couples without children fast become the family norm. As our population ages and baby boomers become 'empty nesters', it is predicted that couples without children will increase the fastest of all family types, making up 43% of all families by 2031. Other big changes include a massive increase in the number of Australians living alone - again largely a result of an ageing population. This type of household is expected to increase by up to 91% over the next 25 years, representing the fastest growing household type over the period 2006 to 2031. The number of people in our households will continue to decline until it reaches an average of between 2.4 and 2.5 by 2031. By 2016 Australia's household size is projected to be the same as Japan and New Zealand and larger than England (2.2) and Scotland (2.1). Although there will be fewer people per house, the number of households continues to rise. Estimates place the number of Australian households at over 11 million by 2031, an increase of 4 million households since 2006. Over the same period, Australia's population is projected to increase by 39% to 28.8 million people. So what picture does this paint for property investors? It shows there will be plenty of demand for property into the future but it will pay to keep an eye on projected demographics when planning your next property purchase.

Out-Of-Cycle Rate Hikes There's a very public stoush going on between the banks and the politicians about out-of-cycle rate rises. While each side argues its case, consumers are left confused about whether they are getting a raw deal. Since the RBA began cutting interest rates by 125 basis points from last November, there has been a shift in the tradition of lenders moving their rates in line with the RBA. Lenders have instead chosen in many cases to withhold part of each reduction and to make their rate announcements up to two weeks after the RBA's first-Tuesday-of-the-month announcement. We have lately fielded many questions from confused clients, asking 'who is driving rates', 'am I being ripped off', 'why are out-of-cycle rates rises happening'? Here we'll take a look at both sides of the argument and what it means for you as a mortgage holder. The government argues ... The banks are protecting their profits at the expense of consumers. We've all heard Treasurer Wayne Swan's very public criticism of the banks for moving out of cycle with the RBA. He has suggested they have a responsibility to match the RBA's rate cuts and their 'high returns' give them the profitability to be able to do so. The banks argue ... They have always been independent of the RBA when setting their interest rates and they are under no obligation to follow the Reserve Bank. Their profit margins have been hurt by an increase in 'funding costs' (the amount of interest cost paid by a financial institution for the money they have acquired from various sources), largely as a result of Europe's debt problem and they have a duty to shareholders to adjust rates based on these pressures. The Australian Bankers Association has warned that lenders can't follow the Reserve Bank's cash rate moves without risking the stability of Australia's financial system. "The risk is that if international investors become concerned that the banks in Australia are politically constrained from managing their higher costs, they will perceive us as riskier and they will reflect this in what they charge for the money we raise, adding further funding cost pressures on the banks, and ultimately, customers." We say... If you feel unhappy with the rate movement your lender has made, give us a call to find out if there is a better alternative out there for you. When you come to us you can be sure we will help you find the best deal, answer your questions honestly and provide clear unbiased advice.

Book Review A young woman walks into a laboratory. Over the past two years, she has transformed almost every aspect of her life. She has quit smoking, run a marathon, and been promoted at work. The patterns inside her brain, neurologists discover, have fundamentally changed. Marketers at Procter & Gamble study videos of people making their beds. They are desperately trying to figure out how to sell a new product called Febreze, on track to be one of the biggest flops in company history. Suddenly, one of them detects a nearly imperceptible pattern--and with a slight shift in advertising, Febreze goes on to earn a billion dollars a year. An untested CEO takes over one of the largest companies in America. His first order of business is attacking a single pattern among his employees--how they approach worker safety--and soon the firm, Alcoa, becomes the top performer in the Dow Jones

Useful Tips When Purchasing A Property How to build equity in your home quickly Every home owner has the chance to build equity in their home over time, but here's how to speed up the process. Equity is the difference between the market value of your property and the amount you still owe on your loan. The quicker you build equity, the earlier the opportunity to invest further, expand your portfolio and build your wealth. Buy at a good price At the start of your investing career, it doesn't hurt to knock $25-50k off an average priced home. Paying a lower price not only saves money up front, but also long term through reduced interest payments. Mastering the art of negotiation is your best bet for knocking down the purchase price. Start by doing your sums and knowing your limit, but never let on to the seller what your top price is. Place a time limit on your offer and tempt the seller with something like a quick sale. Stay calm during the process; keep a clear mind and a cool heart. Buy in an up-and-coming area Look to buy your property in areas that market demographics show are just about to boom or that will soon receive new infrastructure or an injection of new business. It can take time to put in the research but the payoff is you will be able to buy a property for a reasonable price and it won't be long before its value starts to rise. Buy a property that can be improved Renovation can increase the value of a property but be aware that it takes time, money and experience. For those would-be-investors not able to make this kind of commitment, the alternative is to buy a property that only needs a bit of cosmetic work. Freshening up the exterior, a lick of paint, new storage areas or a simple bathroom/kitchen tidy up will cost less and can significantly improve property value. Pay your loan off sooner Aim to make your initial down-payment at the time of purchase as high as possible. Then look for ways to repay your home loan early: increase the regularity of your repayments, make larger repayments and make lump sum repayments (ensure your loan has the flexibility to allow this without penalty). Another option is to use the interest offset accounts that come with many loans - these reduce the amount of interest that is charged by offsetting your savings to the value of your loan. As your mortgage broker we are happy to guide you through various strategies for building equity in your home loan.

Finding Empathy Despite the common adage 'never judge a man until you have walked a mile in his moccasins', many of us are too quick to judge others without considering the full picture. How long since you have given someone the benefit of the doubt rather than forming a quick judgement? How long since you stopped to take in someone else's perspective? If your answer was 'today', then congratulations, it means you have what it takes to be empathetic - to place yourself in the shoes of another person and be able to identify and understand their situation. It has been said that a common characteristic of people who are successful as business leaders, teachers, parents, spouses and healthcare professionals is their ability to be empathetic. By gaining an insight into what others are feeling and thinking, they are able to create bonds of trust. They are also able to understand how or why others are reacting to a situation and use this to inform their decisions. Empathy is sometimes wrongly confused with being too soft, giving in or not being assertive. You can be empathetic and yet disagree with another person - it simply means you are in tune with what they are going through and respond in a manner that acknowledges their thoughts, feelings or concerns. How to develop empathy You can strengthen your ability to emphasise by learning to listen attentively and ask questions. To listen attentively means putting your complete focus on that person without getting distracted. For example, if you're doing chores and your child wants to tell you something, stop what you're doing and turn to your child. If you need a few minutes to finish that task or email before comfortably being interrupted by an employee, then let the person know that. To be curious; to ask questions is to learn what the person is feeling and to gain a clearer understanding of the full picture. It also demonstrates you want to know more and you care about what they have to say.

Disclaimer: This newsletter is intended to provide general news and information only. Readers should rely on their own enquiries before making any decisions regarding their own interests. Please do not rely on any part of this newsletter as a substitute for specific legal or financial advice. All material is copyright 2012. Click here if you would like to unsubscribe from future newsletters.

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BlueWealth offer a number of Free Property Investment Seminars throughout the year. If you would like to know more please contact us.

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