Frequently Asked Questions

Q1. What is negative/ positive gearing?
Q2. What are the tax rebates I can claim?
Q3. How do I finance my purchase?
Q4. Do I need to speak to a solicitor?
Q5. What does buying off the plan mean?
Q6. What is the process for purchasing property in Australia?
Q7. Can I talk to someone in person about these properties?

Q1. What is negative and positive gearing?

Negative gearing is a term commonly used today, but what does it actually mean? In plain terms, it refers to a situation where your expenses to maintain an income producing property exceed the income of the property itself. This shortfall is a tax claim for you and Negative Gearing is popular with many investors because it effectively means that you can use money that would normally be paid to the Australian Tax Office (ATO), to support your property investment portfolio.

Your tax rebates, along with rental income are used to pay off your loan, with the smallest percentage coming from your own pocket.

Apart from negative gearing, there are two other types of gearing situations.

Firstly, there's Neutral Gearing which happens when the costs incurred running your income producing property match the income that the property generates. In this situation you would pay no tax on the rental income but would very likely be entitled to a tax credit for depreciation on the chattels and possibly the construction.

And then theres Positive Gearing, where the income from your property actually exceeds the costs of running the property. It's worth keeping in mind that the excess income is taxable.

Negative gearing is the first step for most investors because, through the significant tax deductions offered, it is by far, the most affordable, so it enables you to accumulate over time multiple properties for a very low up front and ongoing cost.

Once your loan has reduced, and your property has increased in value, you'll start to experience neutral gearing.

Then down the track your portfolio will be positively geared which is the ultimate goal for many investors, enabling you to retire on a very comfortable income.

Leverage and Negative Gearing
Negative Gearing and property investment are based on the principal of leverage, i.e. using your existing asset base to accumulate more assets.

Leverage in a financial sense, is simply the use of a small amount of money or equity to borrow a larger one, thereby increasing the investor's investment base. Instead of finding a cash deposit, to approved purchasers, the lender (Banks etc) will allow you to use the equity built up in your home as security on your investment property.

Your unutilised borrowing or investment capacity is a major asset. It allows you to undertake investment programs far larger and at an earlier date than you might have thought possible. It must be used wisely - it can only be used once until capital growth or debt reduction creates additional equity for you over time. For the majority of Australians the use of the equity in their own home to partially support an investment program is the only means available to attain financial independence during their working lives.

And, when you buy a property there are costs like establishment fees, Solicitors fees, stamp duty and the like, that together add up to a few thousand dollars.

Instead of trying to find cash to pay these fees, the bank/lender will allow you to add these onto the loan amount, if you have sufficient equity and income.

Q2. What are the tax rebates I can claim?

Investment property tax rebates fall into two major groups:

1. Your cash deductions - these are actual running expenses you've incurred over the year.
2. Your non-cash deductions - claims you can make on the wear and tear on fixtures, fittings and the construction of the dwelling itself.

Cash Deductions

These are things like rates, insurance, loan interest, letting fees, strata or body corporate levies (if you purchase a property in a strata complex, each owner usually pays a levy towards the maintenance of common areas, security lighting, insurance, etc) and accountancy fees.

Non-cash deductions
These non-cash deductions include loan costs and depreciation on the fixtures/ fittings and on the construction cost.

a) Loan Costs
Loan costs are the expenses your lending institution will charge you for setting up the loan for your investment property, they are also tax deductible. Loan costs include the following:
1. Loan application fees
2. Mortgage insurance (required only if you are borrowing over 75%)
3. Bank valuation fees
4. Bank legal fees and
5. Other establishment fees associated with setting up the loan.

Loan costs can be written off as tax deductions over five years, or over the term of the loan, whichever is the less time. Loan costs are different to Stamp Duty and legal fees, as the latter are acquisition costs and are not tax deductible.

b) Depreciation
The Tax office allows you to claim a tax deduction on the decreasing value of fixtures and fittings inside your property, caused by wear and tear.

In other words, if you buy a new property, items inside it including the hot water system, lights, stove, carpets and air conditioning etc. are brand new and worth a certain amount of money. As the years go by, those appliances get older and therefore decrease in value. That's where your depreciation benefits come in.

Items for deprecition can be claimed by two different depreciation methods:
1. Diminishing Value (DV)
2. Prime Cost (PC)

Individual investor's needs vary and the method of depreciation you use depends on your financial situation.

Building Write Off Allowance
This Write Off Allowance works on the same principle as the Depreciation Allowance, in that a deduction is given that accounts for the reducing value of the construction, due to aging and wear and tear. All residential investment properties built after the 1987 budget was introduced, include a 2.5% depreciation allowance on the construction costs. This is a substantial and legitimate claim and you should ensure your accountant includes it when compiling your tax return.

Because of the complexity of this taxation law we recommend investors have a Quantity Surveyor prepare a depreciation & building allowance schedule to ensure tax deductions are maximised.

Then, adding your non-cash losses to your cash losses gives you your tax deductions which will be deducted from your taxable income. Of course, to claim these tax deductions, you also need to declare any earnings relating to your property, namely rent.

Professional advice from a finance and accounting expert is necessary.

Q3. How do I finance my purchase?

Section 15 of the Tax Act enables you as a property investor (as a PAYE tax payer) to afford an investment property through receiving the projected annual tax deductions each week, fortnight or monthly, whenever you are paid, in advance!

In other words, you get your annual tax deductions pro-rata in your hand each pay day instead of carrying the costs associated with the property investment and putting in a claim at the end of the financial year.

Summing up Section 15 of the Tax Act, it is a legal way of helping you fund a property investment. Many thousands of Australians are using this procedure to enable them to afford to invest in property.

The annual tax deductions for your property are calculated at the beginning of the tax year. The calculated deductions are then looked at and your marginal tax rate is reduced accordingly. This reduction in your tax rate through the property deductions will result in your net pay being a higher amount. The increase in your net pay helps fund the property investment.

Please note that you have to submit an application for a Section 15 to the Tax Office before you recieve the benefits. Australian Residential affiliates (finance and accounting specialists) can assist their clients by showing them what forms they have to fill in. We also recommend a quantity surveyor in assessing the projected tax deductions for their proposed property investment.

Once this has been approved by the Tax Office you take the notice into your pay office and they adjust their books so you take more money home. This increase is then used to help fund your investment property.

All estimated deductions for your property investment should be checked by your accountant.

It's important to note that because every investors needs and financial situations are different, the above information is intended as a guide only.

Professional advice from a finance and accounting expert is necessary
to firstly see if you qualify and then to ensure that you structure your investment correctly. Please feel free to contact us anytime for referral to a property investment specialist in your area.

Q4. Do I need to speak to a solicitor?

Investing in property may be one of the most important transactions in your life. Factors other than the price of the property need to be considered.

To ensure that no unexpected costs arise or problems appear in the transaction, it is best to seek the advice of your solicitor before any contract is signed.

The contract details
When buying an apartment or townhouse off the plan it is important that you read the contract carefully and understand its contents. Have a solicitor check over this document for you and explain to you any points you do not grasp.

When reviewing this document:

1. Check that the specifications and plans meet your requirements and have been drawn up exactly as you expected. It is a good idea to employ your own independent architect or builder to appraise these plans.

2. Also look over the building plan and take note of how close your apartment is to common areas such as stairways, entry areas and lifts. You do not want to live too close to these high noise areas, nor do you want to be too far away from the conveniences they provide.

3. Check the completion date. Are there penalties if the developer does not finish construction on time?

4. Add a clause stating that the vendor must advise you of any changes (even minor changes) to the plan.

5. Ensure that warranties as to the standard of the works and the fittings are contained within the contract.

6. Make sure that all fittings are outlined and accurately described. For example, if your apartment is to come with a new dishwasher, the contract should outline the brand and model of this machine. The contract should also state that the developer is responsible for the installation of all basic services (including telephone and television wiring).

7. Check that the developer will insure the property and fittings until the settlement date (the day you take possession of the property). You should also be able to terminate the contract before settlement if the property undergoes structural damage.

8. Review any Body Corporate regulations. Do these suit your lifestyle? For example, are you or your tenants allowed to keep an animal on the property?

9. Ensure that the contract makes reference to the way in which outgoings will be apportioned between owners (e.g. water, power and electricity services) if your unit is not metered separately to other units in the development.

10. It may also be wise to have the contract allow you to on-sell your property prior to completion. Check with your solicitor.

Q5. What does buying off the plan mean?

It means entering into a contract to invest in a property prior to its construction. This property must be built from a plan of subdivision and will therefore commonly be a unit or townhouse.

Advantages and Disadvantages
The main advantage to buying 'off the plan' is the considerable saving you can make on Stamp Duty. In some Australian states, the law requires Stamp Duty be paid on the value of the property at the time of signing the purchase agreement (contract). By buying off the plan you often enter into a contract before construction commences and therefore need only pay stamp duty on the value of the vacant land.

Also, in a rising property market, it is possible for the value of your asset to increase between the period of signing the contract and moving in. So, buying off the plan can offer significant savings compared to buying an existing building.

One further advantage to buying 'off the plan' is that you will eventually own a brand new property. You may even have been able to select the fittings (e.g. lights, carpet and dishwasher) for the property.

And finally, buying 'off the plan' can offer you extra time to save your money for future mortgage repayments. A deposit will be required when you sign the contract, however the balance should not be required until construction is completed. This can take many months to several years, during which time you can grow your savings.

Disadvantages include the possibility of the market price falling between the time you sign the contract and settlement. Under this scenario you would have paid more Stamp Duty for the land upon signing the contract than you would have needed to had you bought the land at the later date. You do however still stand to make Stamp Duty savings on the building itself. Another disadvantage for some people is the delay that exists between signing the contract and settling on their new apartment/townhouse. This can take months to years. Some people prefer to see the finished product before committing to a property purchase. Therefore, if you do decide to buy off the plan you should choose your townhouse/apartment with care.

Q6. What is the process for purchasing property in Australia?

We have tried to simplify the investment process for you as follows:

1. Speak to your financier and find out what you can afford (pre-approval)
2. Search for a property
3. Select a property and reserve it with a $1,000 refundable holding deposit
4. Find a solicitor
5. Request a contract be sent to your solicitor
6. Have your solicitor run through the contract with you
7. Sign the contract and return with 10% deposit
8. Receive counter-signed contract (exchange)
9. Receive monthly updates on your development
10. Three months from settlement / completion apply for finance
11. Find prospective property manager and have them ready to find tenants
12. Settle on property
13. Find tenants

We know that some investors do not have the time or resources to manage this whole process so Braxton Chase can help you along every step of the way.

Q7. Can I talk to someone in person about these properties?

Of course. Click here to contact us and let us know if you want to set up a meeting at our offices.