The Asian century in Australia rises, so does the rise of Asian investment in Australia and the rise of their interest in property investments in Australia, across residential and commercial, capital cities and regional centres. India is missing in action when it comes to Asian investment of real estate in Australia, as per the writer’s previous published articles. China now replaces United States in the top spot, with Singapore, Malaysia and Japan, among major foreign property investors in Australia, with Great Britain, Unite States, Germany and South Africa. Looking at the Foreign Investment Review Board (FIRB) data (Source, 2013/14 & 2012/03 FIRB annual reports), foreign investment approval of real estate investment in Australia now stands at an annual value of 74.6 billion, a rise of $22.6 billion or a considerable 43.5% increase from the previous year.
As the Indian/South Asian community in Australia rises on its way to be one of the largest migrant group in Australia, so does the rise to focus on business, trade and investment with Australia. Australian Federal Trade Minister Andrew Robb MP is in negotiations with Indian Prime Minister Narendra Modi MP, of a broader version of Free Trade Agreement (FTA), called the Australia-India comprehensive economic cooperation agreement, in which the writer company, ABS Group, has submitted a submission, requesting for real estate acquisitions and investments to be considered in each other’s countries. At the moment in Australia, Indian and South Asian nationals without local citizenship/permanent residency is restricted to acquisitions/investment of new or “off the plan” residential properties and commercial properties restricted threshold of $54 million. Recent Free Trade agreements with China, Japan and South Korea, allowing these countries to enjoy commercial property thresholds, similar to United States and New Zealand, of $1.094 billion.
For property investment in Australia, which is a major investment class in Australia, which is different from United Stated and Europe, which is property is only minor, as they have share markets are double the size and major investment classes. A big factor reason why property investment in Australia is such a big “talked about” major investment class, is the tax benefits – Negative Gearing and Tax Depreciations.
Negative Gearing simply means having an investment property that generates rental income that is less than the cost of loan (with interest repayments excluding principal/capital repayment components) and property related expenses (management fees, repairs/maintenance, council/water rates, strata levies, land tax, accounting fees, depreciation allowances etc), to gear tax benefits for the property investor. Mum and Dads property investors can benefits from negative geared investments properties, as this would have the potential benefit of pointing them into lower tax income levels and tax rates.
Migrants and investors who come to Australia, when looking to invest, they quick to hear about property investment in Australia. When they soon become an Australian resident, then soon hear about the benefits of negative geared property investment. Negative gearing in property investment was introduced in the 1930s to help Australia out of the great depression, offing tax benefits to help national rebuilding of savings and investment. The next fifty years, grew to make property investment a major asset class and investment focus for Australians. In the mid-1980s, the Hawke/Keating Labor Government started to make changes into negative gearing, restricting the benefits and depreciation allowances. Some of the changes were then reversed, resulting from a political backlash and property market impacts (investors leaving and rental prices spiralling) and opinion polls during this time, forcing Paul Keating to reverse some of the unpopular reforms.
Since Paul Keating’s attempt to reform and restrict negative gearing, no government to date, include the current Abbott Liberal-National Government, would consider restricting negative gearing for Australians with negative geared investment properties, a major investment in Australia, due to the political consequences. When John Howard as Prime Minister in office, he quickly dismiss media speculation on negative gearing, referring to many Australian have negative geared investment properties, for their retirement planning. Current media reports, at the time of writing article, there is discussion of tax reform, which capital gain tax to be reviewed and possible reform, in lieu of reforming negative gearing. Australian Taxation Office (ATO) recently (April 2015) released the taxation statistics for the 2012/13 financial year show 1.26 million individual tax payers are landlords with negative geared investment properties, showing a $12 billion investment pool of negative geared property in Australia. The number of individual tax payers with negative geared properties rose by almost 60,000 from the previous year. Most individual tax payers with negative geared properties making tax deductions, of between $37,000.00 to $80,000.00 a year, which shows the negative gearing property investment system benefits “Middle Class Australia”.
Adding to Negative Gearing and most property investors go for new recent built properties, is for Tax Depreciation benefits. Depreciation is the capital value decline over time with its age and effective life, before it is written off. Since the late 1980s, in most cases, the Income Assessment Act legislation with the Australia Taxation Office rules, allow the capital value (does not include land or land related value) can be written off 2.5% per annum over 40 years. This can be either the diminish or prime cost methods, in which a tax accountant and their tax depreciation assessor, can determinate which method is best for their client. New properties are favoured for property investors, as the Tax Depreciation benefits in the property, when new, is in the bulk of the fixtures, such as light fittings, floor coverings, tapware, air conditioning, curtains/blinds, cooktop/oven/range hood, hot water service, dish washer, alarm system etc. The Income Assessment Act legislation with the Australia Taxation Office rules, have a table in place that determined the number of effective years the fixture can be written off over time. Items less than $300 can be written off in one years. Items over $300 and less than $1,000.00 can be written off in four years. Other items, is determined by the Australia Taxation Office effective life years table.
Tax Depreciation Schedules are prepared by quantity surveyors during construction or by registered tax accountants engage tax deprecation assessors, by appropriate property related professional who have the skill, knowledge and expertise, on tax deprecation valuation assessments or quantity survey assessments. Smart property investors tend to acquire new properties that gives them the maximum tax depreciation benefit, in the first 5 to 10 years, then sell them off, when the maximum tax depreciation benefit runs out. Smarter property investors tend to buy new properties that are strata titled, for further tax depreciation benefits, with their portion share of the common property fixtures, such as lifts, swimming pools, gyms etc.
Tips for acquiring and investing in property investment –
- Pick an area with great public transport (benefit for tenants), rising capital and rental values. Property should be close to public transport, shopping centre and other local facilities, such as a gym, club, cafes, churches/temples etc.
- The rental prices and sale prices in the area should have a good indifference relationship, meaning for example, if the sale prices are around $700,000.00, then rental should be around $700 per week. If the rent is way less, it means it is a not a good rental area to invest. If it means the rental more than $700 per week, then it means it is a good rental area to invest.
- Speak to a banker or mortgage broker on investment property loan packages, which are good for negative gearing.
- Pick projects that are selling well, renting well and is a new property to purchase, for the maximum tax depreciation benefits.
- Pick projects that are new strata title properties, for further tax depreciation benefits, with proportion share of the common property fixtures.
- Do homework on the project properties for sale, to see if they have any existing defects/post completion maintenance or pest issues, don’t headaches for yourself or for the tenant.
- Speak to local property values and other agents on comparable re-sales in the local area, to make sure the offer you are buying, is not too inflated.
- Get your conveyancer/solicitor to check the Contract well, especially the Special Conditions, sunset clauses etc.
- Make sure your investment property loan approval has no expiry and good for settlement.
- Make sure you do the pre settlement inspection to check for defects and other issues.
- Appoint a good property manager/leasing agent that is proactive, with good systems in place, has a good qualified list of trades people and networks well with potential tenants.
- Speak to your tax accountant and solicitor about having the investment property in your superannuation fund (as a self-managed superannuation fund), for asset protection and tax benefits.
Written by Paul McKenzie, CEO of ABS Conveyancing & Valuations, is a legal conveyancer & property valuer, with almost 20 years in the real estate industry. Member of the Australian Institute of Conveyancers, the Australian Property Institute, North Sydney Chamber of Commerce & the Australia-India Business Chamber. He has written a number of property articles and has appeared on radio
Copyright 2016 Paul McKenzie – all rights reserved.