It’s often said there are two things that are guaranteed in life – death, and taxes.
While taking care of your physical and mental health can lead to a longer, healthier life and stave of the death part, what can you do to legally minimize your tax?
Since tax can be one of your biggest expenses as a property investor, in today’s podcast I chat with independent financial advisor Stuart Wemyss about what options are available to you.
Before we get started let me give you a quick disclaimer… cheating or doing dodgy things to minimise your tax is wrong and illegal – and never worth it.
Remember, when you dodge a tax return, the taxpayer takes all the risk.
If you get audited, you will be liable for the interest and penalties, not your accountant.
And of course, after my chat with Stuart, I’ll share my popular mindset message.
Building a substantial property portfolio may be simple, but it’s not easy.
And that’s not a play on words.
It’s simple if you follow the systems and frameworks other successful investors have, but it’s not easy because it requires money management skills, delayed gratification, discipline, resilience, and an understanding of finance, tax, and the law.
I guess when I put it that way it’s not surprising that 92% of investors never get past their first or second property.
And of course, property investment is a team sport – you need to get a good team around you including a property survey accountant, a proficient finance broker, and a property strategist.
In your journey as a property investor, after your interest payments to text will probably be the most expensive outgoing in your property investment business and if you get it wrong it could end up being the most expensive cost.
- The three tax phases in a property’s life
- Initial negative gearing phase. Income tax benefits. Land tax is often not material.
- Neutral phase. Property starts to produce a taxable income.
- Tax liability phase. After holding a property for 20 years, you should have heaps of equity in it, and it has helped you build a lot of wealth. However, a consequence of this is that (1) income tax liabilities start to become material, (2) land tax can also be quite costly
- Some income tax considerations
- To maximize negative gearing often requires putting property in the highest income earner’s name.
- Minimize income tax later – having all property in one spouse’s name could increase tax consequences.
- You need to think about your tax position in retirement.
- Land tax considerations
- Consider geographical diversification
- In VIC, the land tax-free threshold hasn’t changed since 2009 ($250k). Don’t own property jointly i.e. one in each spouse’s name is better. Use separate trusts.
- In NSW, avoid using a trust. Use personal name or company.
- QLD, similar to VIC. A personal name is cheaper than a trust. If you want to use a trust, use separate trusts.
- Capital gains tax considerations
- Sell when your taxable income is close to nil e.g. in retirement.
- The goal is to spread the gain across as many taxpayers as possible to take advantage of marginal rates. E.g. $1 taxable gain:
- In one person’s name = $440k of tax
- Distributed to 4 adults = $352k ($88k saving i.e. 20%)
- SMSF will pay zero CGT when in the pension phase.
- Finding a tax advisor
- We tend to think deeply about our own challenges and circumstances, so with that in mind, it’s important that you use an accountant that invests in property themselves.
- A referral is the best way to find good advisors. Find a successful property investor and ask who they use.
- In business, you quickly learn that professional advice always pays for itself. Sometimes we are conditioned to reduce expenditure wherever possible. Not with tax. You want your tax advisor to spend time thinking about your situation, not feel pressured to churn the work out quickly because the margins are thin.
One good financial decision will have positive consequences.
But five good decisions in a row will be life-changing.
It will create a lot more than five times the positive outcomes that one good decision will.
That’s because good decisions are a compounding asset.
Stuart’s Book – Rules of the Lending Game
Get a bundle of free eBooks and reports at www.PodcastBonus.com.au
Some of our favourite quotes from the show:
“I don’t mind paying a fair share of tax, so we’re not talking about illegally doing the wrong thing and getting into trouble, but we don’t want to pay more than our fair share of tax.” – Michael Yardney
“You’ve got to be prepared to pay for advice.” – Michael Yardney
“The most expensive advice you can get is wrong advice, bad advice.” – Michael Yardney
PLEASE LEAVE US A REVIEW
Reviews are hugely important to me because they help new people discover this podcast. If you enjoyed listening to this episode, please leave a review on iTunes - it's your way of passing the message forward to others and saying thank you to me. Here's how
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.