With the likely changes to capital gains, and reductions in company tax rates announced in the budget, how long until it makes sense for us to only buy property within corporate entities? Many considerations, and obviously those two changes are being pushed by different sides of the political isle, but both seem to be consistent with broader pressures on the tax system so I wouldn’t rule out both happening eventually. At the moment the 50% tax cap gains deduction means a max tax rate just under 25%, although under labor this would increase to nearly 37% if the deduction is reduced to 25%. The proposed 25% tax on corporate earnings starts to look interesting no? As I mentioned, I appreciate there are many considerations, but the above is becoming a big one I would have thought. Any views?
At present the budget is a media stunt and no more. Not one of the things announced will be passed in the budget appropriation bill tabled last night. I will be waiting for the election outcome and what final law changes see the light of day and their final form.
I have no accounting or anything much going for me at all. However, I do observe and it could be rash to do anything based on what is announced in a Budget. It's the final legislation passed by Parliament which is important. Remember the 2016 Budget speech in which it was announced the work test for superannuation contributions was to be removed for those between 65 and 75? Never happened. I wouldn't plan one thing until I know what is actually going to be in place.
The work test was re-annouced last night. Subject to the election. The ALP oppose that change however.
Would it be reasonably called a ‘loophole’ though? I appreciate this is a subjective term, but against the idea that this would represent a ‘loophole’ that needed to be closed would be 1) NG treatment in corporates is basically same as labors proposal for established property, 2) property investment can reasonably be called a business, and this would mean cap gains income is just taxed as normal income, 3) if 25% is an appropriate tax rate for other small businesses, can see why it wouldn’t be for prop investment too? Dunno, but just can’t see why this would be a negative loophole to be fixed?
Property investment is VERY difficult to be described as a business. Try that and the ATO will impose hefty penalties for recklessness. Easily detected when any individual tries to offset a rental loss v ordinary income. An automatic audit query at best. I suspect there is a easy way based around the business issue but the ATO dont want to give an opinion. Property ownership generates rental income. Its a passive return. Its like arguing you are in business owning shares in BHP.
Thanks for that. I didn't bother with the circus show last night nor have I read about it apart from here. I chased down the reference and according to the Treasures speech it seems he was announcing it will apply to those who are 65 or 66. That covers a wide spectrum. Could be a market for false birth certificates if the proposal ever sees the light of day - unlikely.
Super funds use date of birth and TFN and report to the ATO on all contributions. So fake details just escalates a query.
Paul, I take your points. And I’m certainly not familiar with how this plays with the ato at the moment. But I believe it isn’t uncommon for real estate investment by individuals to be done in corporate entities around the world, although the ATO probably couldn’t give a stuff about that. The other point though is that the ‘business’ wouldn’t differ in practice from that of the more vanilla listed reits, even the internally managed ones. They choose to structure as reits cause it’s even better than a corporate entity for tax purposes, but even they do sometimes structure part of their businesses as corporates. I would have thought that a business activity should, within reason, be whatever you want it to be. I.e. property investment could be done as a sole trader, partnership, company etc. Maybe just dreaming, but I don’t see why this should be an issue in theory anyway.
Resi property most certainly can be held by a company. Companies cant produce a neg gearing loss as such. It would need another source of income or that loss carries forward. There is also a issue regarding loss of the main residence exemption, loss of the (reduced ?) CGT discount and more. The land tax threshold also must be considered and is a sole threshold. The other key problem with a company is lets assume the company does produce a profit after sale. If the owners of the company (shareholders) take that profit or borrow it, wind up the entity etc it will impose a dividend and uplift tax applies. Maybe with a tax credit and maybe not. Its possible to pay company tax and also not get a shareholder franking benefit in a simple way. So the seemingly low rate is not a final tax rate. It can end up being 56%+ v's the present max CGT rate of 24.5% (incl Medicare). Company finance can also pose problems for investors. Fewer lenders etc REITS are a form of fixed trust and affected by specific tax laws. Think of a fixed trust. They have tax concessions when they are widely held. eg No duty on sale of units. I can see fixed trusts coming back big time. I can already see their role in an ALP tax policy. They allow unitholdings to change without stamp duty in many states and can be used to game the proposed policy
Yes I get the NG issues, but under labors policy there wouldn’t be anywhere near as much difference no? And I am only talking about IP, not PPOR. I am not as familiar on tax issues such as potential not to benefit from franking credits, but hopefully there would be ways to ensure double tax is avoided? And if so, earnings could be retained for extended periods unlike trusts. Can see land tax issues depending on states etc. and if land taxes start increasing at the expense of stamp duty then this would become a bigger issue. Hope financing could be dealt with through guarantees if absolutely necessary?
