Wealth Creation Australia

It is fair to say that the Australian economy is still struggling in its post-resources boom transition and that is underlined by the fact that the RBA is very likely to continue to cut interest rates.

While falling interest rates may give some relief to property investors, the outlook for the property market in many capital cities is becoming more challenging and as a result investors need to utilise every tax benefit they are entitled to so they are not put under any undue financial stress.

For example, it is still a fact that a large proportion of Australian property investors fail to claim their full tax depreciation benefits that can equate to 60 percent of the purchase price of a property.

In dollar terms, if you bought a new apartment for investment purposes that cost $500,000, these total tax depreciation benefits could amount to a massive $300,000.

The typical cost of a tax depreciation report is around $600 which is also tax deductible making it a great investment for astute property investors.

Tax depreciation on a residential property is a deduction against assessable income allowing the owner to reduce the amount of taxation payable.

An investor is able to claim for two distinct types of depreciation on buildings. The first is capital allowance which is a deduction based on the historical construction costs of the property and may include surveying, engineering, architectural and building fees. The second is plant and equipment which includes items such as floor coverings, window treatments and fixed equipment i.e. cookers.

Most investors do not realise that tax benefits obtained through depreciation can be equivalent to 60 percent of the total purchase price of the property.

You should engage the services of a tax depreciation company who will undertake an inspection of your property and provide you with an ATO compliant tax depreciation report which you can provide to your accountant. This report is a ‘once off’ and will outline the amount of tax benefits you can claim on an annual basis. Anyone considering employing a tax depreciation company should ensure that they are a member of the Australian Institute of Quantity Surveyors (AIQS).

We estimate that only one in five residential investors make use of the tax depreciation entitlements which are available to all investors on all investment properties.

Many property investors who have owned their properties for several years and have not undertaken a tax depreciation schedule still have the potential to claim back thousands of dollars in tax depreciation benefits.

A depreciation schedule can be undertaken at any time by a property investor. If you own a property for a number of years, you can still undertake a depreciation schedule and put in an adjusted tax return to enable them to obtain unclaimed tax depreciation benefits.

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Cross collateralisation is when two or more securities ( properties ) are used to secure the same mortgage. If you are unsure just look at the mortgage contracts and if any one contract mentions more than one property then it means all of the properties mentioned are being used as security ie: cross collateralised ( sometimes referred to as cross secured ). Here are the 7 reasons to avoid:

Reason 1: Unnecessary Paperwork and Legal Fees

If you sell a property the bank has the right to reassess their exposure to you and therefore charge a fee to do this or even ask for brand new valuations on all your properties. Then if the values are less the lawyers get involved at your cost to draw up new legal paperwork known as “Variation of Security”. The bank may even ask you to sell a property.

Reason 2: You may not be able to access your funds when you sell a property

If you sell a property the bank might say they need the sale proceeds to reduce your the banks expose. So instead of you getting that big cheque the bank keeps the money and pays down your debt.

Reason 3: Not the best loan deal

Say you are with Bank ABC and you want to expand your property portfolio and buy another property. So you go off and buy this property and ask the bank for the money. They will no doubt give you the money but you are now restricted to that particular bank’s loan products and their loan pricing. This could cost you thousands over the years and make the investment a poorer one.

Reason 4: The bank holds too much security than they need

Just because the bank wants more security for its loans does not mean you have to give them this security. As the example of your paid off home that you would die for why give this to the bank?

Reason 5: Hard to change banks

Ok now you have your home and 3 investment properties with Bank ABC well good luck trying to change to another bank if they do not look after you. You will now have to discharge all the securities and pay out the loans then incur more costs to get into the next bank. Wow what a nightmare and all because the bank could not look after you and you were silly enough to give them all your security.

Reason 6: Hard to access equity

Most investment property goes up and down and this will vary from location to location. So what if you wanted to get some money out of the equity you hold in these properties? Well in a cross collaterised security arrangement it is much harder as the bank will revalue all the properties and then tell you that the one in Location A went up but Location B went down so they cannot give you any more money. But under a stand-alone security program you would have just gone to then Bank that had the property in Location A and got the money.

Reason 7: Your equity is at the mercy of the banker

Ok the worst aspect of this Cross Collaterision is that the banker now controls all your equity. When you have an event like the Global Financial Crisis (GFC) the bank gets scared and starts to make their credit criteria (how you qualify for a loan) really hard and they start limiting the exposure to property from say 90% loan against the property value to say 80% loan against the property value. So just when you need the money the most to survive the problem times the banks pull the rug from under your feet and you end up losing money. By the way the Banker never loses money that is the sad fact in all of this.