Is Negative Gearing a Positive Investment by Tina Zawila

At this time of the year we meet with many clients who own rental properties and who are very keen to have their income tax returns prepared and lodged so that they can access their tax refunds.

There’s also been lots of talk in the media about the suggestion that the government may abolish “negative-gearing” in the future, which would potentially wipe out the rental property investor’s annual tax refund!

Before we talk tax, let’s talk about the fact that purchasing a rental property is a major investment decision. Like all major decisions, careful thought should be given to the worthiness of the investment prior to signing the contract. As a minimum you should consider the following issues:

1)      Rental Returns – what is the current state of the rental market?

2)      Capital Growth – what are the long term prospects for the property?

3)      Funding Capacity – can you manage rental expenses including loan repayments if the property is untenanted for a period?

4)      Liquidity – how long will it take you to sell the property if you need to realise your equity?; and

5)      Comparison - how does the investment compare with alternatives such as shares, managed funds, listed property trusts etc?

You will note that tax isn’t mentioned in the list above, and the reason for that is that “saving tax” should be an added ‘bonus’, not the predominant reason for the investment.

So what is “negative gearing”?  Quite simply it is where the expenses exceed the income received.  This net loss can be offset against other income in your tax return, reducing your tax payable, or creating a tax refund.  The amount of the tax benefit is essentially the net loss multiplied by your marginal tax rate. The higher your marginal tax rate, the higher your tax benefit from negative gearing.

Remember, the difference between the tax benefit gained and the actual loss on the property comes out of your pocket.  In order to break-even each year, the property must be growing in value by at least your out-of-pocket costs.

The professionals at Sothertons Gladstone are here to help you understand taxation minimisation strategies, call us today on 4972 1300.

Understanding the Game of Business: Article by Tina Zawila

Recently, we had the opportunity to present to business owners on behalf of the Department of State Development.   The objective of the workshop was to improve the financial literacy of business owners to help them make better business decisions.  

To make it easier for participants to understand some of the concepts, we often compare being in business to participating in a sporting game.  You generally wouldn’t play a game where you did not know the rules, (such as ‘offside’) didn’t know the language (such as what a ‘try’ is in a footy game) or where you had no idea how to read the scoreboard to know if you are winning or losing!  Yet many business owners, don’t know the rules of business (such as profitable businesses can and do go broke), don’t know the language (accounting terms), and can’t read their scoreboard (their financial statements).  Yet this Game of Business is probably one of the most important games they are playing!

We talked about how understanding your numbers, and being able to interpret your results, allows you to make sound business management decisions, which become activities within our business which lead to our results.  Again to use the sporting analogy, the coach of the team regularly uses the scoreboard and the time remaining in the game, to influence the decisions he makes regarding on how his team plays the game.  As the coach of your business team, are you interpreting your results correctly and making the right decisions based on this information?

Now don’t panic, you don’t need to become an accountant, but you do need to get a basic understanding of the most important principles.  Your accountant or business advisor is there to support you and assist you at any time with any of the more difficult concepts. 

At Sothertons Gladstone, we are passionate about improving the financial literacy of the business owners we work with.  If you need help with the Game of Business, please call us today on 49721300.

The Seduction of Spending By: Tina Zawila

When this article goes to print it will be 30 June - that special day in the calendar when everyone's thoughts turn to tax - at least for a moment!  

Last week, we held our annual Tax and Property Seminar, where one of the questions we were asked on the night was regarding the small business incentives announced in the Federal Budget. There seems to be some confusion regarding the $20,000 immediate deduction for new capital items such as plant and equipment.  

First and foremost, you must meet the definition of a small business, that is, your turnover ("top line", sales/income) must be less than $2million.  If your income is greater than this amount, then you are ineligible for the small business incentives.

Secondly, you need to understand that the immediate deduction does not mean you will "get back" the amount you spend on the item.  So you don't get a $20,000 tax refund if you spend $20,000 on an item.  It just means you can deduct the full $20,000 against your assessable income in this financial year, instead of claiming it over several years.  So if you operate your business in a company and therefore pay tax at a rate of 30%, and you spend $20,000 you will save $6,000 in tax in the same year in which you buy the item.  Of course, if you don't have $20,000 in assessable income (profit) against which to claim the deduction then you won't save any tax!  

Another common misunderstanding is that you will get "tax back", when you haven't pre-paid any tax!  

Therefore, there are times when these incentives and opportunities are just not practical or effective for you and your business.  Don't be seduced into spending your hard-earned cash.  It pays to seek professional advice before you act.  At Sothertons Gladstone we are here to help you.  Call us on 49721300.