Tax variations: 2010 & 2011

Ok, we've just received notice that the last date for lodging tax variations for the 2010 financial year is this Friday, 30th April. And then from Tuesday, 4th May, we will be able to help you with getting the 2011 tax variation in place.

These can be great tools for increasing your cashflow, allowing you to receive your tax refund as part of your salary. This means that you don't have to wait until lodging your tax return, and the money is much better in your hands than with the tax office all year!

So, if you'd like our help with these, you can download this checklist from our website. Or, just shout if you'd like to know more about how this can help you.

Property analysis #12 - Nathan Birch @ 18 years old

You might have heard of Nathan Birch, the self-made investor who created a million-dollar-networth by age 21 and now at 25 years old has well over twenty properties. If you haven’t already, check out his website or his Facebook page. Anyway, this guy actually bought his first property at age 18, back in 2003, and that’s the deal we’re going to be looking at.

Now, I don’t have all the figures, but here’s what I’ve worked with...

It’s a renovation job, so it might just be similar to this hypothetical analysis I did a while back. Nathan was off to a good start, negotiating the property down from an asking price of $280,000 to $248,000. At that point he was looking at rental income of only $190 per week which in anyone's terms, is going to be negatively geared.

This is where Nathan’s two separate renovation projects come in, costing $7,000 and $30,000 respectively. He’s improved the existing house and then converted it to a duplex, which as we’ve seen from my previous analyses, is a favourable situation to be in. The dual income should have him heavily in positive cashflow by this point.

This project increased the rental income to a combined amount of $550 a week. On a purchase price of $248k, plus stamps and legals of say 9k, and total reno cost of 37k, Nathan's total entry price was about $294,000. $550pw return on this works out to about 9.7% yield - now we're talking!

Of course there are things I don’t know about the whole deal that could swing that figure out either way, but we can still see he’s very likely to be in the black regardless.

Since then, Nathan’s achieved some great stuff, so make sure you check him out.

Take this as inspiration, too, if you like. If Nathan could do this at age 18, then surely with the right attitude and perhaps a helpful community of investors on your side, you can achieve your goals too.

Fringe benefits tax

Just a reminder that the Fringe Benefits Tax year (FBT) runs from the 1st of April to the 31st March. So if you think that you’re going to have items that are subject to FBT, you’ll have to lodge an FBT return for the period ending 31st March 2010.

If you own a company or a trust that owns a vehicle that you use for private purposes, then there’s a handy dandy checklist online which can calculate for you the FBT liability relating to your car. Note that this spreadsheet is only useful if there is a car involved, and if you think your business may be incurring FBT then we recommend you contact us before proceeding, as there may be a way we can help avoid this problem.

Using a trust to invest in shares

As I’m sure we’re all aware, a great method for investing in property can be to purchase it through a trust. There are a number of benefits to property investing in a trust, such as asset protection, tax advantages and estate planning. So does share investing using a trust carry any benefits?

In my opinion, I would say... well, it depends.

On asset protection; you are not generally vulnerable from a legal perspective if a company is being sued and you are a shareholder, so there is no real need for protection from that perspective. However if, for example, you run a business - or may do in the future - then keeping your assets safe may be a priority.

The trust does give you the power to distribute profits to different beneficiaries to minimise tax payable, although if we’re talking long term share investments a lot of that income will be coming from franked dividends, so a lot or all of the tax payable (depending on your tax bracket) will have been paid for you. The benefit though comes from being able to distribute those franked dividends to beneficiaries on lower tax brackets (such as children, or a non-working spouse) to get the credits refunded in part or even in full.

On top of that the capital gains that do arise are likely to be eligible for a 50% discount (if held for more than 1 year), regardless of whether you hold in your own name or in a trust.

Trusts also cost a little to set up and maintain, which is no issue if you expect the benefit to exceed or justify the cost. Whether or not you do decide to use a trust for share investments often comes down to personal preference and priorities, and the more complicated your finances become the more likely it is that a trust could become useful. 'Small' investors may have no real need for such a structure, while larger players may find that the potential advantages really start to add up as their portfolio grows. As always, it's important to start with the end in mind, so it might be worth looking at where you plan to be as well as where you're starting from.

Free residex reports

Our good friends at Verix Finance recently sent a few bits and pieces to us, as part of their thanks for our presentation at their March seminar on using the tax system to your advantage. Amongst this, there was a good handful of vouchers for a free Residex Comparative Market Property Report. Rather than use them all ourselves, we thought that it might be a better idea to offer these to our clients and readers of our blog.

These reports can help you assess the value of a particular property and include previous sale prices along with suburb demographics and property trends in the area.

If you'd like us to send one of these vouchers out to you (for use on any property that you like), please either comment below or email Dannielle, and we'll get you hooked up quickly.

Bye the way, the next Verix seminar is on this week! The topic is all about negotiation tactics and James will be along to help answer any accounting or investment questions that you might have, as well. Our readers can get a special discount by using the code HOW when ordering your tickets. See you there!

Property analysis #11 - Leasehold in the ACT

Alrighty, I’m heading to the capital for this one.

This is a nice property at 56 Longerenong Street in Farrer ACT, with two self contained units; a two storey setup receiving two different weekly rental payments. We've covered this sort of thing before, so we know that two streams of income is a great starting point.

We’ve been given amounts for rates and land tax of $1,282 and $2,268 respectively, and I’ll put in the usual rental expenses that we’ve come to know are all too common, and often predictable. With a combined (quoted) rent of $670 per week, we’re improving our situation bit by bit.

Now, you might have noticed this property is being sold at auction. So, for the sake of this analysis, I’ve estimated a purchase price of $560,000 plus purchase costs. The agent has confirmed this as realistic, and I wouldn’t want to go too far over this amount or else the end result may not be as pretty.

Working with all these figures, we can now see that dual income properties don't always stack up so well! Here, the investor is in fact losing about $53 per week in that first year! Ouch!

Stress less, though. There’s one more benefit to be taken advantage of.

Stamp duty is slightly different in ACT, in that the full amount is claimable as a tax deduction in the first year of the investment, rather than it being treated as a capital expense at the time of sale. ACT property is sold on leasehold, not freehold, and this makes all the difference. It's also where Parliament sits, but make of that what you will...

So now this means that in the first year, we’re switching that $53 weekly loss over to an annualised cashflow profit of $5,500. Much better! However, the second year will still be at a slight loss as the stamp duty benefit is a once-off deduction.

Obviously, a lower purchase price would also push that figure further into being positively geared.

Not a bad position to be in, and this just confirms that it’s always good to know the different tax laws and benefits applicable to each state. An investor wanting to excel in the property market must have a strong understanding of these laws, or at least, have a smart accountant who can help you out ;)