Happy New Year and welcome to the first CapitalQ blog article for 2021. We trust the CapitalQ Community have enjoyed all our great State had to offer over this festive season. For the CapitalQ Team it was beach, beach and more beach. Oh and barbecues!
We also suspect many Community Members will have spent some of their time off, as we did, assessing how their financial goals are tracking and considering their next moves in business and/or in their investments.
If the steady increase in media attention is anything to go by, momentum certainly appears to be building, as we predicted it would, when it comes to the WA property market. And no doubt, building wealth through property has been on the mind of many CapitalQ Community and Team Members alike.
Certainly investing in property was a hot topic at the CapitalQ Team Christmas Party just a couple of weeks back, and myself and some investment partners have actually just this week made an offer on a commercial property we feel is ripe for future growth (wish us luck).
So with that in mind, we want to help arm our readers regarding the tax treatment of property investing in 2021 and that way, hopefully, help you to avoid unnecessary procrastination and to allow you to confidently take action.
Property Investment Tax Implications
We will break our discussion down into the three stages of property investment over a series of posts. Those stages being –
- Tax Implications of Investment Property Acquisition
- Tax Implications of Investment Property Ownership, and
- Tax Implications of Investment Property Disposal.
So today we will start with..
Tax Implications of Investment Property Acquistion
The three main tax implications when acquiring an investment property are –
- Transfer Duty (previously known as Stamp Duty)
- Goods & Services Tax (“GST”)
- Foreign Residents Withholding Tax
What we used to refer to as ‘Stamp Duty’ is now known as Transfer Duty and is imposed under the Western Australian Duties Act 2008.
Transfer duty is a tax imposed by the WA State Government (as opposed to the majority of taxes which are levied at a Federal level). Each of the states have effectively matching rules.
Transfer Duty applies to certain transactions over ‘property’. In this context ‘property’ not only includes real estate but it also includes interests in business, and other forms of property or assets.
But for the purposes of this article, we will just focus on real estate which includes land, and anything affixed to the land such as a home or building.
The first thing that catches out many first time property buyers is that transfer duty is payable by the purchaser, not the seller.
So, if you are planning on buying a property you must not only ensure you can afford the property purchase price, but you must also be able to afford the transfer duty that must be paid on top of the purchase price.
This means a $500,000 investment property purchase will generally require the payment of an additional $17,765 in transfer duty.
The amount of transfer duty payable is determined by reference to the market value of the property being transferred.
Usually the market value will be what the purchaser is paying for it (assuming the purchaser and the seller are unrelated, self interested and dealing with each other at arms length). However, if the parties to the transaction don’t meet this criteria, the market value may be different to the actual value they have agreed. In that case the transfer duty will apply to the higher value of the two.
Transfer duty generally applies based on a sliding scale, but there are different rates and rules regarding how much duty is payable depending on whether you are acquiring residential property, non-residential property (ie. commercial property) and whether you are a first home buyer. Though generally the first home buyer concessions will not apply to someone buying to invest.
The most commonly applicable rates of transfer duty are the Residential Rates.
Residential Rates of duty apply to residential property including primary residences, rental properties and vacant land where building commences within 5 years.
The rates are as follows –
|DUTIABLE VALUE||DUTY THRESHOLDS|
|$0 – $120,000||$1.90 per $100 or part thereof|
|$120,001 – $150,000||$2,280 + $2.85 per $100 or part thereof above $120,000|
|$150,001 – $360,000||$3,135 + $3.80 per $100 or part thereof above $150,000|
|$360,001 – $725,000||$11,115 + $4.75 per $100 or part thereof above $360,000|
|$725,001 and upwards||$28,453 + $5.15 per $100 or part thereof above $725,000|
Goods & Services Tax (“GST”)
We all pay GST every day without noticing it. It is included in the price of most things we buy and it generally isn’t a problem.
But when it comes to property, due to the values involved, GST is a big deal, and you do not want to get it wrong.
The good news is, in the majority of property transactions, neither the purchaser nor the seller need to worry about GST.
That is because GST does not apply to residential property transactions. With one exception…
GST does apply if you are buying ‘new’ residential property. For example where you are buying a newly built home or apartment.
Traditionally in the majority of these cases it was the seller that needed to worry about the GST and how to deal with it.
And for the most part purchasers still don’t need to worry about GST in terms of it being an additional cost.
Just like when buying something from your local store, the purchase price of the new residential property includes the GST component, so the purchaser pays the amount advertised or agreed and the fact that some of what they pay is considered GST (and therefore payable to the ATO) is not the purchasers concern, as they will not have extra, unexpected out of pocket expense.
However, under recently introduced rules, the purchaser now needs to pay the GST component of their new residential property purchase price to the ATO, instead of paying it to the seller. And if they fail to do this, there can be consequences.
So if the purchaser is acquiring a new residential property for $500,000, they are required to pay the GST component, say $45,454, to the ATO while paying the balance of the purchase price, being $454,546, to the seller.
Your settlement agent will take primary responsibility for making sure the GST is handled correctly, but it is important the purchaser is aware of what is occurring and to speak up if they have concerns regarding how their settlement agent is proceeding.
Non-Residential Property (including Vacant Land)
Unlike most residential property, non-residential property, which includes vacant land, is subject to GST.
And in this case, usually the advertised price does not include the GST.
So you need to be careful and ensure you understand what the total amount you will need to pay is including the GST which may be in addition to the advertised or agreed price.
In most cases, where a non-residential property transaction includes GST the purchaser will get to claim back the GST from the ATO. But of course that is not always the case. Personalised, formal advice is always required in these circumstances to ensure misunderstandings, and therefore miscalculations, do not occur.
It is worth noting, the vast majority of court cases that occur in connection to GST relate to property transactions.
Both purchasers and sellers alike regularly make errors in their understanding of how the GST obligations will work and because of the big numbers that apply when dealing in property, getting it wrong results in big costs.
These costs invariably only increase when a dispute arises and legal action occurs.
So please if you are buying anything other than a vanilla, existing, residential property, be very careful and seek advice.
Foreign Residents CGT Withholding Tax
Like the recent changes to the treatment of GST on property transactions, there are now also obligations on purchasers of property in relation to foreign residents capital gains tax (“CGT”) withholding tax.
The good news is that much like the situation with GST above, your settlement agent will take primary responsibility for ensuring your obligations are being met. But nevertheless, the ultimate responsibility rests with you the purchaser.
In short, if you are buying a property, you must determine whether you are required to withhold foreign residents CGT withholding tax from the purchase price. And if so, you must pay the amount withheld to the ATO directly.
If the market value of the property is less than $750,000 then there is no requirement to withhold.
But you must get the assessment of the market value right.
Firstly you may need to make adjustments to your purchase price for GST. Secondly, the price you are paying may not be the market price (ie. if you and the seller aren’t dealing at arms length), so in that case an independent valuation may be required.
If the market value is $750,000 or more then further obligations rest with the purchaser to determine whether they need to withhold or not.
If the seller can provide a Clearance Certificate, stating they are not a Foreign Resident, then the purchaser may rely on this certificate and there is no need to withhold.
If a Clearance Certificate is not provided then the purchaser must assess whether any exclusions apply.
If no exclusions apply, then finally the purchaser must work out how much they are required to withhold and then ensure that amount is paid to the ATO, not to the seller, at settlement.
While foreign resident CGT withholding tax is not an additional expense for the purchaser, failure to comply with the rules could result in penalties. So again, seek advice if you are unsure of where your obligations lie.
Please note: The information provided above is general as is requried in an article like this. It does not cover all tax considerations. We are hoping to write more about the tax consequences of property investing over coming weeks and months, but if you are seriously considering investing and are not experienced with all the ins and outs, we are keen to meet and discuss your plans and help you make an informed decision. So please contact our office today.