Could Poor Property Tax Planning Cost You $100,000? A Real Client Story

One property client faced a $100,000 CGT bill that earlier advice could have significantly reduced. Another went from $1,900 payable to a $3,300 refund. Here's what made the difference.
Property investment advice and wealth planning for Australians

This week we are sharing some real client examples that demonstrate why the right advice at the right time can make such a significant difference — not only in tax savings, but also in the time and effort involved in running a business.

The $100,000 CGT Bill That Didn’t Have to Happen

We recently reviewed a client’s property sale that resulted in approximately $100,000 in capital gains tax. Unfortunately, by the time we were engaged, many valuable tax-planning opportunities were no longer available.

Based on the client’s circumstances:

  • If advice had been obtained before purchasing the property, we could have considered strategies from the beginning — including how the property was owned and used, and whether strategies such as the six-year absence rule could potentially apply. With the right planning, the CGT outcome could have been significantly reduced or potentially eliminated.
  • If advice had been obtained before the sale, there were still opportunities to reduce the tax. We estimated that proactive planning could potentially have saved approximately $50,000, including considering the timing of the sale and other available strategies such as additional superannuation contributions.

The key lesson: do not wait until after you buy or sell a property to think about tax. Good tax planning happens before the transaction, while there are still options available.

From $1,900 Payable to a $3,300 Refund

A client earning both employment and sole trader income originally had approximately $1,900 in tax payable. After reviewing her return in detail, we identified a number of legitimate deductions that had been missed.

What we found:

  • Motor vehicle expenses: The client regularly travelled for her business, but eligible car expenses had not previously been claimed.
  • Home office expenses: We compared the available methods and helped her determine the more beneficial approach based on her actual circumstances.
  • Previously overlooked expenses: A review of bank statements and credit card transactions uncovered a number of legitimate deductible expenses.
  • Dedicated home office costs: Additional eligible expenses including cleaning and electricity costs had been overlooked.
  • Travel and work-related expenses: Work-related parking, tolls, taxi, and Uber costs had not previously been claimed.

The result? Instead of paying $1,900, the client received a refund of approximately $3,300 — an overall improvement of around $5,200.

How We Also Saved a Client 5 Hours Every Week

Tax savings are not the only way a good accountant adds value. A new business client was spending around 5 hours every week managing bookkeeping and financial software. By reviewing, simplifying, and automating their accounting processes, we helped significantly reduce this workload — potentially saving over 250 hours a year on top of the tax savings we identified.

Is Your Term Deposit Actually Building Wealth?

Term deposits can provide certainty and security — but is your money actually growing? If you have $500,000 in a term deposit earning 4%, that is $20,000 of interest each year. However, the interest is generally taxable, and after tax and inflation, your real after-tax wealth may be growing very little.

This does not mean term deposits are the wrong choice. The question is: how much cash do you actually need in term deposits, and could part of your money be working harder for you elsewhere?

To review your tax position, property strategy, or investment structure, contact us on 1300 TAX SAV (1300 829 728) or book a consultation here.

Tax outcomes and the availability of strategies depend on individual circumstances and cannot be guaranteed. This is general information only.

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10 things you should consider before buying a property

Are you considering buying a property? Do you know you could miss opportunities to save thousands, or tens of thousands of dollars if you don’t plan well before the purchase?

Below are a few key considerations:

1. How should you set up your loan structure? If you don’t have a loan offset account for a rental property, after you make extra payments directly to the loan account, you can only claim interest deduction on the remaining balance of the loan. For tax purposes, this deductible balance can’t be changed even if you redraw the overpaid amount later. A good loan structure could also help you to stabilize interest rate and speed up loan repayment by combining a standard variable loan (with an offset account) and a fix rates account.

2. Timing of renovation. You might want to do a renovation right after you have bought the rental property. But do you know for any genuine repair & maintenance included in the renovation, you can claim an outright deduction against the rental income when the property is available for rental? If the work is done before the date when the property is available for rental, you can only claim the deduction against future capital gain when the property is sold. Depend on when you are going to sell, it could take years or up to decades before you can claim the deduction.

3. How should you split ownership? You might want to share the property ownership with a family member. For tax purposes, the percentage of ownership is based on the legal title, regardless of who is paying more on the mortgage. If the property will give you a tax profit, you might want to allocate more
ownership to the low-income earner to utilize the lower marginal tax rate. If it is giving you a tax loss, you might want to allocate more ownership to the high-income earner to utilize the loss. The goal is for the family to pay minimum tax together.

4. Should you use a family trust to purchase the property? There are many pros and cons related to a family trust. The advantages include tax savings on rental profit or capital gain, asset protection and succession planning on family wealth. However, family trust can’t distribute losses. All losses are trapped in the trust to be used to offset future trust profit. Therefore, you can’t utilize any rental loss in a trust to offset other income such as salary & wages. Family trusts also attract high accounting fees on initial setup and annual fees on financial statements and tax returns. State governments also charge much higher land tax on family trusts.

5. Will the income level change in future years for different owners? You might want to forecast the possible income for different owners to understand total tax payment / savings related to the property. This could also impact on your decision making on point 3 and 4 above.

6. Understand when you can treat your property as main residence to receive an exemption on capital gains tax. When eligible, even if you have received rental income, you could still treat your rental property as main residence and receive the exemption. To be eligible, you will need to treat it as your main residence at the beginning. Please check out this ATO link: Treating former home as main residence.

7. Decide whether you need to purchase a depreciation report. Most taxpayers don’t know that the depreciation on the building will need to be added back to calculate capital gains tax when the property is sold. When the property is held for more than 12 months, after applying the capital gains tax discount of 50%, it will effectively cut the tax rate by half at the time of sales. This makes depreciation deductions desirable for high income earners. However, for low-income earners it might not be ideal to claim depreciation as a rental deduction since they could be paying more on capital gains tax in the future. It could get more complicated if the property is under joint ownership between high and low income earners.

8. You might want to consider Centrelink payments for future or existing owners. Most Centrelink payments are income and asset tested. Before attaching a rental property to a family member who is receiving, or plan to receive government benefits, you might want to check the testing thresholds first to see if the Centrelink payment will be impacted. This is also applicable when you are making distributions from a family trust to different family members.

9. Have you considered using your SMSF (selfmanaged super fund) to make the purchase of a rental property? There are a lot of tax saving opportunities with a SMSF since the income tax rate is only 15%. And the capital gains tax rate is effectively only 10% after factoring in the 1/3 discount. The major downside with a SMSF is normally you can’t get the money out until you retire or on compassionate grounds (SMSF does have more flexibilities compared to normal retail super fund. But the choices are still very limited). It could be expensive to set up and operate a SMSF too. There are also strict legal requirements on the trustees. Penalties on incompliance could be severe. Tax law around SMSF is very complicated too. You will need to find a good tax accountant specialized in SMSF to help you to understand the structure, also do a cost-benefit analysis before setting it up.

10. Consider internal ownership changes. For your existing rental properties, you can also consider whether you should transfer the ownership between family members, or between different business structures (this is not applicable for SMSF). You might want to do this when the income level changes with family members, or rental property changes between tax profit and loss. Before the change, you need to consider the cost of transfer including capital gains tax, stamp duty, conveyancer fees, etc. Again, a cost-benefit analysis is a must before the change.

Last but not the least, did you combine all the above strategies and compare your choices? If you haven’t yet, how would you know that you have picked the best strategy to minimize your taxes? We can help you to factor in all considerations, compare different scenarios, also present you with a Property Prepurchase Report with all our findings to help you to make a decision. Contact us today to book in a consultation with an experienced tax accountant!

IMPORTANT INFORMATION
This is general advice only and does not consider your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from your financial adviser and seek tax advice from your accountant.

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