Net Profit After Tax (npat) Under Australian Tax Regime for Property Investors

ESSAY

The topic concerns with the Net Profit after Tax (NPAT) under Australian Tax regime for property investors as well as owner occupied ones. Thus a brief knowledge of implications of tax rulings on property shall need illustration like

• Negative Gearing.
• Deductions claimed for incurring expenses on investment property.
• Capital Gain Tax rebate for owner occupied dwellings.
• Exclusion of owner occupied property for pension test assessment.        

It’s quite interesting to see the implications of these taxation rules under following headings

1. Equity –The tax concessions provided by the Government is to promote equity and new affordable housing to the people in general (especially first time buyers). But it’s frustrating to know that these rulings are benefitting the people at top end and proving detrimental to the lower and middle class population as well as the entire economy. The details are covered under ^[1]the forthcoming section of this essay.
2. Housing Prices- The asset price rise control is the main point of attention of the policy maker, but if one policy nullifies the effect of other policy then it’s detrimental for the entire market of that asset. Same is the case with housing prices in Australia, where the policy of taxation which was meant for promoting new affordable housing is causing the price rise of existing dwelling units instead.
3. The economy- Taxation is the tool at hands of Government to earn revenue, which can later be utilized on the social welfare policies but if the revenues are getting hit due to the misutilisation of tax rebates by unintended income group then entire economy stands to lose. The repercussions can be seen in the form of declining home ownership rates ,more renting , and mortgaging for longer periods.(Molly Johnson and Baker:2015)1

For the purpose of this essay I am focusing on only two types of property holdings

1. Investment property (individual investors), and

2. Owner occupied

The taxes which are incurred by an individual on property holdings include (www.ato.gov.au)2

1. Income tax-Any income generated from the property are included in calculating the tax and correspondingly any expenses incurred qualify for the deductions(as we will see in coming sections)
2. Capital Gain tax- Any capital gain you make when selling or otherwise disposing of the property will be subject to Capital Gain Tax (CGT) except in some circumstances where you rent out the home you've been living in.
3. Property Taxes-Sometimes referred to as council rates, this local tax typically funds local government investment and expenditure, such as rubbish collection, parks and public facility maintenance and other community services. The frequency and amount of tax will depend on the local municipality and the market value of property.
4. Land Tax-Land tax is imposed by all state and territory governments, excluding the Northern Territory. It is payable based on the combined unimproved value of the land owned and is calculated what land would be worth if it was vacant; therefore it does not include existing dwellings on the property. Land tax is payable on all property owned, except principal place of residence. The amount of this annual payment will vary by locality.

To begin with let us consider the simple equation

                                                                                            ……..equation 1

Case 1- Investment property (individual)

When the investor is buying a property for renting and has it geared (borrowed a part of cost of the of asset from Bank) then the equation (1) becomes

                                                                            Return = Rent – Expenses 

Under Rent are included (www.ato.gov.au)2

• Rental bond money – such as tenant defaulting on the rent, or damage to rental property requires any repairing or maintenance.
• Insurance payouts in some circumstances – such as receiving an insurance payment to compensate for damage to property or for lost rent.
• Letting and booking fees.
• Associated payments received, or becomes entitled to, as part of the normal, repetitive and recurrent activities through which profit is generated from the use of rental property (if these payments are in the form of goods and services one will need to work out their monetary value).
• Reimbursement or recoupment for deductible expenditure.
• If an amount from a tenant to cover the cost of repairing damage to rental property is received and it can be claimed for deduction for the cost of the repairs, then it needs to be included in the whole amount in income.
• If  a government rebate for the purchase of a depreciating asset, such as a solar hot-water system is received then it  needs to be  include in amount in income

Expenses (Deductions) which an investor can claim on the rental property are (www.ato.gov.au)2

1. Acquisition and Maintenance Costs:

• Advertising costs to find tenants
• Bank fees and charges on your loan accounts
• Borrowing expenses
• Body corporate fees
• Cleaning costs
• Council rates
• Electricity and gas not paid by the tenant
• Insurance – building, landlord, etc.
• Interest on your investment loans
• Land tax
• Legal expenses
• Property manager fees and commissions
• Surveyors’ fees
• Repairs and maintenance
• Stationery and postage expenses
• Investment related telephone bills
• Tax-related expenses
• Travel and car expenses for rent collection or inspections
• Costs incurred for the inspection or maintenance of your property
• Water charges.

Depreciation Allowances
on newly purchased items like

• Appliances
• Blinds
• Carpets
• Furniture
• Hot water system.

Now if in equation (2), any combination of expenses mentioned above exceeds the rental income then the investor is said to be incurring a loss on that property and in that circumstance the Government allows the loss on property to be deducted from the gross income, and the tax bracket of the holder gets lowered there by reducing the tax he was eligible to pay before the property came into the picture. The property holder in this case is said to be NEGATIVELY GEARED.ie the property which was purchased to add income is now transformed in a tool of reducing Tax altogether.