Introduction Investing in rental properties is a popular form of investment due to the potential for capital growth. Australians have always had a love affair toward property investment. Most rental investment properties tend to be held in joint names. Unfortunately this can reduce the tax benefit of the rental investment where one owner has a higher taxable income than the other owner. This style of ownership does not provide any asset protection and it is quite inflexible. Until Now!
Examples Examples Rental property in joint names Brad and Angelina are married and own a rental property in both their names. Angelina earns $150,000 per annum and Brad does not work as he is developing a project at home and does not earn any income. The rental property they own earns $15,000 in rental income and incurs interest, rates and sundry expenses of $25,000. Under normal circumstances, the income and expenses must be split between Angelina and Brad according to their ownership share in the property TR 93/32. Assuming they each hold a 50% share in the property, Angelina and Brad will each inherit a loss of $5,000 (i.e. [$15,000 - $25,000] ÷ 2) from the property. As Brad has no other assessable income to apply the loss against, he will not receive any tax benefit from the $10,000 rental loss. Thus Angelina and Brad have lost $2,425 (i.e. $5,000 x 48.5%) in tax benefits that Angelina would have received if the property was acquired solely in her name or in a Hybrid Discretionary Trust. Salary packaging rental property expenses Salary packaging the rental property expenses is a way a taxpayer can avoid the above scenario. All rental property expenses (council rates, water, etc) except for depreciation would be able to be salary sacrificed. The reason that depreciation cannot be salary sacrificed is that it is not an expense that is "otherwise deductible". Section 51AH of the ITAA 1936 and the "otherwise deductible" rule in section 24 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) constitute a scheme of taxation designed to take into account losses or outgoings that are deductible in one income year. Deductions for decline in value are taken over the effective life of depreciating assets and are not intended to be part of that scheme. The "otherwise deductible" rule in the FBTAA 1986 provides for a reduction in taxable value of a benefit if the employee who received the benefit would have been entitled to a once-only income tax deduction for the expenditure if that expenditure had not been paid or reimbursed by the employer but paid by the employee. What savings are achieved using this strategy? In effect, this scheme actually allows the higher income earner to claim all rental property expenses (except depreciation) thus reducing their taxable income and ensuring the greatest tax benefit possible. The tax saving is the difference in tax rates between the high income earner (where the rental income would have been taxed at, if not for salary sacrificing) and the lower income earning spouse (where the rental income is now taxed at, with salary sacrificing). Case Study Shane and Simone own a rental property in both their names. Shane is a high profile athlete earning $250,000 per annum and his wife, Simone, stays at home with their children. Simone works casually during the evenings and brings home $15,000 per annum. Shane also engages in other income generating activities which create a further $100,000 in business income. The rental property they jointly own derives rental income of $30,000 and has expenses of $40,000. The rental property expenses comprise interest, rates, land tax and water rates. 1. Net disposable income without salary packaging Thus, without salary packaging, the family’s net disposable income would be $203,525 2. Net disposable income with salary packaging rental expenses By salary packaging all rental property expenses in Shane’s income, the family’s net disposable income increases to $208,515.
Conclusion Conclusion In these circumstances, salary packaging the rental property expenses has increased the family’s net disposable income by $4,990. Are there any risks with this strategy? When considering entering into this type of arrangement, taxpayers must consider the following: The transaction needs to be effective for salary sacrifice purposes; Part IVA may apply The anti-avoidance provision in the FBT Act may apply Taxpayers should consider professional advice or seek a private binding ruling should they require certainty with this strategy. See also Discussion about this article Real Estate articles Accounting, Tax and Legal articles Real Estate discussion forum Commercial Real Estate discussion forum Accounting, Tax and Legal discussion forum Investing Book reviews Glossary of Investing Terms
