139 – Why Your Tax Accountant Must Be An Expert in Property Investing
Property tax accountant role is to help clients and businesses with their financial and income tax statements. These competent individuals do research, analysis, and interpretation of tax law. Preparing payments, detecting tax savings, and assessing tax difficulties are all part of their job.
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Why Your Tax Accountant Must Be An Expert in Property Investing
- [01:08] Brian Goodridge: not your average number cruncher
- [02:24] The value of having a property tax accountant
- [03:23] Law changes in business and property
- [04:54] When to take action with GST
- [09:39] Renovations that you can’t claim
- [11:31] Identifying the risks involved
- [14:38] Do renovators can still claim plant equipment?
- [15:51] How the claim plant equipment is being calculated
- [17:32] Make sure to do your own research
- [20:09] Do the right thing and manage what you do
- [22:36] Learning from the past experiences
- [23:56] Things to consider in asset protection and tax minimisation
- [26:35] Scariest thing encountered in tax and asset protection
“Tax laws change all the time. And it’s not just a change when the government passes new legislation or there’s a new budget. There are cases that go through the courts or through tribunals that influence how the ATO looks at things. So it’s really important to stay on top of it.”
~ Brian Goodridge
Brian Goodridge: Not Your Average Number Cruncher
Brian started his business, Goodridge Advisory in 2013 when Brian spent way too much time complaining to his wife, Laura, about how an accounting practice should be run. He looks for creative, legal solutions to tax problems. He has also been the accountant for The School of Renovating.
The Value Of Having A Property Tax Accountant
In Brian’s view, this is important not just to manage your tax but also to manage your level of risk. Having gone through renovations himself, he has a fair idea of what renovators go through in the early stages of knocking a house down and rebuilding it.
Brian feels a renovators pain and can talk to them on their level. The advice he gives is not a theoretical, textbook kind of advice, but is very practical advice.
Bernadette Janson shares…
“You’ve got to realise renovating is a business. Having that level of insight into the activity is very valuable, but also taxes are quite complex.”
Law Changes In Business And Property
The tax law is changing all the time. It’s not just a change when the government passes new legislation or there’s a new budget. There are cases that go through the courts or through tribunals that influence how the ATO looks at things.
It’s a very fluid dynamic system and important to stay on top of it. If you’re not looking at a particular area on a regular basis, it’s so easy to not know what you need to be looking at.
When To Take Action With GST
As a property tax accountant Brian shares…
When you go to renovate, you need to think about:
- Capital gains tax issues
- Income tax issues
No one ever thinks about GST because it’s residential property and there’s no GST on residential property. However, there’s a tax ruling 2003 and it goes through what makes GST relevant for new residential property. Because the GST act says that a new residential property is subject to GST.
So many people will say, “That’s fine. I’m buying secondhand property and I’m renovating.”
However, in this tax ruling, the AHFM (Alternate High-Frequency Material) comes out and if you do a substantial renovation on a residential property, it becomes a new residential property. Therefore, it’s subject to GST.
Also, in the legislation, residential property is a new residential property for five years after it was built. If you do a renovation and it’s on a scale, big enough to be a substantial renovation, you have got yourself a situation where when you sell it, that property is subject to GST.
If you decide to keep it and rent it out, it could still be subject to GST, if we sell within the next five years.
“It comes to a whole lot of record-keeping issues that we’ve never had to think about. And if you’re not on top of it at the very start, chances are, you’re not keeping the records and you’re going to end up in a bit of a hole at the end of the process.“
~ Brian Goodridge
Property Tax Accountant Says Some Renovation Expenses Can’t Be Claimed
You must look at renovating as a business, not renovating a property for capital gain. In terms of the business, you can claim pretty much everything.
However, things like deciding to take all your trades out for lunch falls under entertainment. There are separate rules and you can’t claim it or you’ve got to pay fringe benefits tax. Even if you don’t want to claim it, you still have to pay fringe benefits tax, depending on how much money you’ve spent and frequency.
As part of the renovation, you can’t claim if you’ve paid some personal things out of it. It depends on whether it’s a company or an entity doing the business or a sole trader.
Identifying The Risks Involved
If it’s done by an individual, they’ve got a different risk profile to a couple who’s doing it. You’ve got them in different risk profiles to a group of people who are doing it. So you’ve got to look at what the individual risk profiles are, including the people involved.
As soon as you’ve got a business, there is a high level of risk that you will face than someone who’s just an employee. Here are the most common questions asked:
- How many of those have their own business?
- How do we want to give you the profits?
- Is there a way we need to look at to make it more tax-effective?
Can Renovators Still Claim Plant & Equipment?
Four years ago, the rule changed. What was happening is people would have a rental property, and for example, they may replace the oven and depreciate it, then they’d sell the property. The new owner would get a quantity surveyor to report, and they’d provide the oven’s worth and depreciate that again.
The government worked it out, and they didn’t like how it was getting claimed twice. Unless you paid for that piece of plant and equipment brand new, you can’t claim any depreciation on it. So when you buy a house to rent out, and you get a depreciation report, the quantity surveyor will ignore all the plant equipment because you haven’t purchased that brand new.
How The Claim For Plant & Equipment Is Calculated
If you’ve got all your receipts, then it can just be calculated on the ATR (Average True Range). Going back about having rental properties, if year on year, your rental property is fixing your tax problem, you go to commerce. That means you’re losing money. You got your highest marginal tax rate and Medicare levy which is 47%. If you have a negative year of $10,000, they will get $4,700 back in their tax. They’ve got $5,000 and lost $300 unless the capital value of the property is going up or more than that.
A lot of people also say that property never goes down in value but according to Brian, they have clients from five or six years ago who bought properties in mining towns in Queensland, and they’ve got negative equity because the properties’ value went down.
Make Sure To Do Your Own Research
Never do something just for a tax purpose because it usually comes back to bite you from a cash flow-wealth perspective. Some sophisticated investors buy in absolute blue-chip areas, and there’s a science to it. Most of the people have been brainwashed by so-called gurus, who talk about building wealth and what they’re doing is selling cookie cutter systems.
“Any form of investment, as long as you’ve got a plan and you’ve done your research can be good.”
~ Brian Goodridge
When it comes to building wealth, the people who make the most amount of money are the ones doing things in areas where people are doing their research.
If you’re thinking that you’re going to get rich by going to a seminar and by having someone else do all the work for you, you’re just making other people rich. You might make a little bit of money, but you’re not going to make anywhere near the sort of money you would if you practically do the work yourself.
Do The Right Thing And Manage What You Do
For the most value for money, it is worth spending on your education and not spending money on getting people to do things for you. In reality, other people will go to some seminars and happily sign on the dotted line to hand over 250 or half a million dollars, and yet won’t spend $5,000 on an education program. They would rather go and trust someone to do it for them.
“You should understand that if you’re spending money to get someone to do something for you, you also make sure to understand what they’re doing. You also need to manage what they’re doing to make sure they are doing the right thing for you.”
~ Brian Goodridge
Property Tax Accountant Learned From Past Experiences
10 years ago, Brian was looking at some properties and found one in Western Australia. It was $750,000, and it was $1,500 a week rent. He told his wife, Laura, how good the property is. His wife whacked him over the back of the head and reminded him that it’s in a mining town and there’s only one industry. What will happen if the industry shuts? Fortunately, he learned his lesson with just a sore head rather than losing a lot of money.
Similarly, Bernadette Janson shares that she had the same experience, but it turned out to be good. She was asleep at the wheel for a recently bought block of land and was not aware the planning laws had changed. It just happened that she was able to turn this around and make a profit out of it.
“Instead of just accepting that you could lose money, you went out there and found a solution to the problem. That’s what they say, ‘Finding solutions to problems makes money.’”
~ Brian Goodridge
What To Consider In Asset Protection And Tax Minimisation
The first thing Brian does is get a piece of paper and draw a line down the middle of it. On one side, he has assets and heavy risks on the other side. What he wants to do is to separate assets and all the risks. One person controls all the assets and the other one for the risks. If the worst thing happens and everything just collapses, and the person with the risk goes bankrupt, you still need to come home to the house. You’ve got your rental properties and other assets because that’s all controlled by the other person.
They look at what they’ve got currently and how to split it moving forward. So one person has the risk and one person has all the assets and that’s from the risk protection point of view. They look at setting up structures and everything else around it from a tax minimisation point of view and the whole picture of where their income is coming from since they want to push profits out too. For example, if they’ve got kids at university not earning much money, that’s a great opportunity for them to have a trust that distributes profits to those kids and use their lower tax rates while they’re studying.
“It’s about looking at the whole picture to see where things can go. It’s important that I’ve got a clear idea in their head where they want to go to.”
~ Brian Goodridge
Scariest Thing Encountered In Tax And Asset Protection
For Brian, as a property tax accountant, whenever he does the presentation in BernadetteJanson’s class and if you’re doing business with other people, you need to have an agreement in place. Examples are how disputes are being resolved if someone wants to get out and how it will be managed.
A few years ago, when he first started from a very first real estate agent client, it was going fine. They ended up creating revenue. The cousin still went okay, and the guy brought his girlfriend into it. Then within two months, the whole thing imploded because of the girlfriend.
They had no shareholders’ agreement in place. They put it into liquidation and were now selling the rent roll. He said to one of the partners that if they just took it out and if they hadn’t put in the liquidation for the liquidate to sell the rent roll, they could have sold the rent roll separately. They would have walked away with a lot more money.
One of the partners told him that he’s richer than the other guys and that really upset him. He just wants to see them lose as much money as possible. If he had an agreement in place, the other guys could have stopped that from happening and they could all walk away and still be thousands of dollars better off.
“It’s an insurance policy. Some cost a couple of thousand dollars to have, but that’s your insurance policy. If something goes wrong, that might save you several hundred thousand later.”
~ Brian Goodridge