Common Rental Mistake No 2 - Paying down the loan and then redrawing.

Property Investment - Competent - 500 Words - Reading Time 4 Minutes

When you own a rental property you will want to take advantage of the help you get from the tax deductions associated with negative gearing. And one of the biggest expenses to claim as a tax deduction is the interest on the property. However, over the years, I have seen a lot of investors get the structure and use of their loan wrong and as a result they end up with a loan and a big

interest bill every year - but no tax deduction for it.

In my current blogs, I will explain some of these mistakes so you can ensure that you can avoid them and get the maximum tax advantage on your investment property. It is important to understand that it is how you use the proceeds of the loan that determines the tax deductibility. Keep this principal in mind and it will help you keep your loan interest deductible.

Mistake No 2 - Paying down the loan and then redrawing.

Just like the first mistake I highlighted recently, this relates to the use of the money. Let’s look at an example.

John has a rental property and the loan on the property has a balance of $300,000. All the interest on this loan is tax deductible as it was used to buy a rental property. John receives an inheritance, but is not sure what he wants to do with the money. While he is deciding, he pays $100,000 off the rental property loan to reduce his interest bill. The loan balance is now $200,000 and all the interest is still tax deductible.

Shortly after, John sees a nice boat he would like to buy. So he redraws $100,000 from the rental property loan to buy the boat. The loan balance is now back up to $300,000. However, from now on only the interest on the $200,000 will be deductible, as the other $100,000 has been used for a private purpose - to buy a boat. From now on only two thirds of the interest will be tax deductible.

How to avoid this outcome - and still save the interest on the loan:

Once you have paid money off the loan, it is really difficult to correct this situation. However, with some forward planning, John could have saved the interest on $100,000 of the loan without impacting on the tax deductibility of the interest. He could do this by opening an offset account with the bank.

An offset account, is a separate bank account set up in such a way that the bank will offset the balance of the account with the balance in your loan account and just charge you the interest on the difference. In John's case, he would still have a loan of $300,000 and an offset account with $100,000 in it. The bank only charges interest on the difference - being $200,000. However, when John takes the $100,000 out to buy his boat, he takes it out of the offset account and does not change the loan balance of $300,000. From then on the bank will start charging interest on the full $300,000 again, - but this time it will all be tax deductible.  

Our Economic Outlook October 2013

Economics - Competent - 700 Words - Reading Time 5 minutes

Australia's economy is in transition. Mining investment has been powering the economy but is now in decline. For growth to continue at the same rate, there will need to be a pick up in the domestic economy. We are in a good position to be able to make that transition but the uncertainty about how this will play out has dampened business and consumer confidence and held back domestic demand. In this article we will look at the factors influencing our economy and what the outlook is. 

The Federal Election

Australian Elections do not usually have a major economic impact but this election took on more importance because of the difficult period with a minority government leading to an uncertain environment.

The policies of the coalition will to lead to smaller government and less regulation. This business friendly approach should improve productivity and economic growth. However, the effectiveness will depend on getting legislation past the Senate. 

The US Economy

While the US government shutdown and debt ceiling issues have been resolved for the moment, the US economy will continue to have an impact on the Global Economy. The International Monetary Fund (IMF) has reduced its forecast for US economic growth due to the impact of sharp spending cuts instituted by the government earlier this year. These were aimed at trimming the federal deficit.

China and the Emerging Market Economies

Global growth in recent years has been boosted by China and the emerging economies of Brazil, Russia, India, and South Africa. However, these economies are currently experiencing a slowdown and this is going to have an impact on our economy - particularly in the mining sector.

Mining Slowdown

Over the last decade, our economy has benefited from a large increase in investment in the mining sector that has gone from under 2 per cent of GDP to 8 percent of GDP. This has been fueled by global demand and a steep rise in commodity prices.

Those commodity prices have now come off from their high and according to Reserve Bank of Australia (RBA) governor Glenn Stevens on July 30 2013: "It is now well understood that the 'mining boom' is shifting gear, and that we are entering a new phase."

Shipments of iron ore are still rising by about 15per cent per year and GDP will get a lift from this increased activity. But the bigger impact will come from the slowdown in infrastructure investment. According to the Bureau of Resources and Energy Economics (BREE), the value of new resources projects at the committed stage declined by $799 million from October 2012 to April 2013 and further falls are expected. With the infrastructure already in place, the emphasis is now on shipping. The result will be fewer jobs in the mining sector and this will have a flow on effect.

Some positives

There are a number of factors that will help us make the transition from our heavy reliance on mining investment to drive the economy.

The Australian Dollar come down in value by around 15% from it's peak. This increases the price of imports and decreases the price of exports making Australian companies more competitive

In addition, the RBA has cut interest rates and created an environment to stimulate local levels of demand. Household savings have steadily increased over the last decade and are currently averaging around 10% of household disposable income. All this means that Australian Households are in a strong position to spend as consumer confidence grows.

In Summary

With a number of world economic factors impacting us and some concern about the slowdown in the mining sector we are likely to see moderate growth in the economy through 2014. The IMF outlook for Australia's growth rate is 3% this year and 3.3% next year. Our Reserve Bank has predicted growth of 2.25% this year. However, there seems to be an increase in confidence in the economy and some good signs that Australia is well placed to cope with the transition from our reliance on the mining boom.

Please Note: This document has been prepared for the purpose of providing general information only, without taking account of any particular investor's objectives, financial situation or needs. Before making any investment decisions, you will need to consider if the information in this document is suitable for you. You may want to ask a financial adviser to help you.

Avoid these common mistakes when you are buying a rental property

Property Investment - Competent - 700 Words - Reading Time 5 Minutes

When you own a rental property you will want to take advantage of the help you get from the tax deductions associated with negative gearing. And one of the biggest expenses to claim as a tax deduction is the interest on the property. However, over the years, I have seen a lot of investors get the structure and use of their loan wrong and as a result they end up with a loan and a big interest bill every year - but no tax deduction for it.

Over the next few blogs, I will explain some of these mistakes so you can ensure that you can avoid them and get the maximum tax advantage on your investment property. It is important to understand that it is how you use the proceeds of the loan that determines the tax deductibility. Keep this principal in mind and it will help you keep your loan interest deductible.

Mistake No 1: Using the funds to buy your own home.

This is a common mistake where people have paid off their own home and are going to move. In the process, they also decide to keep their existing home as a rental property. Many people assume that if they refinance their existing house and use it as the security for the loan, the interest will be deductible when they use it as a rental property. However, this is not the case. The security is not relevant - it is the use of the money that determines if the interest is tax deductible - and in this case they are going to use the money to buy their new house. This is not a tax deductible purpose and therefore the interest on the loan is not tax deductible.

For example, John owns his house in Melbourne and has paid off the mortgage. He gets a job transfer to Adelaide and decides he would like to keep his Melbourne home as a rental property. John gets a loan using his Melbourne home as security. However, he uses the proceeds of the loan to buy an Adelaide house to live in. Unfortunately, the interest on John’s loan will not be tax deductible, because he used the money to buy his new home. This leaves him in a difficult situation. On the one hand he is receiving rent on his Melbourne property and he will be paying tax on that income. On the other hand he is making repayments and paying interest on a home loan but not getting any tax deduction for it.

This situation is not always easy to solve, but you may be able to do something about it if you are careful in the planning stages. Sometimes, it can be better structured at the start of the loan by changing the ownership. For example, if John was married to Maree, and the Melbourne home was solely in her name, John could borrow to purchase the home from Maree and in that case would have a tax deductible loan. Maree could then use the proceeds from the sale of the Melbourne property to buy the new home in Adelaide.

This leaves John owning the Melbourne property with rent coming in but also deductible loan interest to offset the tax payable. The new home in Adelaide has no loan against it.

There may be some tax consequences in this type of restructure. However, if the Melbourne property has always been John and Maree’s  main residence, there will be no Capital Gains Tax and it will also be exempt from stamp duty as the property is in Victoria and the transfer is between spouses.

Please note: This document has been prepared for the purpose of providing general information, without taking account of any particular investor's objectives, financial situation or needs. It does takes into account Australian Taxation Law that was in place as at October 2013. Before making any investment decisions, you will need to consider if the information in this document is suitable for you. You may want to ask a financial adviser to help you.

Should the umpires be voting for the Brownlow Medal.

AFL - All Levels - 350 Words - Reading time 2 minutes

Well deserved Brownlow Medal win this week by Gary Ablett. However, once again the press raise a few eyebrows when they highlight rounds where the umpires seem to have got the voting wrong and start questioning if the umpires should be the ones voting. Of course the umpires should do the voting. You see the Brownlow is awarded to the fairest and best player as voted on by the umpires. So if the umpires don't do the votes - it wouldn't really be the Brownlow. 

We already have a multitude of awards that are voted on by others in the sport. There are all the media awards, the players association awards, and the coaches awards. But over the years, it is the Brownlow Medal that has risen enormously in stature - much more than any of these other awards - and I would suggest that is largely due to the fact that the umpires are the exact people who should be voting. This is because they are both impartial and close to the action. 

I think it is important to be close to the action. From there, the umpires get a great perspective on the impact of each player. This is often different from the perspective that you get from the stands. It also gives them a good handle on the Fairest scale. 

The other element of being impartial is essential  - and this is a concept that much of the media fails to understand so we certainly couldn't have them voting on it. 

Finally, we often hear the complaint that we only see mid fielders win the medal. The umpires only notice them. To me, this means that they are getting it right. In the modern game, it is the team with the best midfield that invariably wins. They have the biggest impact on the game and are generally the most valuable players. Add to that the fact that teams run most of their players through the midfield and it makes sense that they commonly win the Brownlow Medal and Gary Ablett is a very deserving winner.

New Labels on my Posts

My Blog - All Levels - Reading time 5 minutes

I have been grappling with my blog for a while now and one of the issues I have is that there are a lot of different areas of life that I have an interest in - sports, taxation, investment, technology and the list goes on.  Therefore, I have been concerned that I would be writing stuff that did not interest everyone reading my blog.

I do not want to waste your time by encouraging you to read posts that are just not relevant to you - but I want to write on a wide range of topics.

Therefore, from now on, all my posts will be labelled with the key words for the topic. These labels can be found at the end of the article - but I will also include them in the first line of the post. If you want to see all the articles with the one label, there is a list on the top right hand side of the page.

In addition to that, I want to let you know what level each post is aimed at. This is particularly relevant for my tax posts where some are really an overview while others can involve in depth analysis for experts in the subject. Therefore, I will indicate this in the first lines of the post:

• All Levels
• Competent
• Proficient
• Expert