24 Sep Tax on, Tax Off: Accountant Kym Nitchske’s Tips on Tax Structures & Negative Gearing (Pt 1)
In this week’s episode of The Rentvesting Podcast, we’ve got Kym Nitchske who’s an accountant by trade and runs his own business based in South Australia. He also runs a podcast called the Accounting Insiders Podcast.
We’re covering TAX! But we’ve split it across two episodes because there’s so much information and it’s such a big topic.
In this episode we cover:
- Tax in property
- Things you can do around structuring
- How tax plays into that
- How it will affect you in the future
- Gearing – negative gearing in particular and how that fits into your overall tax strategy.
Can we get a bit of a background on you Kym?
I’m an accountant, I’ve got a practice with six staff and we’re a boutique agency, I’ve been doing it for 20 years. Before that, I worked for Price Waterhouse Coopers. I started doing family and friends tax returns and then built up my knowledge in property. By default I built up my property portfolio, now I’m a bit of a property expert in the accounting field.
As part of growing a property portfolio, tax is critical and it’s something people don’t get right. When do you think people should get involved with their accountant? What are the advantages of speaking to your accountant early on?
We can add tremendous value, it’s important to get it right from the start and when you’ve identified a property, that’s when you should be calling your accountant. Ask them what structure, what entity, how should you finance it, along with whether variable or fixed rates are best for you. Even when you’re at the concept stage, old or new properties, we can add value there.
Looking at structures, should you put it in your personal name?
By default, most people begin buying their first property in their own name, that one is the first and easiest step. But when you start adding property into the mix there are factors like land tax. In South Australia if you own a property in your own name and another in your wife’s name and another joint, you get the land tax for three different entities even though it’s the same people.
Land tax has about a $500k tax-free threshold. If you add more properties into the mix, you’ve only got the threshold for the first, but if you spread it over different entities, you can get millions of dollars worth that you can use, by being clever.
Another reason is that if you choose a family trust, they enable you to split income. Trusts are a tremendous way to split income with other members of the family. Capital gains can be split, really, there’s a whole world of creativity you can bring to the table when you invite your accountant into the conversation.
Whenever I have a customer call me, I sit down and do the numbers. Looking at the long-term approach. There are all these different calculations to figure out which entity is best. Drilling down on the detail from the get-go will allow you to forecast what’s going to happen.
Is it true if you’ve got a family trust there are certain capital gains tax benefits that are different to a unit trust?
Yes, so a unit trust is typically when you’ve got two people who are unrelated going into a property transaction together and everything is split 50/50 down the line. For the family trust, you use family members to split income. For both trusts, if you’ve held a property for more than 12 months you’ll be able to half the capital gains tax you pay on the sale.
The unit trust has legal implications that protect you if you invest with the unrelated person, they’ve got legal mechanisms where you can’t put all of your assets on the line if the other partner goes belly up.
There are tax implications and legal implications for choosing the ultimate entity.
Negative gearing – it might not always be appropriate if you’re on lower income, but at a high level, what is it and in what situations does it suit?
Negative gearing – I’m always chasing the capital gain. I want something that I’m paying $500k for today to be worth $600k to $750k in four to five years time. They are the numbers I’m chasing.
Behind the scenes, negative gearing, in a nutshell, is claiming the losses that you’re making and typically that’s when your interest is more than the rent you’re receiving.
So you’re making a loss on paper every year.
That is absolutely gold when you’re a high-income earner and your marginal tax rate is 0.48c to the dollar. It’s less beneficial and it doesn’t actually work if your income is low, like around $20k/year and you’re paying no tax at all. Also if you’re a pensioner or retired, it loses all of the benefits.
It’s a quirky piece of legislation where if you make a loss on a property you can use it to reduce your tax.
As an investor, you can make great use of it and the tax you pay to the government very minimum.
- If you’ve got an accountant, lean on them and get them to help you unlock benefits and savings quicker.
- Negative gearing, whilst it’s great, it doesn’t fit everyone.
Next week we have part two where we’ll go through capital gains. Make sure you check out our Q&A Wednesday and if you’ve got a question, send it in! If you have time, please leave us a review on iTunes here.