Property taxation
The treatment of income producing properties in
Western Australia
This presentation is illustrated by a companion Excel worksheeet
Prof. Dominique Fischer, Curtin University
Prof. Dominique Fischer, Curtin University
Bon appétit!
ATO tax menu
State tax menu
Local tax menu
On operation
1.
Stamp duties
1.
Local Rates
- allowable deductions
2.
Land tax
2.
Water rates
3.
Emergency
3.
Parking fees
- financing expenses
- capital allowance
Service Levy
- depreciation
-On disposition
4.
- recapture
- capital gain
- GST
Prof. Dominique Fischer, Curtin University
Metropolitan
region
improvement tax
You can
always return
to this menu
by clicking on
the Pink
house (in
slide show
mode)
Taxed by whom? when? On what?
•
Income producing properties are taxed at three levels:
– Federal
– State
– Local Governments
•
Taxes can be levied:
– Annually: income tax, GST, land tax, local rates, etc.
– On transaction: stamp duties, capital gain
•
And applied to:
– Value: land tax, rates, stamp duties, capital gain
– Activity level: income tax, GST
– Gross rental value: council rates, water rates, emergency services
Prof. Dominique Fischer, Curtin University
Federal level: the ATO tax menu
• The ATO will tax income producing properties at
different stages:
– operation
– acquisition/disposition
– and good and service indirect levies
See notes for
the various
types of
taxpaying
entities
Prof. Dominique Fischer, Curtin University
The State government bite…
• Stamp duties charged to the purchaser
• A land tax is charged annually on land values
• Emergency service levy: the new baby…
• Metropolitan region improvement tax
• Back to the menu of federal taxation
Prof. Dominique Fischer, Curtin University
Some indicative numbers (millions of $)
Taxes on property
Land tax
266.50 $
Stamp duties
799.00 $
Total
1 065.50 $
As a percentage of State
total annual taxation
34%
As a percentage of State
total annual revenues
9%
Prof. Dominique Fischer, Curtin University
The local government levies
• Property rates calculated on the gross rental value of
the property
• Water rates
• Parking licence taxes (applicable in Perth)
Prof. Dominique Fischer, Curtin University
Menu of state and local taxation
1. Stamp duties
2. Land tax
3. ESL tax
4. Metropolitan Region Improvement tax
5. Council rates and water rates
6. Parking levies
Prof. Dominique Fischer, Curtin University
Stamp duties : duties on what?
•
Tax imposed on various types of documents used in a property
transaction:
– Transfers of real estate;
– Mortgages;
– Leases.
•
Stamp duties are not limited to property transactions and can
be charged on:
– marketable securities (not applicable after July 2001);
– documented gifts;
– policies of insurance;
– issue of motor vehicle licences;
– business of renting goods (except books).
Prof. Dominique Fischer, Curtin University
Rates and concessions
• The rates are progressive and based on transaction values
• Two stamp duties may apply: one on the property transaction
and the other one on the mortgage transaction (including on
refinancing….)
• Check your Excel workbook for rates and examples
• Concession rates apply to home owners principal residence (value capped)
• Rebate of 500 $ may apply to first home buyers (value capped)
• Transfer of farm properties between family members are exempted
• Corporate reconstructions are exempted
Prof. Dominique Fischer, Curtin University
Duties on leases
• The lease document is `stamped’, thus a duty applies;
• Duty based on total rental contract amount;
• The dutiable rental is GST inclusive.
– Stamp duties on lease were supposed to be eliminated in
2003…
– And were eliminated in March 2004….
– But still duties on a lease of land in consideration for
a premium.
Prof. Dominique Fischer, Curtin University
Complications
• Since the ‘stamp’ is charged on the document, the
nature of the transaction may affect the duties:
– No duties on shares of listed properties;
– Different treatment of private unit trusts;
– Possible duties on shares of ‘land rich companies’;
• Cies that own land valued over 1M in WA
• Cies that have 60% of their assets as land (under review)
– Duties are applicable to option fees. Then on property
value at exercise time.
Prof. Dominique Fischer, Curtin University
The future…
• The whole package of State taxes is presently under review.
• A 2002 reports suggests the abolition of quite a few stamp
duties… however not on property transactions.
– Streamlining Western Australia's Tax System - Fewer,
Fairer and Simple, The final Report of the Review was presented
to Government on 28 February 2002.
The report can be found on http://www.treasury.wa.gov.au
Prof. Dominique Fischer, Curtin University
Land tax
•Based on assessed unimproved land value
•Levied by the department of treasury
•Assessed by DOLA (the valuer general)
Prof. Dominique Fischer, Curtin University
Duties on what?
• Annual tax on assessed land value
• Paid by the owner (usually passed through to tenants)
• And the lessee of Crown land
Prof. Dominique Fischer, Curtin University
How much?
• Rates have been amended in 2001 (Land tax bill 2001)
• Starting July 2002: land tax on properties with an
unimproved land value of less than 50 000 has been
abolished
• High value properties are now taxed at an increased
rate
• Check the Excel workbook for rates and examples
Prof. Dominique Fischer, Curtin University
Exemptions
• Principal residence exemption is limited to direct owneroccupation
• Not to Trusts, nor to Companies
• Except if:
– Trust in favour of a disabled beneficiaries
– At least one of the disabled used the land for primary
residence
Prof. Dominique Fischer, Curtin University
Emergency service levy
•
Starts in July 2003
•
Levied in order to fund WA fire and emergency services
•
Replaces existing arrangements used in the financing of fire
and rescue services, Bush fire brigades and the State
emergency service (SES)
•
And should replace various insurance schemes
•
Check the Excel workbook for rates and examples
Prof. Dominique Fischer, Curtin University
Duties on what?
• Annual tax imposed on the gross rental value of the
property
• Applicable to all properties including vacant blocks
regardless of ownership
Prof. Dominique Fischer, Curtin University
Complications
• From 1 July 2002, removal of the principal place of
residence exemption for properties held by companies
and trusts.
• Objections to land valuation are dealt by DOLA
Prof. Dominique Fischer, Curtin University
Metropolitan region improvement tax
• 0.15% of unimproved value of land for properties that
are subjected to a land tax
• In my humble opinion…
– Who is the #$%%@@ that has created this anachronism?
– If land values are related to ‘metropolitan location’ then
the land tax already captures the ‘metropolitan’ advantage
and we don’t need this tax heresy.
– Back to the menu of State and local taxes
Prof. Dominique Fischer, Curtin University
Council rates and water rates
• Rates are levied by local councils
• Property rates are decided by the local governments
• Each local government may have different asset
categories
• Water rates are getting closer to user’s fees for water
and sewage services.
Prof. Dominique Fischer, Curtin University
Duties on what?
• Annual tax imposed on the Gross rental value of the
property (check this slide’s note)
• Amended rate accounts can be issued where the Valuer
General considers the Gross Rental Value of their property has
changed.
Prof. Dominique Fischer, Curtin University
How much?
• It depends… a list of all taxing WA local authorities can
be found at:
– http://www.walga.asn.au/locgovinfo/councilwebdir.htm
• Where the property is vacant land, an equivalent GRV,
based on 5% of the property value, is used.
• For a given rate of say 8% the rate is calculated as.
• GRV x Rate in the dollar (0.08 $) = Amount of tax to pay
Prof. Dominique Fischer, Curtin University
Parking levies
Applicable to Perth only (for the time being…)
Prof. Dominique Fischer, Curtin University
Duties on what?
• Annual tax on property owners in the Perth Parking
Management Area
– Exemption if less than 5 bays
– Exemption for loading bays
– If you really want to know….
//www.dpi.wa.gov.au/planning/parking/policy.html
Prof. Dominique Fischer, Curtin University
How much?
• Business with more than 5 parking bays:
– Motorcyles bays: 77.50 $/ year
– Short term public bay: 155 $/year
– Long term public bay and tenant parking: 180 $/year
– Bicycles and roller skates are still free… just wait!.
Prof. Dominique Fischer, Curtin University
The taxation of rental income
• The full amount earned on a rental property is declared
• Various deductions will lead the amount of taxable
income to add to your other sources of income and
taxed at your marginal rate
• Tax liability must be paid quarterly under a PAYG
principle if rental income > 8000 $
– Rental income generated on properties held outside
Australia are also taxable… With different deductibility
conditions.
Prof. Dominique Fischer, Curtin University
Rental income
• Effective gross income
• + Any other sources of rental related income
– Could be payments in nature
– Could be retained bond money left by tenants
– Or an insurance payout
– Or the reimbursement of expenditures by a tenant
Prof. Dominique Fischer, Curtin University
What can be deducted
• Operation expenditures
• Leasing incentives
• Financing expenditures
• Depreciation
Prof. Dominique Fischer, Curtin University
Deductible expenses from operation
• Normal and periodic expenditures that are related to the
operation of the property…
– Council rates, water rates, ESL levy, Land tax….
– Insurance
– Servicing contracts
– Pest control
– Management fees
– Etc.
Prof. Dominique Fischer, Curtin University
Operating expenses deductions
• Matching principle:
– Deductions are related to income produced: no
income… no deduction
– No `reasonable expectation of income’… no
deduction
– There must be a causal link between the deduction
and the source of income (ex: travelling expenses
related to rental property)
Prof. Dominique Fischer, Curtin University
Leasing incentives
• Lease incentives payed by the lessor are deductible in
the year
• Period free rental is not accepted as a deduction and are
not assessable in the hands of the lessee
• Concessionary lending rates are not accepted as a
deduction and are not assessable in the hands of the
lessee
– A better source: tax ruling IT 2361
Prof. Dominique Fischer, Curtin University
Apportionment of deductible expenses
• Pro-rata allocation of income and expenses if:
– Property not held for a full year: pro-rated for time
– Property held by different owners: pro-rated for share
– Property is partially used to generate rental income: prorated for floor space
•
Pro-rating means: applying a percentage of the number of days of ownership.
Example for a property owned for 60 days, the amount deductible would be
60/365 of the expense. If a taxpayer owns a third of a property, she will be able
to deduct only a 1/3 of the expenses. Etc.
Prof. Dominique Fischer, Curtin University
Operation or capital
• Picking the fruits: operation expenditures
– Operating expenditures are related to ongoing activities
and are deductible during the year of operation
• Planting a fruit tree: capital expenditures
– Capital expenditures are linked to the acquisition, the
betterment or the disposition of a property
– Capital expenditures are amortised or applied to reduce
capital gains.
Prof. Dominique Fischer, Curtin University
Repairs and maintenance
• Can be treated as operation or capital expenditures.
• Depending on the nature, importance and frequency of
the expenditure.
– If the repairs increase value: capital expenditures
– If the repair expenditure is a substantial part of the value…
will be treated as capital expenditure
– If repairs required at acquisition (initial repairs)… capital
expenditure
Prof. Dominique Fischer, Curtin University
Fit outs (tenants improvements)
• If the lessor (the owner) pays and owns the fit out: non
deductible in the year (capital expenditure);
• If the lessee pays part of a fit out that he may remove
at the lease… the lessor may deduct his contribution to
the cost
Prof. Dominique Fischer, Curtin University
Depreciation of buildings (building
allowance)
• Technically defined as a special building write off deduction
• Capital allowance on capital work = Buildings + items that
are incorporated in a building
• But not on land…
• The undepreciated value passes to the new owner but
depreciation is not based on purchase price.
• An estimate for a qualified professional can be used if
construction cost is unknown
See
notes
• Building allowance is not recaptured at disposition but will affect
the cost base.
Prof. Dominique Fischer, Curtin University
Capital work… means:
• Construction expenditures for a building or for
extensions
• Other incorporated constructions: garage, pergola,
carport
• Retaining walls, concrete driveway, swimming pool,
fencing
• Built-in cabinets, electrical wiring, doors and windows
fitting
Prof. Dominique Fischer, Curtin University
Construction costs include
• All hard construction costs (labor, material and profits)
• All soft costs required before or during construction
(architect fees, legal fees, valuers, property research)
But cannot include:
– Land value
– Land clearing and plotting
– Landscaping expenditures
Prof. Dominique Fischer, Curtin University
Applicable rates… it depends!
• Construction started before 1985: 0%
• Construction started before 1987: 4%
• Construction started after 1987: 2.5%
– The allowable depreciation (capital cost allowance) is
pro-rated to the length of possession and or length
of rental
Prof. Dominique Fischer, Curtin University
Plant (now defined as ‘depreciable assets’)
•
Plant: anything that is a non integrated part of a
property: fixture, machinery, furniture, carpets,
curtains, etc..
•
Can be removed from the building without damage
•
Allocation between plants and other assets must be
based on reasonable estimates but do not need to be
part of the purchase contract.
•
If a fixture is built-in: it will be depreciated as a
building
Prof. Dominique Fischer, Curtin University
Decline in value of depreciable assets
–
Diminishing value method (declining balance)
–
Straight line method (prime cost)
–
Pooling for low cost (<1000 $) assets at a 37.5%
rate (1/2 rate for the first year)
–
•
Check the Excel workbook for examples
•
Information on rates: TR 2000/18
Depreciation can be recaptured at disposition
Prof. Dominique Fischer, Curtin University
Operation losses
• Can be carried forward
• Not backward…
• This carry over is subjected to ‘continuity of ownership
test’ (COT) or ‘same business test (SBT) constraints
– COT: the owner still owns at least 50% of the ‘loosing’ cie.
– SBT: a set of criteria evaluate the continuity and similarity
of activities (TR 1999/99)
• Specific rules apply to Property Trusts
Prof. Dominique Fischer, Curtin University
Acquisition/Disposition: various forms
• Sale
• Exchange
• Gift
• Foreclosure
• Demolition and destruction
• Ceasing residence in Oz
Prof. Dominique Fischer, Curtin University
Taxation at acquisition
• Review of some points raised previously:
– Stamps duties and other acquisition costs are included in the
transaction cost
– Depreciation starts at the level left by the previous owner (the
seller must provide a notice of building allowance within 6
months)
– Financing related expenditures can be spread over the lesser of
the term or 5 years
– Initial repairs are treated as a capital expenditure
– The acquisition cost should be allocated between components
(buildings, land, plants and other assets)
Prof. Dominique Fischer, Curtin University
Taxation at disposition
• Capital gain taxation
• Recapture of depreciation
• And GST consequences….
Prof. Dominique Fischer, Curtin University
Capital gain
• Put in place in 1985
• Triggered by a CGT event on sales of:
• Collectables
See
notes on
CGT
events
• Personal use assets
• Other assets (including property assets)
• Dwelling units are generally exempted
See notes
on dwelling
treatment
• CG are added to your income and taxed at the marginal
rate
• CG = Capital proceeds – Reduced cost base
Prof. Dominique Fischer, Curtin University
CG : what’s in between the 2 yellow dots…
Acquisition
price
Capital
expenditures
Written down value
Disposition price
Net disposition price
Check the Excel workbook for calculations and the note below for an example
Prof. Dominique Fischer, Curtin University
See
notes
How to tax capital gains
• 3 methods (see note)
– With indexation
– With the discount method
– With the ‘other method’
• Indexation adjust the cost base for inflation
• The discount method applies a discount of 50% to CG
• The ‘other method’ applies to assets held for less than
12 months. The CG is not discounted.
Prof. Dominique Fischer, Curtin University
Recapture = called `Balancing
adjustment’
• When net disposal is greater than the depreciated value
of the plant.
• Building depreciation is not recaptured but it increases
the capital gain (by reducing the cost base)
– Thus, with the discount method applied to compute capital
gains, a 50% recapture occurs.
Prof. Dominique Fischer, Curtin University
Disposal of depreciable assets: definitions
Decline in value
Adjustable
value
Cost of the
plant less
allowable
depreciation
Termination
value
Net acquisition cost
Sale proceeds
minus sale
expenses minus
GST
Evolving ATO jargon
• Depreciation
= decline in value
• Undeducted cost
= adjustable value
• Written down value
= adjustable value
• Plant
= depreciable assets
• Owned
= Held
Prof. Dominique Fischer, Curtin University
Partial recapture
Adjustable
value
80,000 $
Termination
value:
90,000 $
Net acquisition
cost
100,000 $
10,000 $
Are recaptured or
can be offset against a new acquisition
Prof. Dominique Fischer, Curtin University
Full recapture
Adjustable
value
80,000 $
20,000 are
fully
recaptured
or offset
Prof. Dominique Fischer, Curtin University
Net acquisition
cost
100,000 $
Termination
value:
150,000 $
Final balancing adjustment…
Termination
value:
50,000 $
30,000 $
Are still
deductible
Prof. Dominique Fischer, Curtin University
Adjustable
value
80,000 $
Net acquisition
cost
100,000 $
And GST consequences…
• Check the Excel workbook and specific
powerpoint presentation for GST details and
examples
Prof. Dominique Fischer, Curtin University
Prof. Dominique Fischer, Curtin University