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Jansen Walsh & Grace


 



This Guide is to warn you about scams and the things to look for when buying an investment property or a rental property.


Extra duty

If you are purchasing a property over $2 million, you will have to pay a premium land transfer duty.  This is $110,000 plus 6.5% of the dutiable value in excess of $2 million.  It applies to contracts signed after 1 July 2021.


Borrowing to fund your purchase

If you are borrowing in order to fund part of the purchase price, you should make the contract subject to finance.  However, if the property is a commercial property, the vendor may not agree to this.


If you need finance for your investment, we may be able to help you in two ways.  We can help you procure funding from our private lenders.  Alternatively, you can raise all or part of the purchase price through an offer seeking funds from investors either by the issue of shares, the issue of units or an interest.  We are here to advise on the best method.



Property investment scams

Now that the investment property market is cooling, we have seen a sudden upsurge in property investment scams.   You are told that you can unlock your wealth in six easy steps.  You are offered to attend a free seminar.  The promoters have special arrangements with developers.  They have the property right for you.  There are finance brokers in attendance at the back and the contracts are ready for you to sign.  In reality, the property right for you is one a developer is trying to unload.



"I am buying off-the-plan"
Formerly, several of our clients purchased from developers selling properties off-the-plan in order to show the pre-sales to the bank to get finance.   Once the developer gets finance and the dwellings are almost finished, they delay registration and use the "get out of jail" card in the Contract of Sale to terminate the contract and resell the same property at a higher price, often to the same purchaser, who must sign a new Contract of Sale to re-purchase the same property at a higher price.  Most contracts also allow the developer to make certain changes to the plan and you cannot object or complain.  Often, he finished product often does not look as attractive as the photographs in the showroom.  Only a minority of developers are rogues.  For that reason, we recommend you only buy from a reputable developer.

Fortunately, legislation currently provides that off-the-plan contracts cannot be terminated by a developer under a sunset clause unless ordered by the Supreme Court of Victoria or with your written consent.  This applies not only to new off-the-plan contracts, but also to existing off-the-plan contracts.




Warning about paying Vendor's legal costs
Watch out!  Some vendors are tricking purchasers into unknowingly agreeing to pay part of the vendor's legal costs by disguising it in a special condition in the Contract of Sale.


We have also seen contracts signed by purchasers which allow the licensed conveyancer for the vendor to charge $1,150 for a default notice.  This is more than a lawyer would be allowed to charge and it is more than the major law firms charge for a default notice.  If you think this won't happen to you because you won't default, think again.  If you have a lender, then there is a real risk you will default.  A large number of banks, presumably because of the workload or because they do not have sufficient trained staff, are not ready to realise the funds for settlement.  When that occurs, you will be in default.


Our advice: don't pay 16% interest to the vendor

We also see many contracts in which the vendor is entitled to charge the purchaser 16% per annum for each day of default.  This is higher than the standard rate, which is currently 12% per annum.  As mentioned, you could default because your lender is not ready on the settlement date.  Tell the selling agent you want it reduced before you will sign the Contract of Sale.


Measurement of land

A copy of the title for the property will be attached to the Vendor Statement along with a diagram showing its measurements.  It is important that you check these before you sign the contract.  You should also compare what you see and any plans the estate agent shows you with the shape on the title search attached to the Vendor Statement and check the shape of the land on LASSI.  If you subsequently discover that the measurements of the land do not match those shown on the title diagram, there may be nothing you can do about.  Where there is any doubt, a licensed surveyor should be engaged before you sign.


Building

Another matter that should be checked before you sign the contract is the physical condition of any buildings on the property.  There is unlikely to be any remedy against the vendor if you find out after you sign that the buildings have been constructed illegally, are infested by termites or defective in some other way.  The selling agent will tell you that you can have it subject to satisfactory building and pest inspection reports.  However, if you have already signed, then your rights are much more restricted.  The safest course of action is to have building and pest inspection reports before you sign the contract. 



Asbestos

Breathing in asbestos fibres can cause asbestosis, lung cancer and mesothelioma.  If any building was constructed before 2004, you may care to obtain a building report as to whether the construction materials included asbestos.


Buying with a lease

If the property is subject to a lease, you have to check whether you are getting vacant possession or subject to the lease.  If you are buying subject to the lease, then you are actually purchasing the reversion under the lease.




Rubbish

Sometimes the vendors leave the property in a poor state and you must clean up the rubbish and remove the old tyres at your own expense.  We suggest that the contract include a special condition that the vendors have an obligation to remove all old tyres, rubbish, etc at their own expense at settlement. 


Buying in older parts of Melbourne

If you are borrowing to buy an apartment or unit in older parts of Melbourne, like St Kilda or Brunswick, then ask us to look at the contract before you sign.  If it is not a standard title, then the bank might only lend you as little as 50% of the valuation.




Purchase of investment property “subject to contract”

Offers to purchase property “subject to contract” are often ambiguous.  In The Edge Development Group Pty Ltd v Jack Road Investments Pty Ltd [2018] VSC 326, Riordan J held that an offer to purchase real property which stated “The offer is subject to the contract being executed” was not intended to create binding relations until a formal contract of sale of land was executed.




Inspection of property before settlement

The agent will contact you to arrange a time for you to inspect the property before settlement.  That will happen a few days before the settlement.  


"Can I now claim damages from the vendor for default?"

When the purchaser defaults, it is easy for the vendor to seize the deposit and sue the purchaser for damages.  Not surprisingly, as the Contract of Sale is drafted by the vendor’s lawyers.  What if the vendor defaults?  Purchasers were often told by their lawyer or licensed conveyancer they had no remedy other than getting their deposit back.  The decision of the Supreme Court on 31 August 2020 shows that a purchaser can sue the vendor for damages.  In that case, the vendor was unable to get the mortgagee (a bank) to grant a discharge of mortgage and the caveator to give a withdrawal of caveat at settlement.  The Supreme Court awarded the purchaser damages for his loss.




"What are the expenses?" 

As an investor, you must factor in GST, land transfer duty, land tax and other taxes and the extent to which you will be allowed to claim tax deductions.  Some deductions for fixtures were removed in the 2017 budget and, on 8 May 2018, it was announced in the budget papers that deductions will be removed for vacant land.  These are described below.


GST

If it is a commercial property, you will usually have to pay GST on the purchase price.  Check whether this is or is not included in the purchase price.  If, however, the property is subject to a retail or other commercial lease and you are registered for GST, you should be able to purchase the property as a going concern, thereby saving you money.


Withholding GST

The purchaser will have to pay one-eleventh (or 7% for margin schemes) of the sale price to the Australian Taxation Office where settlement of a Contract of Sale of land which occurs on or after 1 July 2018, even if the contract was entered into before that date, but subject to the exception for existing contracts entered into before 1 July 2018 where settlement takes place before 1 July 2020.  The vendor is entitled to a GST credit for an amount withheld by the purchaser from the contract consideration but only if and when the purchaser pays the withheld amount to the Commissioner.


Land transfer duty and transfer registration fee
If you are borrowing to fund part of the purchase price, your lender will calculate the land transfer duty and the transfer registration fee.  However, you can calculate the land transfer duty and the transfer registration fee, if you wish.  It does not deal with off-the-plan purchases.


Abolition of off-the-plan duty concession for investors
The concession for land transfer duty for buying an investment property off-the-plan was eliminated on 1 July.

The off-the-plan duty concession is now only be available for those who intend to live in the property or who are eligible for the first home buyer duty concession.


Buying in regional Victoria

If you are buying a commercial or industrial property in regional Victoria, you will be entitled to a concession rising to 50%.




Land tax and land tax surcharge

Once you own the investment property, you will have usually to pay land tax.  You also often have to pay a land tax surcharge if it is held by a trust.

If your investment property is retail premises, you cannot pass on the land tax to the tenant.


Land tax on properties valued at between $1.8 million and $3 million will increase from 1.3% to 1.55% for 2022.


Land tax on properties valued at more than $3 million will increase from 2.25% to 2.55% for 2022.


The general land tax threshold will increase from $250,000 to $300,000 for the 2022 land tax year.  The land tax threshold for land held on trust remains unchanged at $25,000.




Land tax: trust surcharge

If you are the trustee of an absentee trust that owns taxable land as at 31 December each year, you must inform the State Revenue Office before the following 15 January.  The trustee must pay the absentee owner 0.5% surcharge on the trust’s land tax assessment.  Contact us if you are unsure what that means for your trust.


Landholder duty

When you acquire an interest, such as shares or units, in a company or unit trust scheme that has land holdings of $1 million or more (a landholder), you may be liable for duty at the general rate.


Vacant Residential Property Tax

If your investment property is residential, then a 2% Vacant Residential Property Tax is levied on dwellings that are vacant for more than a total of 6 months in a calendar year.  The rate is currently 1.5%.


It is payable on a calendar-year basis, just like land tax.


The vacant residential land tax exemption for new developments will be extended to apply for up to two tax years.    

It only applies to vacant properties located in the municipalities of Banyule, Bayside, Boroondara, Darebin, Glen Eira, Hobsons Bay, Manningham, Maribyrnong, Melbourne, Monash, Moonee Valley, Moreland, Port Phillip, Stonnington, Whitehorse and Yarra.


There are a number of exemptions, including holiday homes owned by those with a principal place of residence in Australia; those who need a city unit for work; properties in deceased estates; and homes subject to legitimate temporary absences, such as overseas holidays and hospitalisation.


The tax applies at the rate of 1% of the property’s capital improved value.  For example, if the taxable property has a capital improved value of $500,000, the applicable tax will be $5,000.  The capital improved value of a property is the value of land and buildings as determined every second year as part of the council valuation process.  The capital improved value of your property is displayed on your council rates notice.


The tax is self-reporting.  That is, owners of vacant residential property will be required to notify the SRO of any vacant properties that they own.



"Can I claim tax deductions on my investment property?" 

Federal legislation disallowing deductions for owners of vacant land


Property owners are no longer be able to claim tax deductions for interest, council rates and maintenance costs for vacant land in their income tax returns.  However, property owners will be able to claim deductions after a property was constructed on the land, the property has received approval to be occupied and was available for rent.  The measures were announced in the budget papers on 8 May 2018 and are aimed at denying tax deductions to property speculators engaged in the practice known as land banking.

Denied deductions will not be able to be carried forward for use in later income years.  Expenses for which deductions will be denied that would ordinarily be a cost base element (such as borrowing expenses and council rates) may be included in the cost base of the asset for capital gains tax (CGT) purposes when sold.  However, denied deductions for expenses that would not ordinarily be a cost base element would not be able to be included in the cost base of the asset for CGT purposes.


The amendments will not apply to expenses associated with holding land that are incurred after:

  • a dwelling has been constructed on the land, it has received approval to be occupied and is available for rent; or
  • the land is being used by the owner to carry on a business, including a business of primary production.

The amendments will apply to land held for residential or commercial purposes.  However, the "carrying on a business" test will generally exclude land held for commercial development.


Tax deductions for fixtures

The value of fixtures like ovens, stoves, dishwashers, air conditioners, hot water services, curtains, rugs, that were in the  property when purchased can no longer be claimed against any income.

There are two exceptions:
1.     a new property; or
2.     properties purchased before 9 May 2017.

You will still be able to claim a deduction for depreciation if you actually purchased a new oven, a new dishwasher, etc, for the property.


Capital gains tax when you sell

When you come to sell the property, your sale will trigger a capital gain (or loss).

There is no actual rate of capital gains tax in Australia.


Your capital gain is the difference between the sale price for the property less the cost base (the original purchase price, together with some other costs associated with acquiring, holding and disposing of it, such as the land transfer duty to purchase it, municipal rates, insurance, land tax and maintenance costs, the transfer registration fees, solicitor fees, the selling agent’s commission, etc).  You exclude both the day of acquisition and the day of the CGT event.

If you hold the property in your own name for over 12 months, you have several choices.  You can choose the method that gives you the best result — that is, the smallest capital gain.  The usual method is the CGT discount method.


If you are using the GST discount method, the gain is halved.  The discounted gain is then included in your income tax return as assessable income.  Your normal marginal rate of tax applies.  This method is not available if you are using a company.


The other two methods (the indexation method and the “other method” as it is called) do not usually produce such a good result where you will not be holding the property for very long.

If you are using a company, you cannot use the discount method.  However, offsetting this disadvantage is the fact that the company tax rate is 30%.  If you held the property in your own name, you would pay at your top marginal rate of tax.  Although you would not get the 50% discount, the applicable tax rate is much less than the maximum marginal rate plus the Medicare levy.  So, the difference is not vast, but still significant and, of course, your top tax bracket may well not be the maximum.


If you are using a discretionary trust or a family trust, then you can use the 50% discounts.  This is a significant tax concession because the 50% discount can be claimed at either trustee level or the beneficiary level.  That is, the trustee can claim the 50% discount at trustee level and accumulate the capital gain or distribute the capital gain to an individual beneficiary, who can claim the 50% discount resulting in a maximum tax rate being paid on the capital gain at the top marginal rate plus the Medicare levy.


There are potentially several small business CGT concessions that may be able to be claimed.  A small business entity is defined in section 328-110.  A taxpayer is a small business entity if the taxpayer carries on a business and satisfies the $10 million aggregated turnover test.


What we do
Since 1981, our firm has provided advice and assistance to property investors, first as Jansen Walsh & Associates, and later as Jansen Walsh & Grace.  You want a firm which has the specialist expertise and resources to take the purchase of your investment property through to completion with expertise.  You do not want to be working with a firm where the conveyancer works one day a week or where the time taken to deal with the purchase of your investment property can be far too long.  We can assist you in purchasing your investment property, whether it is

1.  a commercial property;

2.  a unit, apartment or townhouse;

3.  an “off the plan” purchase.

The information on this page is intended to help you if you are buying an investment property  We have another page with additional information if your superannuation fund is buying the property.   We have another page with additional information if you are a foreign investor.  We have information on a different page if you are looking for information on buying your own home.


The information in this website and the links provided are for general information only and should not be taken as constituting professional advice from Jansen Walsh & Grace.  You should consider seeking independent legal, financial, taxation or other advice to check how the information on our website relates to your own circumstances.  Jansen Walsh & Grace are not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of our website.

 

 





 

 




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Financing your investment

If you need finance for your investment, we may be able to help you in two ways.  We can help you procure funding from our private lenders.  Alternatively, you can raise all or part of the purchase price through an offer seeking funds from investors either by the issue of shares, the issue of units or an interest.  We are here to advise on the best method.


Measurement of land
A copy of the title for the property will be attached along with a diagram showing its measurements.  It is important that you check these before you sign the contract.  If you subsequently discover that the measurements of the land do not match those shown on the title diagram, there may be nothing you can do about.  Where there is any doubt, a surveyor should be engaged before you sign.