October 2024
It’s October and, as Spring delivers a bracing mix of weather events from rain and wind to snow and hail in some parts, we’re looking forward to the longer, warmer days ahead.
In this issue:
– Selling your investment property? Watch out for tax
– Estate planning gives you a final say
– 5 smart ways sole traders can manage their money better
– Market movements and review video – October 2024
As always, if you would like to discuss the contents of this newsletter, don’t hesitate to contact our office.
Selling your investment property? Watch out for tax
If you are considering disposing of a property, it’s important to understand the implications so that there are no surprises when your tax bill arrives.
As with most investment assets, when you dispose of an investment property generally you are liable for capital gains tax. Capital gains tax (CGT) is levied when you make a profit on selling and is part of your income tax, rather than a separate tax.i
When you dispose of an investment asset, your capital gains and losses must be reported in your tax return. The capital gain or loss is the difference between what it cost you to obtain and improve the property (the cost base) and the amount you receive when you dispose of it.ii
The CGT event is triggered when you enter into the sales contract, not when you settle on the property.
Capital gains must be included in your tax return for the income year the property is sold, while capital losses can be carried forward and used in future years.iii
Under the 6-year rule, you may be entitled to a part or full main residence exemption if you lived in the investment property before renting it out. This rule allows you to continue treating a property as your main residence for up to six years if you use it to produce income.iv
Other taxes to check before selling
In most situations, you are not required to add goods and services tax (GST) to the sale price when selling an investment property.
GST does, however, need to be applied to the sale of newly built and redeveloped properties. This may apply even if you are not a business.v
In some states (such as NSW), land tax is levied on investment properties over a certain value, so it’s important to ensure you pay any land tax bills prior to selling.
How CGT works
When it comes to CGT, you pay tax on your net capital gains, which is your total capital gains less any capital losses less any discount you are entitled to on your gains.vi
An important factor in the CGT calculation is when you purchased the investment property and how long you have held it.
If you sell within the first year of ownership, 100 per cent of your capital gain will be subject to CGT. If you sell after 12 months only 50 per cent is subject to CGT. For example, if you sell your property two months after purchase and make a capital gain of $10,000, the entire $10,000 is subject to CGT, but if it’s sold after the first year, only $5,000 is subject to CGT.
Property acquired before 20 September 1985 is exempt from CGT as this was the introduction date for CGT.
Calculating your capital gain or loss
Correctly calculating your capital gain or loss requires you to identify all the legitimate expenses contributing to your property’s cost base.
This usually includes items such as the price paid for the property, costs of transfer, stamp duty and selling costs (such as advertising, accounting and agent’s fees).
You can also include the cost of owning the CGT asset (such as rates, land taxes and insurance premiums), but you are not permitted to include amounts already claimed as a deduction (such as depreciation and capital works).
If you acquired your property before 21 September 1999, you can index its cost base for inflation to reduce your capital gain.vii
For more information about the tax implications of selling your investment property, call our office today.
i What is capital gains tax? | Australian Taxation Office (ato.gov.au)
ii Cost base of assets | Australian Taxation Office (ato.gov.au)
iii CGT when selling your rental property | Australian Taxation Office (ato.gov.au)
iv Treating former home as main residence | Australian Taxation Office (ato.gov.au)
v GST and property | Australian Taxation Office (ato.gov.au)
vi Calculating your CGT | Australian Taxation Office (ato.gov.au)
vii Indexing the cost base | Australian Taxation Office (ato.gov.au)
Estate planning gives you a final say
Planning for what happens when you pass away or become incapacitated is an important way of protecting those you care about, saving them from dealing with a financial and administrative mess when they’re grieving.
Your Will gives you a say in how you want your possessions and investments to be distributed. Importantly, you should also establish enduring powers of attorney and guardianship as well as a medical treatment decision maker and/or advance care directive in case you are unable to handle your own affairs towards the end of your life.
At the heart of your estate planning is a valid and up-to-date Will that has been signed by two witnesses. Just one witness may mean your Will is invalid.
You must nominate an executor who carries out your wishes. This can be a family member, a friend, a solicitor or the state trustee or guardian.
Keep in mind that an executor’s role can be a laborious one particularly if the Will is contested, so that might affect who you choose.
Around 50 per cent of Wills are now contested in Australia and some three-quarters of contested Wills result in a settlement.i
The role of the executor also includes locating the Will, organising the funeral, providing death notifications to relevant parties and applying for probate.
Intestate issues
Writing a Will can be a difficult task for many. It is estimated that around 60 per cent of Australians do not have a valid Will.ii
While that’s understandable – it’s very easy to put off thinking about your own demise, and some don’t believe they have enough assets to warrant writing a Will – not having one can be very problematic.
If you don’t have a valid Will, then you are deemed to have died intestate, and the proceeds of your life will be distributed according to a statutory order which varies slightly between states.
The standard distribution format for the proceeds of an estate is firstly to the surviving spouse. If, however, you have children from an earlier marriage, then the proceeds may be split with the children.
Is probate necessary?
Assuming there is a valid Will in place, then in certain circumstances probate needs to be granted by the Supreme Court. Probate rules differ from state to state although, generally, if there are assets solely in the name of the deceased that amount to more than $50,000, then probate is often necessary.
Probate is a court order that confirms the Will is valid and that the executors mentioned in the Will have the right to administer the estate.
When it comes to the family home, if it’s owned as ‘joint tenants’ between spouses then on death your share automatically transfers to your surviving spouse. It does not form part of the estate.
However, if the house is only in your name or owned as ‘tenants in common’, then probate may need to be granted. This is a process which generally takes about four weeks.
Unless you have specific reasons for choosing tenants in common for ownership, it may be worth investigating a switch to joint tenants to avoid any issues with probate.
Having a probate is favourable if there is a refund on an accommodation bond from an aged care facility.
Rights of beneficiaries
Bear in mind that beneficiaries of Wills have certain rights. These include the right to be informed of the Will when they are a beneficiary. They can also expect to hear about any potential delays.
You are also entitled to contest or challenge the Will and to know if other parties have contested the Will.
If you want to have a final say in how your estate is dealt with, then give us a call.
i Success rate of contesting a will | Will & Estate Lawyers
ii If you don’t, who will? 12 million Australians have no estate plans | Finder
5 smart ways sole traders can manage their money better
No matter what line of work you’re in, if you’re a sole trader then managing your money is key to your success. Here are some tips on how to up your game.
When you’re self-employed or doing contract work as a freelancer, the flow of income is rarely steady and often in lump sums, followed by periods of drought.
Without control, it can be a feast-to-famine experience for sole traders as you go from spending big after receiving a lump sum, quickly followed by overloading your credit while you wait for the next payment.
So how do you manage the cashflow and minimise your tax while building your business and your wealth?
1. Know your financial position
It might seem like common sense, but many small businesspeople don’t have a true grasp of their net position during the year.
You must have a good set of books and accounts that show you your assets and liabilities, especially as you approach May and June each year.
This puts you in the driving seat, and with some guidance from your accountant you can look at using salaries or dividends, superannuation contributions, bringing forward or delaying income, purchasing or delaying equipment or stock to maximise your after-tax position.
2. Pay yourself first
Get in the habit early on of taking a basic wage for yourself weekly or fortnightly. It doesn’t have to be much to start with, but it should be enough to cover your very basic living costs.
Many people live off their savings while starting a business; it’s actually preferable to lend those funds to the business and set yourself up with a basic wage.
This sets a good habit in place, especially if you have a spouse, partner or family, as they rely on you.
They may support you in your endeavours, but a steady cashflow will help relieve their concerns. It also means you set a key business indicator (KPI) within your business to at least fund that payment, and this may often be your first real milestone.
3. Make the most of your assets
As a sole trader, you carry a much higher litigation risk than people in paid employment. Don’t underestimate how much risk you carry.
For those assets you do own, be sure to alleviate costs where possible, including the tax burden associated with the purchase and installation of significant assets.
4. Don’t lock money away that you may need in the short term
Many people try to pay down their mortgage as quickly as possible, as it is what can be considered ‘bad debt’ or non-deductible debt. We recommend this strategy but with a twist.
Every spare dollar should be placed in an offset account against your home loan or business loan instead of actually making additional capital repayments.
This has the same effect as making capital repayments and reducing your interest bill, but it allows you quick access to a source of short-term funding rather than having to redraw or use costly overdraft facilities.
5. Build wealth separate to your sole trader business
Yes, that old adage of not putting all your eggs in one basket still rings true, especially as we see economies, markets and trends changing so quickly.
While you may love what you do and believe that it’ll make you wealthy, it is always good to have a Plan B.
Putting funds away regularly into superannuation is building wealth in a structure that’s well protected in the event of bankruptcy.
Maybe do this with a view to owning your business premises in your own Self-Managed Super Fund (SMSF) eventually — make it part of your long-term business plan.
If you’re investing in property on your own, then make sure that you maximise debt on that property so in the event of litigation you have little of your equity available to creditors.
A lot of what’s involved in managing your money as a sole trader is about making a sporadic cashflow appear more stable; guaranteeing that you aren’t overexposed to your business to the detriment of your family wealth; and finally that you are protecting that wealth from business risks.
Source: MYOB July 2024
Reproduced with the permission of MYOB. This article by MYOB Team was originally published at https://www.myob.com/au/blog/sole-trader-money-management-tips/
Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.
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