Tax deductions 1st time round

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From: Sheryl Young


Hi ya all!

I have not posted or joined the forum for some time BUT am about to move into a new family home and set up an investment property for the first time.

Now I've had the agents in for quotes etc. and am just sorting out the one who talks the least bull BUT can help me with a decent/acceptable rent.

OK....now the dumb question I wish to ask is.....I can claim things like insurance, maintenance, real estate agents fees, landlord, rates, and prop insurance, accountants fees and the interest paid on the loan, etc right? Well how much of all this is actually given back to me or deductible from my/partners income? All or some? I understand the depreciation of the prop stuff....I think...BUT are the tax deductions I claim all subject to diff rates?

Sorry for the lengthy post

regards S Young....newbie

 

[michaelg]

Reply: 1
From: Michael G


Hi,

Depends on a) ownership b) marginal tax rate. For example;

$100,000 home, owned 50/50 by you and partner. You earn $72,000 per annum and partner earns $46,000 per annum. Let's assume total deductions equals $10,000

Since the ownership is 50/50 the deductions get split the same so you get to claim $5,000 off your tax and partner does the same.

Ok, below is the tax rates
0 – 6 000 (Nil)
6 001 – 20 000 (17c for each $1 over $6000)
20 001 - 50 000 ($2380 plus 30c for each $1
over $20 000)
50 001 – 60 000 ($11 380 plus 42c for each
$1 over $50 000)
60 000 - ($15 580 plus 47c for each
$1 over $60 000)

So if you earned $72,000 then you paid in tax;

$15,580 + $0.47 x (72,000 - 60,000)
= $15,580 + $0.47 x $12,000
= $15,580 + $5,640
= $21,220

On the other hand your partner paid in tax;

$2380 + $0.30 x (46,000 - 20,000)
= $10,180

So before deductions you paid $21,220 in tax and partner pays $10,180 in tax.

Now, lets factor in your tax deductions.

You deduct $5000, that reduces your taxable income to $67,000, which means you pay the following in tax;

$15,580 + $0.47 x (67,000 - 60,000)
= $18,870

While on the other hand your partner deducts $5000 which reduces their taxable income to $41,000, which means they paid tax equal to;

$2380 + $0.30 x (41,000 - 20,000)
= $8,680

So if you paid $21,220 in tax before and pay $18,870 after your deductions then you save;

$21,220 - $18,870
= $2,350 (tax saving)

While your partner saves;

$10,180 - $8,680
= $1,500

As you can see the higher the income the more effective the tax deduction is. Why is that?, well in this case every dollar you reduced saved you paying 47c on the dollar whereas your partner only saved 30c on the dollar, that's why alot of people say its always more effective to have a negatively geared property in the name of the higher income earner (to save more tax).

Of course if that same property becomes positively geared than you would want to ensure you pay tax on the profits based on the lower income earner.

So basically deduction splits are based on percentage of ownership and tax rate is determined by size of income. I hope that helps? In not PLEASE see an accountant! (well go see one anyway)

Michael G.

 

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Reply: 1.1
From: Sergey Golovin


Wow,
What an excellent post. Thanks Michael.

Les I think that Michaels post deserves to be in the Property Investor Archive straight away.

Regards
Serge.

 

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Reply: 2
From: Sheryl Young


Thanks Michael it's MUCH clearer now and of course I am going to an accountant....it's just that I get anxious and you know, want to know it BEFOREhand....I have read about tax deductions and the highest income being the better way to go, but your post spells it out perfectly.

Serge is right it does belong in the archives

Thanks muchly again

Sheryl Young