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First Home – New Home Scheme 101

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This post aims to discuss important things to know about “First Home – New Home Scheme”

Information contained here is beneficial for readers who are planning to buy a new property or is interested in the real estate industry in general. However, for an expert advice or to clarify an intricate detail not covered by this article, it would be advisable to consult a professional conveyancing solicitor.

 

FHNHS Basics –

First Home – New Home Scheme officially commenced on January 1, 2012 but its rates will take effect on July 1, 2012.

 

FHNHS replaced FHPS (First Home Plus Scheme) but is very much similar to FHPS with one key difference – all exemptions, concessions, and eligibility criteria are only applicable if the property to be bought is brand new or a vacant lot where a new house will be built upon.

 

It is important to remember that FHNHS defines a new home as a house that has never been occupied or sold as a residential property. If said property has been renovated it is not classified as “new” unless the entire (or most of the) structure has been demolished and replaced. Please seek a professional conveyancing solicitor’s advice for clarification on this issue.

 

Under the First Home – New Home Scheme, qualified buyers of new homes, whose amount not exceed $550K, are exempted from transfer duty as well as enjoy concessions for new homes valued between $550K to $650K.

 

Additionally, stamp duty (other term for transfer duty) exemptions are extended for purchasers who will buy a vacant residential land whose value not exceeds $350k and are also eligible to receive concessions when said lot is valued between $350K to $450K.

 

Who are eligible for FHNHS?

Aside from the mentioned conditions above, the following are also required for eligibility:

>> Only individual payment structure is allowed (no Company or Trust)

>> Must be 18 years of age,

>> A citizen of Australia (if purchasing with a spouse or de facto partner, at least one must be a citizen)

>> Has not owned Australian real estate residential property (in any form).

>> If the partner has already owned a home or has received any form of benefit under the FHNHS scheme, the purchaser is excluded to receive concession and exemption

>> Procurement is for the whole new property and must be occupied within 12 months after purchase and stayed / live at for 6 months.

 

Investment Strategy Tax Considerations

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Aside from a good investment structure, you should also include tax considerations as a major part of your property purchase strategy.

This article aims to discuss three useful ways on how to reduce tax obligations. However, for a comprehensive approach on how to lower tax liabilities, it would be advisable to consult with your professional conveyancing solicitor as they would also advice on how to safeguard compliance and other “must-accomplish” tasks.

 

Land Tax –

The term land tax can be quite tricky as there is the so-called land value tax and property tax. Land value tax is the levy imposed by the government based on land only (the building or any other improvement done on the infrastructure is disregarded).

On the other hand, property tax (sometimes called as real estate property tax) is assessed from the overall property (land and building included).

 

Unless your property is within the Northern Territory, land tax is always payable – but can be reduced with the following strategies.

 

Lots with small land space but has a high density of occupancy –

As defined above, land tax does not consider infrastructure. A smaller area equates lower tax land. But this doesn’t follow that a small building should also be built on particular lot. A specially designed infrastructure can be used to maximize space and enticed potential buyers

 

Investing interstate –

This technique reduces land tax by focusing on spreading ownership concentration

 

Utilizing various investment structures –

Highly advisable for investors who owns multiple properties as land tax is assessed on an entity by entity basis.

 

Capital Gains Tax –

For any property investment strategy, capital gain tax is always part of the equation. In fact, it plays a major role since it is the levy imposed on capital gains – the profit procured from the sale of property which has been obtained at an amount that is significantly lower.

 

Capital Gains Tax usually depends on the owner’s taxable income at the time of selling the property. However, there are exemptions – and the most popular of which is the main residence exemption.

 

Under the conditions of the main residence exemption, CGT is waived when the property was used as the main place of residence. Additionally, a 50% discount is applicable if said property has owned with a minimum of twelve months.

However, it is important to remember that CGT (capital gains tax) discount is only applicable for individual, partnership, and trust investment structures – company purchase structure is not covered by this discount.

 

Negative Gearing –

One of the most commonly used term that comes up when it comes to property purchasing is negative gearing.

 

Negative gearing is generally defined as the amount used (or borrowed) of owning the property is more than the projected (or actual) income produced by the property. There are many factors that can contribute to negative gearing – some of which are listed below:

>> Maintenance and repair costs

>> Depreciation value

>> Loan interest payment

 

However, when properly handled, negative gearing can become a financial leverage. For instance, if a buyer of a negative geared property purchased the property with a claimable investment structure (partnership, individual, etc…), they can salvage a percentage of losses by claiming it against their personal income tax.

 

Tax considerations and procedures to lower different types of taxes can be quite complex. As mentioned, please consult with a conveyancing solicitor to determine the best approach on how it will have the most minimum impact on your overall purchase and financial strategy.

Things to know about Trust and SMSF Investment Structures

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Another effective (but usually poorly understood) purchase structure is the “Trust Investment Structure”. There are actually five popular purchase structures – and this article aims to discuss Trust and SMSF (Self Manged Superannuation Fund).

 

Before moving on, it is advisable to read the previous post as it contains the first three (Individual, Partnership, and Company) investment structures. Also, don’t forget to consult with a professional conveyancing solicitor about the legal and financial aspects of the purchase structure that suits your personal references and financial objectives.

 

Trust Investment Structures –

As mentioned, trust investment structures are effective but most often misunderstood as it is quite complex and difficult to maintain. Unlike other existing ones, executing a trust purchase structure involves a settlor, beneficiaries, a bunch of official (legal) documents detailing the establishment of the trust, and even has four sub-types (discretionary, unit, hybrid, and supeannuation).

 

For a general overview, a trust investment structure is advantageous in terms of (a) asset protection, (b) capital gain discount (if the property is owned for more than 12 months), (c) better than a company structure when it comes to regulations and cost.

 

On the downside, aside from being relatively complex, negative gearing is not passable to individual investors. It is also subject to both capital loss and rental loss quarantine. Lastly, property transfers can be quite tedious.

 

Self-Managed Superannuation Fund or SMSF –

A self-managed superannuation fund is generally defined as a form superannuation fund that allows members more control about their savings.

 

As early as 2007, many Australians are curious and researching the pros and cons of buying properties using SMSF. This is not hard to understand since (as mentioned on the paragraph above) SMSF give members more control of their savings – in this case, investors have greater control on how their superannuation is being invested.

On top of this, SMSFs provides excellent asset protection benefits, 15% rental income tax, and no more taxes when pension age is reached.

 

Unfortunately, just like trust investment structure, SMSF purchase structure is equally complex. Additionally, if regular home loans are straightforward, SMSFs have stricter rules and regulations that can be quite confusing for someone who is not familiar with the ins and outs of the real estate industry.

 

Seeking the advice of an expert is a good way to save you all the troubles of real estate jargons and confusion. A professional conveyancing solicitor would be able to discuss the full and intricate details of both trust and SMSF investment structures – its long and short term benefits, as well as the difference and what property structure to go for.

 

 

Investment Structure Guide and Tips

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One of the most important aspect to consider when purchasing a property is the so-called “investment structure” (sometimes referred to as purchase structure).

Investment structures are not universal and there is no single perfect formula as it usually depends on the buyer’s objectives and financial capability.

 

But what is a purchase structure?

A purchase structure is generally defined as the way on how properties and investments are legally owned.

 

There are five commonly used investment structures and it is recommended to seek the advice of a reliable conveyancing solicitor to explain the financial and legal details (and benefits) of a suitable one for your next purchase.

 

>> Individuals

>> Partnership

>> Companies

>> Trusts

>> SMSF (Self-Managed Superannuation Fund)

 

We will discuss the first three investments structures on this article and the last two on a separate post.

 

Individual Investment Structure –

Let us start with the most common and simplest form of investment vehicle – the individual purchase structure.

 

This is when a person purchases a property and uses his / her own name. Assets held jointly (a couple for example) also falls under this category.

 

The main advantage of this structure is that it is easy to setup and manage. This obviously follows minimal setup cost, less paperwork to accomplish, and smaller compliance cost. If the property is a residential home, this will also be advantageous as long as tax concerned.

 

If the investment is negatively geared, it might be tax effective today. However, one has to remember that negatively geared resources owned by an individual entity will eventually shift to being positively geared. This would then spell increase tax liability.

 

Another drawback of an individual investment structure is when the property is sold in the future. Unless inherited, profits from the sale (capital gains) will be subjected to tax.

 

Partnership Purchase Structure –

This particular structure must not be confused with a joint tenant account – though the term “partners or partnership” may include family members, friends, and mutual business colleagues.

 

Similar to individual purchase structure, partnership investments are easy and inexpensive to set up. Another cost benefit of this structure is that individual partners may contribute to the budget pool thus expanding overall financial resources.

 

Since this structure has ownership divided to different individuals, disagreements between partners are a usual concern. Shared earnings and distribution can become a potential issue when the property is sold. Joint or individual liabilities can also raise questions if problems will arise.

 

Company Investment Structure –

As the name implies, company purchase structures are most suited for business objectives. The main benefit of this investment structure is the 30% tax rate on profits and if utilized properly with a strategic investment plan, this could work well for the investors.

 

There are a couple of setbacks with a company investment structure and the main one has to be the 50% discount rate on capital gains cannot be collected. Additionally, establishing a company investment structure is complex and expensive to setup – and this goes true for management and control as well.

 

That’s just about. As mentioned, we will discuss both Trust and SMSF investment structures on another post.

For more information about the three structures discussed here, please consult with your professional conveyancing solicitor.

 

A Guide on Property Pre-Purchase Inspection Reports

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What are Pre-Purchase Inspection Reports?

A pre-purchase inspection report is also known as a building inspection report or standard property report. This written report contains relevant information about the property based on visual inspection. The purpose of which is to give the buyer a detailed overview of the condition of the property.

 

As the name implies, this report must be done before finalizing the property purchase – and depending on the contents of the building inspection report, the buyer may continue with the purchase or may back-out of the agreement if still within the cooling-off period.

 

In most cases, the conveyancing solicitor handles the pre-purchase inspection report (and other similar reports) However, it wouldn’t hurt to have a general idea of what are the contents of a standard property report.

 

Below are things / items commonly found on a standard property report:

>> Interior and exterior of the establishment

>> Walk paths and driveways

>> Roofing

>> Summary (a very important part of the report)

>> Date and scope of inspection

>> Name and address of the site inspected

 

Advantages of Pre-Purchase Inspections Reports –

The benefits of having a pre-purchase inspection report are not that hard to understand – the best of which is that it assists with cost negotiation.

 

Remember, a building inspection report contains a detailed overview of items that can be visually inspected. It contains information about major issues found on the property.

 

This report makes the buyer aware of faults discovered on the property during inspection. Obviously, these identified issues will affect the current value and final price of the property.

 

If a consensus cannot be reached between seller and buyer, the latter has the option to cancel the deal.

 

Another benefit of a pre-purchase inspection report is that an expert’s advice can be consulted if any identified problems today, will / can become a major concern in the future.

 

Who should do the pre-purchase inspection report?

It is never a requirement to sign anything on the spot. Be sure to consult and go over the contract details with your conveyancing solicitor. It is also recommended to ask your conveyancing solicitor if they could refer a reliable person to do the pre-purchase inspection report.

 

Since this report is of substantial value that may ultimately affect the financial aspect, it is important to hire the services of a suitable and qualified professional.

 

An experienced professional will know what things to look for, how to prepare the report, can even estimate the cost of repairs for any damage(s), and even spot cosmetic cover-ups trying to hide major faults in the property.

Important things to know about Property Cooling-off Rights

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When talking about purchasing or selling properties in Australia’s real estate industry, discussion of cooling-off period (sometimes also referred to as cooling-off rights) would commonly pop up in the conversation.

 

The conveyancing solicitor usually handles or gives out advice when it comes to this aspect. However, since property purchase involves exchanging a huge amount of money, it would be advisable to know basic and “must-know” information of your rights and obligation as a residential realty buyer in Australia.

 

Let us start by answering the question “What is cooling-off period?”

A cooling-off period is a period after purchase wherein a consumer has the right to cancel a purchase and return obtained goods (for any reason) to acquire a full refund.

 

This core concept also applies to property purchase but other conditions must also be followed.

In Australia’s real estate industry, cooling-off period is an agreed amount of business days (usually 5) wherein the buyer has the right to cancel the contract and walk away from the legal agreement for whatever reasons he / she may have (change of mind is actually considered as a valid reason)

 

When the cooling-period is finished, the buyer cannot back-out from the purchase and the stipulations stated on the sale contract be followed.

 

However, if the buyer do opted to back out within the cooling-period, the seller cannot do anything about it – though the seller may charge a small termination fee which is dependent on state / location.

 

It is also important to note that all property buyers are entitled to a cooling-off period – except for the following situations:

>>The states of Tasmania and Western Australia does not have cooling-off periods

>>When the purchase is made through an auction

>>Cooling off periods are only applicable for residential houses / areas (FYI please that lands whose floor area is more than 2.5 hectares are not considered residential)

>>Waiving the cooling-off period

 

Expanding on the last bullet, the purchaser has the option to waived the cooling-off period. By accomplishing 66W certificate (also known as Office of Fair Trading waiver), the buyer completely forfeits all cooling-off rights. Additionally, this process must be done a business day before contract signing.

 

That’s just about it. Please remember that laws may vary from state to state. Please consult a local conveyancing solicitor for further clarifications about the provisions of the cooling-off period and sales property contract.

Considerations during Pre-Settlement Inspection

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When purchasing properties in Australia, there is a thing called “Pre-Settlement Inspection” Those who are not familiar with the real estate industry may not be aware that in most instances, this so-called pre-settlement inspection is also known as a final inspection.

 

Contents contained in this post aims to discuss the following:

 

>>What is a pre-settlement inspection and why it is called as such

>>Importance of pre-settlement inspections

>>How does hiring a conveyancing solicitor helps during pre-settlement inspection

>>Useful tips on how to make a detailed inspection

 

Let us begin with the first bullet: what is a pre settlement inspection?

Property buyers in Australia are entitled to make a final check of the purchased property before finalizing any outstanding amount. This is the reason why a final property inspection is also called a pre-settlement inspection — because it is done before settling any remaining and unpaid balance.

 

Pre-settlement inspections are important because it gives buyers the chance to check the property before making full payment. It is possible that the property has incurred any damage, no longer complete, or is in a condition that is different from what is described on the contract.

 

One has to remember that once all outstanding balance is settled, ownership now goes to the buyer.

This frees the previous owner from any responsibilities and obligations regarding the property.

 

Conveyancing solicitors are professionals that give advice on when to do a final inspection and how to do it properly. Most conveyancing solicitors advise their clients to do a pre-settlement inspection on the morning of settlement day. This is to ensure that the property is intact and free of damage.

 

If there are any problems found during and after the inspection, the buyer will have to discuss this with the conveyancing solicitor. The conveyancing solicitor will then discuss all buyer concerns with the vendor. Depending on the negotiation, payment may be withheld until all issues are ironed out.

In most cases, the vendor shoulders all expense to fix any problems found on the property.

 

Tips and things to do during a pre-settlement inspection –

Before going to the site and making a pre-settlement inspection, it is would be advisable to be prepared and know beforehand the things to check out.

 

Make sure that the property is still or what is described on the contract. If something is amiss, be sure to take note of it. This includes any wall cracks, damages, missing fixtures, incorrect paint, etc…

 

Additionally, create a checklist of included and excluded items in every aspect of the property – like number of door locks / knobs, are all light fittings and bulbs correct and accounted for, is the carpet design correct, how about window coverings, etc…

 

Lastly, check if everything is operational. This ranges from AC the system, plumbing, heating system, , alarms, and all appliances.

 

Remember, don’t be shy to brought up any discovered issues or problems. That is what the conveyancing solicitor is for and be sure to get your money’s worth.

 

Property Auction Preparation Guide and Tips

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Every week, there are thousands of properties that are auctioned all around Australia. With numerous selections to choose from, one would think that it is a great opportunity in scoring a property that is within preference and budget – unfortunately, this is not always the case.

 

Not everyone is happy at these auctions. Some loses at the bid while others experience buyer’s remorse. Usually, such buyers are those that do not come prepared. Let us remember that there are other people who also wanted the same thing – a great property at a reasonable price.

 

Bidding and purchasing at property auctions in Australia is a serious matter and must be done correctly with the proper preparations. There are two main factors to consider which we will discuss individually:

 

>>Pre-Auction things to do

>>Actual Auction day preparations

 

Preparing before auction day –

Think of auction day as a battle to achieve a highly coveted prize (the property). Buyers are contenders that are willing to spend huge amount of cash. Because of this, it would be a great idea to be one step ahead by considering the following points:

 

>>Determine the reserve price

>>Actual inspection of the property

>>Choose an excellent conveyancing solicitor

>>Making an early move (pre-bidding)

 

First and second bullets are a common tandem. The reserve price is the amount that the seller wants – he / she would never accept anything below this price. If all bids do not reach the reserve price, it would be a case of what we call “passed in”. The seller may re-list the property or in rare cases negotiate a consensus some bidders (usually the ones whose offer is nearest at the reserve price)

 

After knowing the reserve price, it is imperative to check the physical property if it is worth the asking cost. Check the building for any sign of cracks or damage, pests, paint, etc…

 

If the property is worth a comfortable bid, it is time to look for a reliable conveyancing solicitor to handle intricate aspects like condition reports and contract checking.

 

In most cases, a copy of the property contract is provided by the seller’s agent. The conveyancing solicitor will check the contract for details (such as penalty interest dates, settlement dates, etc…) then discuss it with the buyer. There are certain cases wherein the buyer may want to modify some terms of the contract – don’t be shy to bring this up as the seller may agree to it.

 

Lastly, some sellers accept bids even before auction day. But of course, this should be an amount that is attracting to the seller. Also, before doing any bid, be sure to check financial aspects.

Apply for loans and have sufficient funds ready as bid winners are required to make deposits on auction day.

 

During auction day –

Pre-auction preparations are just half of the journey in acquiring that dream property. The auction itself is a different story.

Below are the common steps on how property auctions go:

  1. Buyers (bidders) will have to register to participate
  2. The auctioneer will give important need to know information like state laws, other relevant info about the property, and the starting bid.
  3. Bidders will now have the chance to shout out their bids

Property auctions can happen real fast and can be quite intimidating for first time bidders. This is the reason why it would be advisable to attend other earlier auctions (if there are any). This is to get a glimpse or feel of an actual auction. This is also a good way to observe bidding tactics of other buyers.

The auction will end when a bid matches or is higher than the reserve price. The winner will have to:

  1. Sign the contract
  2. Pay the deposit (normally 10% of the buying price)

Once the two items above are completed, the auction is officially complete. FYI please that the remaining balance must be completed on settlement date which is normally between 30 to 90 days after auction day.

Additional tips and reminders during auction day:

 

>>Properties purchased at auctions are commonly negotiated or agreed to not having a cooling period. The conveyancing solicitor usually informs the buyer of this information as it is most likely indicated on the contract.

>>Wait for a good opportunity to place a bid. Remember to observe first before making a bid.

>>Put a ceiling price. Don’t bid an amount that you are not comfortable with as you may suffer buyer’s remorse.

>>If the final bid is only a few hundred bucks above your amount limit, try to bid some more. Don’t lose that dream home just because of a few hundred bucks. But again, know and remember your limit and the price you are comfortable with.

 

That’s just about it. Property auction is a great way to secure that dream house. Remember the tips indicated here, choose a good conveyancing solicitor, and find the nearest property auction in your area.