When residential property markets turn soft or when there are only a few units left in a project marketers for developers will offer various incentives to entice buyers.
Blogger: Shukri Barbara, Property Tax Specialists
Incentives include furniture packages, guaranteed rental returns, discounts on price, cash rebates after purchase or rent subsidies to a minimum amount.
As they reduce the initial outlay, receiving these effective discounts are great in getting investors into the market.
However, their value should be measured against the expected capital gain to be derived or additional rental income after the incentive ends over the period of a property cycle.
More importantly what is the tax treatment and impact of these types of incentives.
Consider the situation of a younger investor who is purchasing an apartment off the plan being offered a choice of incentives. They can either take a $200 per week rent subsidy for 2 years ( valued at $200 x 52 weeks x 2 years = $20800) or a lump sum discount of $20,000.
From a tax perspective questions include what is the better alternative the subsidy or the lump sum?
Where the payment is termed an ‘incentive’ in my opinion the amount will be taxable in the hands of the investor regardless of whether it is received as lump sum or a weekly rental subsidy.
Where the lump sum is a ‘discount’ and appears on the contract of sale it will be considered of a capital nature reducing the cost base used for calculating capital gains tax on eventual sale.
A rebate is often used so the transaction can process at a higher price to be reflected on the official records such as land titles and services which report property statistics. These statistics are often used by bank valuers for determining the loan ratio to lend. If the figures reflect a higher value the investor may qualify for a larger loan. A higher valuation may also be used to justify the purchase price for other potential investors.
In my opinion a ‘rebate’ is also considered a reduction of purchase price and therefore should be treated similar to a discount as above.
The drawback with using rebates is that stamp duty is paid on the full price as the rebate is only given subject to the transaction settling.
To the developer providing an incentive/discount or rebate will be considered part of their operations and will have no impact on their bottom line or tax liability. But for the individual investor there will be some impact depending on their cash flow position and taxable income situation.
For the property investor trying to decide on whether to take the lump sum incentive or the weekly rent support/guarantee, consideration should be given to the following :
- Taking a lump sum up front will help with stamp duty and legals facilitating acquisition with lower outlays
- As an ‘incentive’ the lump sum may be taxable. The rate of tax will depend on the marginal tax rate of the investor.
- Taking the weekly rent support instalments, will also increase the taxable income for the year. It may however be split over two financial years where the purchase is made in the middle of the year.
- Taking the lump sum as a ‘discount’ of a capital nature reduces the cost base figure used to calculate on sale of the property. This may mean a slightly higher capital gains tax. Given property is generally a long term investment there is little tax concern until sale – at which time cash is available from the sale to manage the liability.
Unless the investor has very low taxable income and marginal tax rate for the financial year in which the purchase is made, where a lump sum is preferred the investor should negotiate for the lump sum incentive to be classified as a discount
To help with your decisions it is always best to discuss the deal and the options available for your specific circumstances with your Property Tax Specialist BEFORE committing to a transaction.
About Shukri Barbara
Shukri Barbara is a CPA with over 30 years experience in public practice and professional associations support service. He is a Certified Practising Accountant and a Chartered Tax Adviser, as well as Principal Adviser at Property Tax Specialists.
He is also a regular columnist in Smart Property Investment magazine.
DISCLAIMER: The above is to be considered as general education. This is not advice and it is not to be acted upon without professional advice from a qualified professional who understands your personal circumstances