The federal Budget had mixed news for tax payers and property investors, but one thing became clear: the impact and importance of depreciation.
Blogger: Paul Bennion, Managing Director, DEPPRO tax depreciation specialists
One of the highlights of the 2014 federal Budget was the decision to impose a levy on high income earners to help reduce the budget deficit.
It is believed that around 400,000 taxpayers earning more than $180,000 will pay an extra 2 per cent tax with the introduction of this ''temporary budget repair levy'' for three years.
The measure will contribute $3.1 billion to the budget bottom line over three years from July 1, until June 30, 2017.
It is estimated that for someone earning $200,000 will pay 2 per cent more tax on the final $20,000 of their income, which equates to $400. A person earning $300,000 would pay $2400 each year for three years, while someone earning $400,000 would pay $4400 of levy.
However, there was some positive news for people owning businesses with the corporate tax rate planned to be cut by 1.5%.
These changes to taxation will likely see more high income earners invest in property to reduce their tax bill and also use a company structure to acquire these assets due to the lower company tax.
Already, DEPPRO has recorded a growing number of investors buying properties through their existing companies as a way to create wealth.
Initially, they buy a company property to operate their business from and then go on to buy other properties through this structure.
Despite this trend, there are still a large number of high income earners who do not own investment property.
For example, the proportion of households who own a second home such as an investment property is still relatively small in Australia.
The reality is that many top wage earners in Australia fail to maximize their tax benefits and built long term wealth through investing in property.
Even those high income earners who do purchase properties in Australia often overlook the important tax benefits such as depreciation associated with owning an investment property.
We estimate that only one in five residential investors make use of the tax depreciation entitlements which are available to all investors on all investment properties.
For an average property investment residential property in Australia this can equate to well over $100,000 in possible tax benefits through depreciation. A large proportion of these tax benefits are never claimed which means that each year hundreds of millions of dollars in tax benefits are lost every year by investors not claiming their legitimate entitlements.