Property
What low interest rates means for property investors
With the Reserve Bank of Australia (RBA)’s cash rate (market interest rates) set at an all-time low, you might find yourself thinking whether or not now is the right time to consider buying property.
When the banks pass on interest rate cuts to consumers, a low interest rate environment is one that’s highly favorable to borrowers – allowing them the opportunity to pay down their loans faster and owe less to the banks overall.
Given a mortgage is often one of the biggest debts you’re likely to take on in your lifetime, the interest rate environment we’re currently experiencing is great for property buyers. With current rates, you can find yourself saving tens of thousands of dollars over the duration of your 30-year mortgage – but it is vital that you contemplate other costs and agendas before investing in real estate.
Property investing is generally believed to be a more comfortable asset choice (the psychology of being able to see, touch and feel the asset in the real world plays a huge role in this), and it’s not uncommon to see property purchased as an asset by investors looking to add some diversification to their portfolios. As a long-term investment, it’s often seen as less volatile undertaking; while markets do fluctuate up and down, a property will almost always go up in value, given the right amount of time.
However, while many Australian’s are comfortable with the idea of property, it is also probably one of the most expensive investments to get into upfront. Aside from your mortgage, you will always find the following upfront costs associated with buying or building a property:
- Conveyancing and legal fees
- Loan registration
- Planning and building permits
- Stamp duty
- Transfer fees
Considering these expenses (and the liability of a mortgage debt) it’s worth looking at things with a more conservative outlook when contemplating property investment. If we apply the principal of accounting conservatism (where expenses and liabilities are overstated and assets and potential revenue are understated), we need to consider the worst-case scenario.
In today’s market, interest rates may be low but economic changes during your loan period are certain, so you need to consider what a potential future increase in interest rates might mean for you. Will you be able to maintain the investment if higher interest rates means an increase in monthly repayments?
Hypothetically, if you didn’t have the means to support your investment should interest rates go up, you may have to sell the property, due to unaffordability. In many cases when the property is settled prematurely the costs associated with buying, maintaining and selling the property far outweigh the growth and the income derived (and might even leave you with negative equity). That’s why it’s imperative that you know that you meet the income feasibility test early in the property buying process.
Thankfully, there are a few checks and balances in place before a bank will lend you money. Banks and other lenders will want to know about your income and will consider whether you’ll be able to continue making repayments at a slightly higher interest rate. It’s in their (and your) best interest to confirm that you’ll be able to service a loan in the long term. It’s also worth noting that while it’s always possible for a rate increase, current market indications strongly suggest that we’re unlikely to see increases any time soon.
If you’re thinking about property investment, consulting with a professional to help you consider all the variables in the context of your personal situation is a great place to start. An adviser can help you understand your ability to borrow, guide you through setting realistic targets and make sure you get the most out of your investments. As they say financial literacy is vital, “An investment in knowledge pays the best interest”. When it comes to property investment – if you’re in a position to do something, now is a good a time as any to act. To get started, speak to The Hopkins Group today.
Top reasons to get a building inspector through before settling your property
If you’ve purchased a property off-the-plan which is due to settle soon, you will usually receive a phone call to book in your final inspection as a matter of course. This call can often bring up a lot of questions, like how will you prepare? What you will bring? Who you will bring? What you will need to do at the inspection? Or even, what happens after the inspection?
With so many things to consider, we find many of our clients benefit from engaging the services of a qualified building inspector to help them through the process. But before we get into the benefits of using a building inspector, let’s cover off what a final inspection is and what it entails.
What is a final inspection, and when is it conducted?
Typically conducted 7-14 days prior to the settlement, a final inspection is often the first and last opportunity you’ll have to view a property before it settles and will usually be arranged by your sales agent to occur during business hours between Monday and Friday. Sometimes these inspections will occur while parts of a project are still under construction, so the builders may set rules such as wearing flat closed shoes or safety gear when entering the building site.
These inspections are designed so you can check the property meets your expectations according to the plan and information you were provided at purchase. If there are any defects or discrepancies, you can report these to the builder to have them rectified prior to settlement.
As the purchaser, it is your right to opt to have a proxy conduct the inspection on your behalf or bring anyone along to these inspections who may assist you through the process (within reason). Engaging the services of a qualified building inspector can assist in ensuring this process goes smoothly.
What is a building inspector?
A building inspector is a qualified professional who conducts inspections. A good building inspector will have experience working within the building and construction industry. They are familiar with the BCA (Building Codes of Australia) and can quickly identify any safety hazards or non-compliant building works.
What services can a building inspector provide?
Building inspectors will generally inspect the inside of the property (including any roof spaces, that are accessible) and the exterior. By getting into the areas you might not necessarily think to look at (or may not be qualified to inspect), you can get a more comprehensive picture of your property. A building inspector can usually conduct termite and pest inspections as well.
All inspections conducted by a building inspector will come with a detailed report including pictures and descriptions, which are usually well-received by builders, so you can rest assured defects detected will be addressed and attended to appropriately.
If you have purchased a house and land package, you can arrange a building inspector to attend multiple inspections across the various construction stages to ensure construction is always compliant with the BCA.
For an aged property that may require work, a building inspector can also determine what works will be required and even investigate and provide fix price quoting and coordinating trades and services.
If any defects are detected at your initial inspection, a building inspectors may attend a follow up inspection (if needed), to ensure the original defects noted have been rectified and confirm there are no new defects in the process of having the old ones rectified.
Arranging a building inspection
While The Hopkins Group does not offer building inspection services in house, we have cultivated relationships with many building inspectors across decades guiding our clients through their off-the-plan property purchases. If you’d like to find out more about the building inspection services we recommend to our clients, or to talk to us about a future property purchase, please don’t hesitate to contact us today.
November property market update
October Property Market Update
September Property Market Update with Brad Carlin-Smith
August Property Market Update with Brad Carlin-Smith
July Property Market Update with Brad Carlin-Smith
$600 million package to fix buildings with combustible cladding announced
The Victorian Government has today announced a $600 million package to fix privately owned buildings with combustible cladding across the state.
The grants will fund rectification works on hundreds of buildings, found to have high-risk cladding, to make sure they’re safe and compliant with all building regulations.
The program will be overseen by a new agency, Cladding Safety Victoria, which will manage funding and work with owners corporations from start to finish.
The State Government will directly fund half of the rectification works and will introduce changes to the building permit levy to raise the other $300 million over the next five years. This announcement comes off the back of recommendations made in the final report from the Victorian Cladding Taskforce, released today.
What does this mean for owners of affected properties?
Rectification of combustible cladding on buildings is complex and difficult – different solutions will be required for different buildings. There are many buildings requiring rectification and they come in many different shapes and sizes. Cladding may need to be removed to ensure safety in many but not all affected buildings. Rectification is a process that will take time, in large part due to the size and number of affected buildings and the nature of the building works to be carried out.
The Taskforce has worked with the Victorian Building Authority (VBA) to identify 15 buildings that will have their cladding fixed first. Work on these high-risk buildings will begin in the coming weeks.
How will I know if I am impacted?
The VBA has been engaged by the State Government to lead a Statewide Cladding Audit, assessing which privately owned apartment buildings are at risk. This audit is ongoing.
If the apartment building where you live or own is inspected as part of the project, you will receive a letter from the VBA. Building managers, building owners or owners’ corporations will also be contacted by the VBA prior to an inspection taking place. The results of these audits will be communicated to relevant parties, by the VBA, when available.
To be eligible for assistance from Cladding Safety Victoria, your property must first have been assessed as part of this audit.
Cladding Safety Victoria will be contacting owners corporations and property owners shortly, starting with those whose buildings are at the greatest risk.
Where can I learn more?
Further information regarding this announcement and the role of Cladding Safety Victoria can be found here.
The Hopkins Group is committed to keeping our clients informed of any updates/changes that may be relevant to them. We are interested to see how this initiative is executed over time and hope that it provides welcome support to those who may be at risk.
Changes to GST on property transactions
If you’ve been around in the tax and accounting game for a while, like I have, you might have noticed that ATO activity in the property arena has been steadily increasing over time. Whether it’s targeting big developers or property ‘flippers’, a quick search on the ATO website shows it is active in making sure taxpayers are correctly recording their income tax and GST liabilities relating to property.
In recent times, the ATO’s activity has been focused on taxpayers correctly remitting their GST liability on new residential premises. If you’re new to the property development game you might be thinking, “There is no GST on residential premises?” Well, that’s not entirely true. If the premises in question are ‘new residential premises’ then the developer must remit GST to the ATO if they are carrying on an enterprise. In my experience, this comes as a surprise to many first time developers.
On the other end of the spectrum, there’s regular developers who register for GST. They claim GST credits along the way, sell the property, but then wind up their structures before remitting the GST on the sales to the ATO. This failure to remit GST has become so common that they’ve made a term for it – phoenixing.
Enter the May 2017 budget, the government announces that they’re introducing legislation that will strengthen compliance with GST law in the property development sector. On 7 February 2018, that legislation was introduced in parliament and it received assent on 29 March 2018. This means from 1 July 2018 purchasers will be required to withhold the GST on the purchase price of new residential premises and remit the GST directly to the ATO as part of the settlement.
What will the new rules apply to?
The new rules will apply to supplies of new residential premises and supplies of potential residential land. New residential premises that have been created as a result of substantial renovations will not be subject to the withholding requirement.
When will they apply?
They will apply to all contracts of sale entered into on or after 1 July 2018. Contracts signed before 1 July 2018 will not be subject to the withholding requirement, provided the consideration for the supply (other than a deposit) is first provided before 1 July 2020.
Accordingly, the new rules will apply to existing contracts and those entered into before 1 July 2018 where the consideration for the supply (other than a deposit) is first provided on or after 1 July 2020.
How will the rules work?
Where a vendor makes a taxable supply of new residential premises or potential residential land, the purchaser will be required to withhold 1/11th of the price and pay that amount to the ATO on or before the day on which any part of the consideration for the supply (other than a deposit) is first provided. This will usually be at settlement and will be done during the settlement process by the conveyancers or property lawyers.
Where the purchaser pays the withheld amount to the ATO, the vendor will be entitled to a credit in its BAS equal to the amount paid by the purchaser. This credit will then be offset against the GST liability on the sale of the property, which the vendor is still required to report in its BAS.
The purchaser must pay the withheld amount directly to the ATO. Alternatively, they can provide the vendor with a bank cheque made out to the ATO. Provided they retain a record of the payment, no penalties will apply to the purchaser for a delay in the ATO receiving payment from the vendor.
Note, where the margin scheme is to be applied to the sale, the GST payable on the supply will be less than 1/11th of the sale price. Instead the purchaser will withhold 7% of the price.
Notification Obligations of the Vendor
To assist purchasers with their obligation to withhold, a vendor is required to give to the purchaser a written notice before the date the supply is made.
The notice must state whether the purchaser is required to withhold and make a payment to the ATO. If so, it must state the vendor’s legal name and ABN, the amount required to be paid, and when the amount is required to be paid.
Importantly, the notification must be provided in respect of all sales of residential premises not just sales of new residential premises.
Failure to provide the notice gives rise to a strict liability offence with a maximum liability of 100 penalty units, which is equal to $21,000 per infringement for an individual. If a company is the vendor, it will be liable for a penalty 5 times that amount.
With the threat of these penalties hanging over them, developers will need to be confident about their GST obligations at the time of sale and not a moment later. For big time developers, this won’t be an issue. My concern is for the mums and dads who are sub-dividing off the backyard and building a property on it, or buying an old knock down and building a couple of townhouses on it. Both scenarios are likely to attract a GST obligation.
Next Steps
If you are thinking about doing any sort of property development, it is important to consider the income tax and GST obligations of doing so from the outset. The team at The Hopkins Group are here to help you understand these obligations and assist you in achieving your financial goals.
General advice warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.