Caclulation of total income with an IP
I’m a little uncertain how this is caululated when you have an IP
1. Say Im on $60K gross and my IP brings in another $10K rent. Does this mean I now have gross income of $70K ?
2. If it does mean I have a gross income of $70K then have I pushed myself into the top tax bracket and thus get a bigger tax break on the IP ?
i.e. 47c in the dollar instead of 42c when I recalculate my net income after the negative gearing effects that include cash loss and depreciation on the IP ?
Thanks
Sorry to say but any NETT income from property adds to your personal income for tax purposes.
So from what you have said, it looks like you are now in the top bracket…
Pete
…Beware of the dreamtakers…
Hi hwd. Yes, you add your income plus rent received, BUT you also minus deductions such as depreciation, interest, etc. Can be good or bad, depends on your gearing etc.
Regards
MartyHmm, now I think I’m talking gross income not net income. I understand the rent is added to my gross income to get total gross income. My property has no net income as it is cash negative.
The total combined gross income, I understand could push you into a higher tax bracket, giving you a better tax break when you claim your property deductions such as cash losses and depreciation.
Also if you get your gearing structured properly, you could find the optimal tax bracket you may want to be in. i.e. you may find that buy spending $500 you push yourself into a lower tax bracket that may overall provide more cost effective.
This is the aspect that I wanted to confirm.
Instead of talking about gross and net lets just talk about taxable income.
PAYG
Gross salary – work related deductions = taxable income. Let say this is $60k.Property
Rental – allowable deductions = taxable income. Lets say this is $8K.Therefore your taxable income is $68k. The tax payable on this is (excluding Medicare):
1st $6,000 = Nil
$6,001 – $20,000 = $2,380 (@ 17%)
$20,001 – $50,000 = $9,000 (@ 30%)
$50,001 – $60,000 = $4,200 (@ 42%)
$60,001 – $68,000 = $3,760 (@ 47%)
Total tax payable = $19,340 (average rate = 28%).As you can see only the additional taxable income over $60,000 gets taxed @ 47% so spending an extra few dollars to put you over $60,000 does not really change your position much.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auUsing Stuarts scenario including the Medicare levy you would pay $20,590 in tax for the year.
This figure would be higher if it were not for the deductions you are entitled to claim.
So you don’t pay 47% on the whole $68,000 it is broken down into parts as Stuart’s table demonstrates.
Hope this helps a little.
Thanks Stu and others.
Getting back to the main item $68K gross income with IP. So the 8K is taxed at 47c thus when you claim deductions they are ofsett at that higher rate. That’s what I meant in my query. I admit it aint much i.e 8000*.05 difference in the tax rates from 47c to 42c but its $400 or $7.69 per week in extra refund.
I’m a little confused about the other aspect
Is rent pluss gross salary total gross income ? Assuming net income from the property after all property deductions is negative. But my Gross income has risen due to rent effects. This is what I’m getting at. Thus I understand my taxable income is higher, but when I claim my property deductions against that I’m getting the bennefit of the higher gross income the then claim back. ie.
Looking at is from another angle, I guess if I did not have an IP but just earned 68K then I would be paying tax in the higher bracket, as I would not have IP deductions or cash losses.
I’m too tired I think I need some sleep. Been averaging 5 hours lately.
I got this from the ATO today 2002 – 2003 rates
0 – $6,000
Nil
$6,001 – $20,000
17c for each $1 over $6,000$20,001 – $50,000
$2,380 plus 30c for each $1 over $20,000$50,001 – $60,000
$11,380 plus 42c for each $1 over $50,000Over $60,000
$15,580 plus 47c for each $1 over $60,000OK had that cupa tea and cream bun and chocolate swiss roll, and am gathering my thoughts about the second point of lowering your tax bracket threshold.
Say I am close to the lower tax bracket limit after claiming my IP loss. Say after IP effects my new taxable income is 50,500 which puts my in the 42c tax bracket for tax re-calculation.
I have used 2002 – 2003 tax rates here.
i.e. $50,001 – $60,000
$11,380 plus 42c for each $1 over $50,000thus my tax is $11,380 + ( $499 * .42 ) = $11,589
No say I spent $600 on painting the property or general wear and tare repairs of one sort or another, prior to tax time. This would mean my taxable income would be less $600 being $51500 – $600 = $49900 Thus now I have fallen into the lower tax bracket calculation of ;
$20,001 – $50,000
$2,380 plus 30c for each $1 over $20,000thus my tax is $2380 + ( 29900*.30 ) = $11,350
Thus $12009 – $11350 = $239 difference in tax paid. I admit this is not much of a saving.! But in effect the tax saving has partly paid for the repainting or general repairs of $600. Also this $239 represents a $4.50 per week cash saving, by structuring the IP and costs with the tax system.
Hmm starting to look like no benefit at all actually when you consider that the expense of $600 would be deductible at the higher bracket also.
Oh well it was worth the mental exercise for me.
Anyway this is what I was getting at.
I have corrected the figures. I think
Hi hwd007,
I think I know where you are getting confused.
You must look at each property on its own….So if you are negative gearing, the property will cost you say $5,000 p.a. Before tax. (Don’t worry about your income for now.)
So this means that whatever your tax bracket is (say 47%) you will get back 5,000*47% = $2,350.
Ok now what happens if you earn $62,000. This means that you would get back 2,000*47% + 3,000*42%.
They key is to just look at the property by itself.
Actually becasue of this I have made a new spreadsheet that takes into account gross income rather than “tax brackets”. Because when you own several properties your tax bracket may changes for EACH property . This new spreadsheet will analyse a whole protfolio and tell you exactly where you stand with and without having properties. (and is much more accurate than my first version. Surpisingly so!)
Hope this helps.
APIM
Hi hwd007,
You will also need to be careful about what you are claiming as a repair, as it may actually be classed as an improvement and would have to be depreciated rather than be completly deductible. Check with the ATO or your accountant.
With my simplistic view I see it as basically the following:
Gross Salary = $A
Total Rent from IP#1 = $B
Total Rent from IP#2 = $C
Total Expenses for IP#1 = $D
Total Expenses for IP#2 = $E
Tax already paid (PAYG) = $FTotal income: $A + $B + $C = $X
Total expenses: $E + $F = $YTaxable income = $X – $Y = $Z
Work out the tax you would have to pay on $Z, if this is less than what you have already paid via PAYG ($F) you get a refund, if it is more, then you make up the difference between $F and $Z
Cheers!
PS: As I am not an accountant, I could be completely wrong [
]Sorry, typo …
Total expenses: $D + $E = $Y
thanks Birdy. I think you are on the money.
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