05/12/2012
Question: I refer to the September edition of YIP magazine. On page 34 there is an interview with Sam Saggers in which he makes the following quote: “The point of having six properties or more is that you pay little to zero tax and your portfolio is diverse and well exposed for growth.”
I was wondering how having six or more properties can lead to someone paying little to zero tax. Is it through negative gearing? I currently hold three investment properties, so I’m curious to learn how the tax I pay can be reduced through having a minimum of six properties.
Answer: I understand where you may be at, getting some reasonable tax deductions from the three properties you have; however the compounding effect of more properties also means you will smash into any tax you are paying. The properties do not need to be negatively geared, however newer is better, as there is more to claim. Personally, I love buying new properties, where returns are sitting at above 6% and where I can add say a furniture package that gets me a higher yield but also higher depreciation and tax losses.
One client I recently helped was on about $250,000 (granted a high salary, she was paying $90,000 in tax from her wage, and was able to claim $75,000 back by having six properties by the end of financial year). So now she is only paying 16% tax, this was all done without too much money flowing into negatively geared assets. Her portfolio is neutrally geared but it is not built around pre-tax positive cash flow strategies. BTW - You don't need to earn $250,000 for it to work for you. You just need the right properties. The principle is the same.
Also, I want to make it clear I’m not promoting negative gearing as an investment principle by itself, as to me, any potential tax deductions are simply a bonus of owning property. Without the assurance of significant capital growth or good rents, buying a piece of real estate to deliberately to lose money, simply to get tax deductions, is not clever. I see deductions as a benefit, not a fundamental principle of buying real estate.
The first way, I truly understood tax was when it was explained to me as follows.
You go to work a certain number of days a week for a certain number of hours, giving your time in exchange for money. It’s a system that’s been around for eons and is the quickest way to make money, though you shouldn’t get stuck in that process if you want to build wealth. Of course, I don’t encourage anyone to quit their job until they actually are wealthy, as it’s hard to become a property investor with no income, when nobody will lend you money.
The trouble with the system is that when you break it down into its separate days you’ll discover that every hour of work on both Monday and Tuesday – and, for some people, Wednesday as well – have benefitted nobody but the tax man. You don’t get a cent of it. So here’s the thing you need to know. If you have an income, PAYG or are in business, the law states says that as an investor you have the right to claim losses as tax deductions and reduce your tax legally when you invest in property.
If the average Australian bought six properties – the newer the better and the higher cash flow the better – they could legally claim back 80% of their tax for providing rental housing to the market. To put it more simply, the average Australian could actually claim back the money they earn Monday, Tuesday and Wednesday by owning six properties. It’s happened to me, and I am sure I am no different to you.
- Answer provided by Sam Saggers, Positive Real Estate
