Money Matters: Under the glitter lurk Gold Coast turkeys

By MARY HOLM

Q. I recently attended a seminar on negative gearing on Queensland properties.

The tax benefits and the whole scenario seem too good to be true.

My wife and I are retired and have two freehold homes with a value of around $450,000.

We have share investments of about $200,000.

Our income is around $40,000 a year, most of which is taxable at 19.5 per cent.

We have $20,000 from a legacy to invest, and a negatively geared property seems ideal.

A. Somebody out there must have done well out of negatively geared Australian property.

But I've yet to hear about it.

I have, on the other hand, heard a few horror stories about what some tax experts call "Gold Coast turkeys."

Some properties are over-valued to start with, and appreciate very little, if at all.

And when people visit their properties, they may find they're not quite as flash - or that the trip isn't quite as fully tax deductible - as they had been led to believe.

Sometimes the rental income from the property isn't as high as forecast.

Sometimes there are periods of no rental income at all.

Let's look at how these investments work.

If a property is negatively geared, the mortgage interest and other expenses are more than the rental income.

You make a loss on the property each year, which you can deduct against other income on your tax return.

It's nice to have that deduction. But you get it only because your costs exceeded your income.

Doesn't sound great to me.

The promoters of the properties no doubt told you that one of your expenses will be depreciation, which is not an out-of-pocket cost.

It's quite possible, therefore, to have a tax loss but not have to fork out money - or not much money - to cover a cash shortfall.

I bet, though, they didn't say much about the fact that, if you sell the property later at a profit, most or all of that depreciation will be clawed back.

Realise, too, that if your rental income isn't as high as predicted you might be dipping deeper than you ever expected to meet mortgage payments.

In the end, the only gain of much significance from most negatively geared property is the profit on sale - after the depreciation clawback.

Because you are geared - meaning you've borrowed to make the investment - a 10 or 20 per cent gain on sale can translate into a much bigger percentage gain for you.

The promoters would have highlighted that.

But I'll make another bet - that they didn't run through a scenario in which you sell the property at a loss. In that case, gearing works in reverse.

A drop in property value could wipe out all the money you put in. You might even have to come up with cash from elsewhere.

Another point: Because you're in a lower tax bracket, the tax losses that come with the investment aren't worth as much to you as to those on higher incomes.

Still dazzled by those promoters' pictures?

Would the addition of some fairly complicated accounting requirements - in addition to regular tax filing on both sides of the Tasman - turn you off?

KPMG tax partner Craig Elliffe points out that if you borrow from an Australian bank or other institution, you may have to deduct non-resident-withholding tax from the interest you pay, and send that money in to Inland Revenue.

There are some possible ways to avoid this.

The simplest is to borrow from an Australian bank with a branch in New Zealand, such as Westpac, AMP Bank or Citibank.

But you should get an accountant to check your situation.

You will probably also have to report to Inland Revenue on foreign exchange gains or losses on your loan, says Mr Elliffe.

And, he adds, "you should check out the position with respect to capital gains tax in Australia."

Who needs it all?

A couple of final questions to ask yourself:

Does it seem wise to own property in another country, where you're going to have to pay someone else to keep an eye on it?

And can you rely on them?

If the deal was really as good as the promoters say, why are they selling in New Zealand?

Why haven't the Aussies - who know more about property trends over there - snapped up the properties?

* Got a question about money?

Send it to:

Money Matters

Business Herald

PO Box 32, Auckland

or e-mail: maryh@journalist.com.

Please note: Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information.