Book Review > Rental Property and Taxation - An Investor's Guide - 3rd Edition

I’ll have to introduce this with two points. Firstly, a book on the taxation treatment of rental properties is never going to be a ripping yarn, nor a do not put down read. Secondly, after flipping through six pages of advertisements for mortgage brokers and the like, I was not pre-disposed to actually liking this book. Advertisements of that sort annoy me, and telegraph to the reader that there may be some ‘advertorial content’ within the text. (Note to editors/publishers, for goodness sake, stick those sort of advertisements at the back where they can be overlooked!)

Books about rental properties are plentiful, books that deal with ownership structures and taxation a little less so. Everyone wants to tell you that you can make a million dollars through property. Very few are prepared to tell you the paperwork that this will involve and the obligations that you, as a landlord, will have to lodge to our glorious taxation department from the day you put your signature on the dotted line. Many new property investors are not aware of their record keeping requirements, including the complexity of depreciation schedules and capital gains tax registers. Most new investors (and many more seasoned ones) do not grasp the importance of these records for each investor. Tony Compton does attempt to explain and simplify the labyrinth of taxation laws and their impact on the property investor and gets the message across reasonably well. He has included some pro-forma checklists which are useful, and could be used as a month by month guide to check how your property is performing.

Compton, as a tax accountant, has structured his book in the same manner as a tax agent would discuss your rental property with you at tax return preparation time, with education components thrown in along the way, such as in chapters 12 and 13 explaining the difference between negative and positive gearing. Although for a cashflow or yield investor only, this explanation wouldn’t be entirely satisfying, as it automatically includes capital gains in the positive gearing explanation “without a corresponding increase in property value, the negatively geared investor is destroying – not creating - wealth. The reality is, however, is that over a longer period of time the capital gains from a property normally exceed the net loss incurred after taxation.” (page 91) This strays into investment territory, is the author’s personal opinion, and no long term (50 year plus) statistics have been provided to confirm this.

Something that let the book down a little was the perfunctory explanation of two topics, capital gains tax and ownership structures. Compton explains the mechanics of capital gains tax, but does not provide any methods of offsetting those gains, such as salary sacrificing into superannuation. If a gain is always expected over a longer period, then reasonably addressing legal and logical methods of reducing those gains ought to be included in such a text, particularly as the author asserts that most investors are using property investment as a long term alternative to traditional superannuation.

In relation to ownership structures, Compton also fails to mention self managed superannuation funds (SMSFs) as owners of investment property, surely an investor segment that this type of book would appeal to. Whilst that would require another two chapters to adequately cover the in house asset rules of SMSFs, and the restriction on gearing, it is a failing of the book not to address this. Further, it is a failing of the book not to discuss the changes to bankruptcy that affects changes in subsequent ownership structures. That is, transferring the rental property to a trust immediately prior to declaring bankruptcy will not protect this asset from creditors and the line “asset protection is provided because litigation against a beneficiary cannot affect any of the trust’s assets” should have had an explanatory footnote to highlight this.

Compton has made a good job of addressing the loan options available to investors. He obviously dislikes interest only loans and cautions the property investors against them. While Compton has discussed split loans, he has failed to mention the new breed of ‘portfolio’ loans available to the investor. Compton has given the reader a good overview of what to claim and what oversteps the mark as far as the ATO is concerned, and the checklist at the beginning of Chapter 9 should be read by every property investor.

Compton also raises some points that the new property investor may not be aware of, including land tax. While handled well, it would have been useful to list each state’s treasury department website, so investors could calculate an estimate of their land tax for themselves.

He includes some statistics, but the source quoted is 13 years old, so you would have to question the current relevance of these statistics given the east coast has been through a property cycle and the west coast is in the midst of a property cycle since the publication of these statistics.

Overall, this is a very easy read in a very complex, and generally poorly handled, area. While not the definitive answer to taxation treatment, it is a book I recommend to any body who owns or is considering purchasing an investment property.

Cathryn Cavaney is a member of the AIA