7 tax tips for the end of the financial year
Smart property investors use all the legal tax rules to minimize their cash flow leakage and maximise their deductions.
The government encourages property investors to provide accommodation for those who need it by offering them a range of tax benefits.
While most investors know about the typical tax deductions, such as interest on loans, repairs and management fees, there are lesser-known ways investors can reduce their taxable income this financial year.
But be careful…the tax man is watching you, so make sure you stay within the rules.
1. Get a depreciation schedule
Property investors, like other business owners, can deduct the amount that assets used to produce income have declined in value over that financial year.
This is called depreciation, but estimating the sum that can be claimed is complex, so it’s wise to instruct a quantity surveyor to prepare the most appropriate report for your property.
By the way…their fees are tax deductible.
2. Pre pay interest and expenses
If you have borrowings against your investment it is worth considering whether pre-paying next year’s bank interest (if fixed) or certain expenses to gain an immediate tax deduction in this financial year would be of benefit.
This strategy is particularly useful if your income is higher than normal this year.
3. Replace low-value items now
While depreciation for expensive items such as hot water systems is claimed over several years, it is possible to claim a 100 per cent deduction for items costing under $300 in the year the items are purchased.
4. Don’t forget to claim borrowing expenses
The costs to take out a loan for your investment property, including establishment fees, mortgage stamp duty and mortgage broker fees can be also be claimed, although these deductions must be spread out over five years.
5. Keep your receipts
With the ATO examining property investors claims more carefully than ever, you need to be diligent with your paperwork.
This starts with keeping all receipts as the ATO considers these verification that you’ve spent the money.
At Metropole Property Management, we recommend allowing our team to pay for your property’s outgoings.
This way we keep track of all the paperwork and send you a statement with all your income and expenses for you to pass on to your accountant at the beginning of each financial year.
6. Find a good accountant
The taxation rules for property investors have become are complicated and sometimes downright confusing. And recent changes means some deductions are no longer allowed.
For example, the landlord cannot claim travel deductions for inspecting or maintaining or collecting rent for their property. And deductions no longer apply for items certain items that were previously depreciable.
A DIY approach may prove a false economy so find a property savvy accountant to prepare your tax returns.
Now, more than ever it’s important that you get good advice from your accountant on what you can and can’t claim, as well as on structuring your investment for maximum effect.
Fortunately your accountant’s fees are tax deductible.
7. Don’t cheat
The ATO is cracking down on dodgy deductions and the penalties can be up to double the tax plus interest.
They are looking carefully at maintenance and repair claims that are really improvements and can’t be written off straight away and false claims for holiday homes are Directly in the tax man’s cross hairs.
What are your obligations?
If you want to maximise your deductions, it’s important to know how to best manage your tax claim.
For the most up-to-date requirements regarding taxation and residential rental properties, you can refer to the Australian Taxation Office (ATO) website.
But in short, as an owner of an investment property owner you must be able to demonstrate that you’ve made every effort to rent your property out.
Some of your considerations might include:
Collecting and producing evidence that it’s been advertised for rent
Making sure the property is in good enough condition to attract renters
Setting a realistic rental price
Removing unreasonable restrictions that may deter renters
What income must you declare?
You need to tell the Australian Taxation Office how much rent and rental-related income you received.
This could include:
Rental bond returns e.g. if your tenant defaulted on rent or caused damage to your property
Insurance payouts e.g. when you receive a payment to compensate for damage to your property
Letting and booking fees you received
Any amount a tenant pays you to cover the cost of repairs for which you then claimed a deduction (assuming, for example, the tenant has caused the damage themselves)
What property investors can’t claim as a tax deduction
There are some costs that you may consider tax-deductible, but which in fact are not. These may include:
Acquisition and disposal costs – although these may be added to your cost base for calculating CGT when selling.
Expenses not actually incurred by you, such as water or electricity usage charges borne by your tenants
Expenses that are not related to the rental of a property, such as:
Expenses connected to your own use of a holiday home that you rent out for part of the year
Costs of maintaining a non-income producing property used as collateral for the investment loan
Expenses incurred in relocating assets between rental properties prior to renting
Expenses relating to your personal use of the property
Interest expenses on loans where the borrower is not on the property title
to rental seminars about helping you find a rental property to invest in
to inspect a property before you buy it
Travel expenses from July 1st 2017 onwards
to inspect a property you own
for maintenance of a property
for rent collection
What property investors can claim as a tax deduction
The ATO will allow you to claim a wide range of expenses, subject to certain conditions and these may include:-
Advertising for tenants
Body corporate fees and charges
Annual power guarantee fees for electricity and gas
Gardening and lawn mowing
In-house audio and video service charges
Building, contents and public liability Insurance
Interest on loans
Preparation, registration and stamp duty expenses for lease documents
Legal expenses (excluding acquisition costs and borrowing costs)
Mortgage discharge expenses
Property agent’s fees and commissions (including prior to the property being available to rent)
Expenses incurred in attending property investment seminars to improve the performance of a current income-producing property
Quantity surveyor’s fees
Costs incurred in relocating tenants into temporary accommodation if the property is unfit to occupy for a period of time
Repairs and maintenance
Cost of a defective building works report in connection to repairs and maintenance conducted
Secretarial and bookkeeping fees
Security patrol fees
Servicing costs, for example, servicing a water heater
Stationery and postage
Telephone calls and rental
What property investors can claim over a number of years
Amounts for decline in value of depreciating assets
Capital works deductions
Loan establishment fees
Title search fees charged by your lender
Costs for preparing and filing mortgage documents
Mortgage broker fees
Stamp duty charged on the mortgage
Fees for a valuation required for loan approval
Lender’s mortgage insurance billed to the borrower