Maximise Tax Advantages at End of Financial Year
ISSUE 133 - JULY 2016
IN THIS ISSUE...
MAXIMISE TAX ADVANTAGES AT END OF FINANCIAL YEAR
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The End of Financial Year has rolled around again, and for property investors it’s a great time to ensure all your documents are in order and you’ve maximised potential tax benefits from owning your investment.
While tax returns don’t have to be submitted for a few months, there are some potential tax savings that need to be in place before the end of June 30, and the sooner your return is submitted then the any refunds are in your bank account and not with the ATO. So haul out those receipts, sharpen your pencil, talk to your accountant and make sure you take full advantage of all your potential negative gearing benefits.
What is Negative Gearing?
The key concept behind negative gearing is that costs associated with owning and managing an investment property can not only be set against the income for that property (reducing the taxable income from the asset), but may also be set against other income to reduce tax liability. A negatively-geared property is one where the cost of owning and managing the property is higher that the income received from the property. So, to achieve maximum tax advantages from negative gearing, it’s important to claim all eligible expenses. However, the Australian Tax Office has stated that property investment deductions are high on its list of problem claims, so don’t get caught out by some common claiming mistakes.
What are Eligible Expenses?
You can claim a deduction for related expenses for the period your property is rented or is available for rent. Some expenses are deductible in the year they are incurred whereas others, such as costs relating to buying the property and capital works deductions, either have to be spread over a number of years or are deducted from the profit on the property when it is sold. Your accountant can advise on what is the most beneficial way for you to handle these type of expenses.
- Management and maintenance costs, including interest, can generally be claimed in the financial year they were incurred. These include:
- Regular outgoings including body corporate fees, council rates, water charges, land tax, insurance and interest on an investment loan
- Costs associated with managing and leasing the property such as agent fees, advertising for tenants and travel costs incurred in inspecting your investment properties
- Repairs and maintenance costs such as cleaning, gardening, pest control, painting, plumbing
- repairs, etc...
What Expenses are Not Eligible?
If you have an investment property that is not rented or available for rent, such as a holiday home, hobby farm or other dwelling, you generally can’t claim income tax deductions for costs associated with it. If the property is available for rent part of the time, or is held in shared ownership, then only the appropriate proportion of the expenses incurred may be deductible. For example, only the interest expenses on borrowed funds used to invest in the asset are deductible, so if a loan has been used for an investment and another use (such as buying a car), only the appropriate proportion of the interest can be deducted. Not surprisingly, you can’t claim expenses you haven’t actually paid, such as water or electricity charges paid by your tenant.
Pay Forward to Reduce Tax
One way to increase your deductible outgoings is to pay expenses forward. For example, pre-payment of next year’s insurance premiums, strata levies or Council rates before 30 June means those expenses can be deducted this financial year. Interest payments on a fixed interest loan can also be paid in advance and may be eligible for an immediate tax deduction.
Don’t Forget to Depreciate
Depreciation is the annual decline in value on a property’s fabric and fittings over a standardised lifespan of the item. Only registered quantity surveyors are authorised to prepare depreciation schedules, but the cost of this depreciation schedule is also tax deductible.
A leading depreciation specialist, BMT Tax Depreciation, claims that every investment property can benefit from depreciation, with an average claim of between $5,000 and $10,000, and guarantee they will find double their fee in depreciation benefits. More information on tax depreciation is available here: https://www.bmtqs.com.au/tax-depreciation-overview.
The depreciation schedule can be handed straight to your accountant for them to calculate maximum depreciation benefits. In order to claim the cost of the depreciation schedule this financial year, as well as the deductions, the report has to be ordered and paid for before 30 June. The ATO also provides an online tool for straightforward depreciation claims at:
https://www.ato.gov.au/Calculators-and-tools/Depreciation-and-capital-allowances-tool/.
Prove It!
It’s important to keep all documentation relating to expenses you are claiming against your rental income. If your property is managed by an agent, you will receive a monthly statement of expenses, and will also usually receive – or can request – an end of Financial Year statement. Proof of additional outgoings will include monthly or an annual bank statement showing interest paid on loans, as well as travel receipts, invoices from suppliers etc. In addition, make sure you retain all documentation relating to buying the property as you may be able to claim these as capital costs against profits on the sale of the asset.
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SUMMARY
- Collect all statements and receipts of income and outgoings for eligible immediate claims
- A depreciation schedule may identify additional tax deductions, and is tax deductible
- Consider paying expenses in advance to claim deductions this financial year
- You can only claim expenses if a property has been rented or was available for rent
- More information: https://www.ato.gov.au/General/property/residential-rental-properties/
