Timely Tax Advice for Property Investors
Maximising tax deductions and leveraging capital in superannuation funds are under-utilised strategies for wealth creation by property investors, according to leading experts speaking at the Forsyth Real Estate Investor Information Night on 20 June 2012. Sponsored by the North Shore Times, the Investor Information Night brought together commentators on the local property market and depreciation and superannuation specialists to give property investors timely advice before the end of the Financial Year.
Anthony Booth of property depreciation specialists BMT Quantity Surveyors said that many property investors don’t bother with depreciation reports because they underestimate the potential tax savings or think that depreciation is only applicable to newer homes. In fact, BMT estimates that every property is likely to attract some level of depreciation benefits, whether it’s through depreciation on the construction of a property (Capital Allowance Deductions) and/or the fixtures and fittings (Plant and Equipment). Capital Allowance Deductions can be claimed on all income-producing residential investment properties built after 18 July 1985. For older homes, there may be opportunities to claim Capital Allowance Deductions against renovations and Plant & Equipment deductions against newer fixtures and fittings. In addition, investors who have properties in apartment buildings or other strata schemes may be able to claim depreciation against a percentage of common property construction and fixtures and fittings.
What can seem like small depreciation opportunities can quickly add up to significant tax savings, according to Mr Booth. He urged investors to remember to depreciate everything, particularly in a furnished apartment where every item that’s provided by the landlord can be depreciated. He also reminded investors not to throw away potential tax savings. If fixtures or fittings have to be replaced or are being updated, you can claim the residual value of items that are being scrapped as an immediate write off of assets. This also applies if you are knocking down a building. And you can start claiming depreciation on the replacement item immediately.
Another common mistake made by property investors is assuming that their accountant can prepare an appropriate or accurate depreciation report. In fact, Mr Booth told the audience, the Australian Taxation Office (ATO) states that accountants, solicitors, real estate agents and others are not qualified to prepare a depreciation report. For the report to be acceptable by the ATO for tax claims, it must be carried out by a quantity surveyor – and the cost of your depreciation report is also tax deductible.
Superannuation specialist Martin Jandera of Aspley Jandera, provided investors with some strategies for maximising returns through utilising capital in Self Managed Super Funds (SMSFs) for property purchases. The laws surrounding SMSFs are extremely complex, but offer a range of opportunities both to invest directly in property and also to borrow additional funds for residential property purchases, according to Mr Jandera. For example, through setting up a specific bare trust structure before buying a property, investors are able to borrow funds (usually up to 80% on a non-recourse loan) to leverage income and capital gains. This offers the potential to achieve a higher percentage return on the initial SMSF investment.
However, Mr Jandera warned that strategies for wealth creation by borrowing and buying residential property with your SMSF have benefits and limitations, depending on your age, work situation and goals. For example, any sales profit remains within the SMSF and attracts tax benefits, provided funds aren’t accessed until retirement. This means it may not be the best strategy for everyone. The ATO has announced that it will be actively monitoring SMSFs, so Mr Jandera emphasised the importance of consulting a superannuation specialist and develop a strategy that’s right for you, before investing with your SMSF.
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