Tax matters Part 3 – Maximise your property investment deductions
Ensuring maximum cashflow is essential for your success as a property investor. And one of the numerous ways you can do so is by claiming as many legitimate, asset related deductions and expenses as possible at tax time.
A qualified accountant who has specific experience with the financial intricacies of property investment should always be appointed to look after your affairs.
I would strongly caution any investor against attempting to complete your own tax returns as it is a complex process, and you are likely to forego the optimal benefit of the full suite of claimable deductions, particularly full depreciation entitlements, without expert guidance.
Further, the ATO does not look kindly at property investors lodging unsubstantiated or incorrect returns, so any mistakes you make in reporting property related income and expenses could mean being hit with hefty fines. It’s just not worth whatever money you think you might stand to save going it alone.
To give you an idea of just how complex property investment claims can be, let’s consider the many items you can include, as well as things that have a few strings attached…
Property repairs and maintenance
Repairs and maintenance expenses are tax deductible. Repairs and maintenance involves bringing something back to its original condition, not improving it. If it’s an improvement then it’s regarded as a capital item, which you should be able to depreciate over the asset’s useful life.
Replacing an item or structure in its entirety is considered an improvement, not a repair (e.g. pulling an old fence down and rebuilding it is an improvement. Repairing the fence is a repair and is deductible).
Repairs undertaken immediately after you have bought a property are not deductible as they are improvements (because you are repairing the property beyond the state it was in when you bought it).
If you complete any repairs while the property is tenanted or between tenants and the property has been available for rent for the entire financial year, you should be able to claim the full cost of the repair. However, if you don’t meet these circumstances (e.g. you occupy a property, then move out and repair, then list it for rent and tenant it), you may not be able to claim the full cost, so be careful with the timing.
Investors may claim a tax deduction for depreciation of dwellings that were built after 17 July 1985. The building cost can be depreciated at a rate of 2.5% a year (4% if built between 18 July 1985 and 16 September 1987).
For investment properties bought after 17 May 1997, the cost base will have to be reduced by the amount of depreciation you have claimed since owning the property (cost base is only relevant for calculating CGT when you sell an investment).
If you haven’t actually claimed depreciation, you will still have to reduce the cost base by the depreciation you could have claimed over the past four years (at the same time you can amend your past four years’ tax returns to include the depreciation deduction).
However, if there is no way to ascertain the deduction without obtaining a quantity surveyor’s (QS) report, then you may not have to reduce the cost base (although the rules are very tight in this regard). In summary, if your property is built after 17 July 1985, you should claim a tax deduction for depreciation. If you don’t, you’re worse off.
For more information about QS services visit www.washingtonbrown.com.au – I use them for my QS reports.
Become tax-smart: maximising deductions
The key to maximising tax benefits is in good advice and good record keeping. In terms of advice, you should always share your entire plans with your financial adviser and accountant.
Even though you might think what you’re intending to do, or how you spend your income, will have no consequences in terms of your tax obligations, there might be certain things you can do to maximise your tax benefits or opportunities. As the saying goes, you don’t know what you don’t know until you know it.
Knowing when to arrange things like depreciation reports and property repairs, what upfront purchasing costs are deductible, writing off loan fees and the like can be invaluable. For example, if you own an interstate investment property you might be able to claim a portion of the cost of travel and accommodation to inspect and maintain that property. Claiming a tax deduction for your holiday sounds pretty good doesn’t it? It’s these kinds of tips you should be getting from your accountant or financial adviser.
Record keeping is also critical. You must religiously keep receipts of all expenses to ensure you have the correct support for claiming deductions – even if it’s in a shoebox! Including notes at the time of incurring the expense, outlining exactly what it was for, is also very useful. That way you won’t be left guessing what certain receipts relate to and why they are deductible. All receipts should be retained for five years.
Here are some examples of potential and some unusual tax deductions investors might be able to claim (obtained from Dale Gutherum-Goss’s Trust Magic book):
- Internet access fees – used for research and communication in relation to property investments.
- iPod – used for professional development materials, for background music or even to store photos of properties.
- Investment magazines – used for research and to keep up to date with any changes.
- Paying your spouse – to assist with management of the properties, research and the like.
- Gift vouchers – for all employees (spouse) at less than $300 a time.
- Home office – if a certain area of your house (e.g. a study) is used to manage your property investments you can claim a percentage of utilities, telephone and the like. You would normally apportion these expenses based on floor area and time.
Using a loan to pay for all your property-related expenses might also maximise your flexibility and future deductions. For example, assume you need to complete repairs to your investment property costing $1000. Most property managers would normally deduct these expenses from the rental income.
However, you could use a loan to pay for the expenses and put the $1000 of rental income in a linked offset account. The benefit of this is that you won’t incur any interest (as the loan is offset) but you will be able to access the $1000 of rental income (from the offset) and use it to pay for non-tax deductible expenses (like the weekly groceries). This is a lot more tax effective.
To read Part One of this 3 part series, click here, or to review Part Two, click here.
For more information on how you can manage and maximise your proper investment debt and maintain your cashflow, click here to contact us, or subscribe to receive regular post updates and industry insights.
Stuart Wemyss is a chartered accountant and founder of Property Tycoon Finance. Email: email@example.com
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