As a property investor, tax time isn’t simply a matter of lodging a return based on your group certificate. It is a more complex process that requires careful records keeping and the help of a qualified Accountant and a specialist Quantity Surveyor.
Getting it right isn’t just a matter of making sure you aren’t breaking the law, but also to ensure you are receiving all the deductions and allowances to which you are entitled. Property investment is Australia’s most popular form of wealth creation and to successfully get the yields you desire, you need to ensure accuracy and efficiency at this time of year.
It is far simpler to lodge your tax return if you have been keeping your records up to date since the beginning of the last financial year in July.
Keep your receipts organised, not just in a shoebox and maintain a ledger of all your incomings and out goings that relate to your property. Often your Property Manager can help you with this by providing a report on the rental income and any expenses incurred throughout the year.
Regardless of whether you plan to do your own tax return or use a professional Accountant, if you’re not conscientious throughout the year, you will almost certainly miss things. Being neglectful can cost you money, or, even worse, put you in danger of being audited if you have lodged an inaccurate return. Ask your Accountant for any checklists you can use to stay organised throughout the year.
Understand what you can claim
The Australian Taxation Office (ATO) readily makes all the information you need to find out what you can legitimately claim available. However, they aren’t going to hold your hand through the process, so it is up to you to learn the ins and outs of taxation and how it relates to you and your investment.
If you draw a loan, you can claim on the interest charges if the finance was for the purchase of:
- A rental property
- An asset for the property
- Repairs on the property
- Land where you intend to build a rental property
These deductions require careful records as you cannot claim for interest incurred when the property is used for private purposes. If the property is only used to generate an income for a portion of the year, then you can only claim on interest charges for that same portion.
A property that is used to generate an income is eligible for a depreciation claim. This includes both capital works for the structure of the building itself and plant and equipment assets contained in the property, for example the oven, dishwasher, curtains or blinds, carpets, air conditioners, hot water system and any furnishings that are included when letting it.
To claim depreciation, you need a comprehensive tax depreciation schedule that breaks down the property and assets into different categories. This schedule can only be compiled by a Quantity Surveyor. These professionals are skilled construction cost estimators who accurately detail the differing rates at which items depreciate and at which the original building can be claimed.
The rate of each individual asset in your property is determined by an effective life set by the ATO. For example, in a residential property the carpet has an effective life of ten years and rangehoods an effective life of twelve years.
For the building structure itself, residential property investors can claim capital works deductions at a rate of 2.5 per cent per year for a total of forty years. There are restrictions however dependent on the construction commencement date of the property or any additional works that have been completed during structural renovations of the property.
Examples of items which are considered to be capital works include the external bricks, walls, doors, windows, roofs and tiles as well as internal fixed items such as bathtubs, toilets, kitchen bench tops and cabinets.
To complete a tax depreciation schedule, a Quantity Surveyor will visit the premises, photograph every asset contained, take detailed measurements and complete the relevant research necessary to contact local councils and other relevant bodies to ensure that depreciation deductions are accurate and maximised.
When you spend money on your investment property, you are entitled to claim these expenses back. Fees such as rates and water levies, strata levies, insurance, repairs and maintenance and travel expenses incurred in relation to your income generating property can all be included in your tax return.
It is vital to keep ongoing, accurate records to ensure you have proof of the expense and the time frame in which it occurred. Once again, these claims are only valid for expenses that occurred when the property was being let or used to generate an income. If you used the property as your own private residence for three months of the year, then you can only claim for expenses for the other nine months.
It is possible to claim a deduction on expenses paid in advance, such as insurance or interest. This means that you will prepay for the next year, then claim it back in the current tax year. This can be a good tactic to offset a capital loss, however you must be careful to keep clear records to prevent it being claimed on in the next tax year.
Stay on track throughout the year
Tax time doesn’t have to be stressful. Provided you have maintained accurate records throughout the financial year, it will pass without too much extra work.
Your Accountant is a great source of information and they, like Quantity Surveyors are happy to provide advice all year round. To avoid the frantic rush to lodge your tax return by the end of October, obtain a depreciation schedule immediately on settlement of an investment property and if you are planning on completing any major renovation work to a property with an existing schedule, find out what implications this will have on the deductions you can claim. Your Accountant can also help you with setting up a Pay As You Go Withholding Variation (PAYG) to take advantage of the deductions regularly to improve your cash flow, rather than having to wait until the end of financial year.