In this article we will explore:
- Maximise your tax return
- Understand loan interest and how it can be claimed at tax time
- Borrowing expenses
- Repairs, maintenance and capital improvements
- Don’t forget to claim depreciation at tax time
- Stay compliant at tax time
- Prove it all with records
Maximise your tax return
The Australian Taxation Office (ATO) performed a review of individual tax returns last year and found that an astounding 90 per cent of investment property owners were making mistakes in their tax return. The most common errors were around loan interest, borrowing expenses, repairs and improvements.
If you’re a property investor, here are some tips for the new financial year that could help you avoid mistakes and save you thousands next tax time.
Understand loan interest and how it can be claimed at tax time
If you obtain a loan to purchase an investment property, the interest charged on that loan can be claimed as a tax deduction. However, there are some rules around this:
- the property must have been rented, or genuinely available for rent, in the income year the deduction is claimed.
- if the property was used for private purposes at any time throughout the year, the interest will be apportioned accordingly.
- if the loan was used for more than one purpose, such as to buy the property and a car, the interest must be apportioned into deductible and non-deductible amounts.
Don’t forget, you can deduct interest on loans for other purposes including:
- financing renovations
- repairing the property
- purchasing assets, such as air conditioners.
You can also pre-pay next financial year’s interest in a lump sum and claim it at tax time this financial year.
|Tip: Ensure you can provide proof that the property has been genuinely available for rent for vacant periods for your investment property.|
Borrowing expenses are those you directly incurred when taking out your investment property’s loan. If over $100, they can be claimed over the course of five years. If under $100, the full amount can be claimed in the same financial year.
Borrowing expenses include:
- lenders mortgage insurance
- stamp duty charged on the mortgage
- title search fees
- mortgage broker fees
- valuation fees
- loan establishment fees
- costs for preparing and filing mortgage documents.
They don’t include:
- capital costs involved in buying your property such as conveyancing fees, legal fees, title search fees, valuation fees, pest and building inspection fees incurred when purchasing the property and stamp duty
- the principal amount you borrow for the property
- loan balances for the property
- interest expenses (these are claimed separately).
For more information on what can and can’t be claimed at tax time as a borrowing expense, visit the ATO website.
Repairs, maintenance and capital improvements
When it comes to tax deductions, there are differences between repairs, maintenance and capital improvements.
- Repairs are generally made to fix the wear and tear or damage that occurs to your rental property. An example of a repair is fixing a broken kitchen cupboard.
- Maintenance generally involves keeping the property in a good condition. If you’re preventing or fixing deterioration of an item, it’s likely to be maintenance. An example of maintenance would be painting an interior wall.
- Capital improvements occur when the condition or value of an item is improved beyond its original state at the time of purchase. Structural additions and renovations like adding a wall are considered capital works deductions. Adding removable or mechanical items like carpet, hot water systems and stoves are considered plant and equipment.
Repairs and maintenance costs may be fully tax deductible in the year they were paid, so long as the expense occurred as a result of your property being genuinely available for rent.
Capital improvements must be depreciated or claimed as capital works deductions, or as plant and equipment deductions, over time.
If you made an initial capital repair or improvement to a property after purchase but before renting it out, you can’t claim the cost as a standard tax deduction. These costs instead will be classed as capital works and claimed at 2.5 per cent per year over forty years.
Don’t forget to claim depreciation at tax time
Research shows 80 per cent of property investors fail to take full advantage of property depreciation and miss out on thousands of dollars in their pocket.
Depreciation is often missed because it is a non-cash deduction, meaning you do not need to spend any money to claim it.
Last financial year, BMT found residential property investors an average first year deduction of almost $9,000.
For those who haven’t been claiming depreciation, a BMT Tax Depreciation Schedule can help you claim back missed dollars and amend your tax return for the previous two financial years.
Stay compliant at tax time
The ATO audited more than 1,500 taxpayers with rental claims in the 2017-18 financial year and issued penalties worth $1.3 million.
From 2019, the ATO plan to extend its program of audits and reviews of rental properties and more than double the number of property investor audits to 4,500.
With the focus now on ‘over-claimed interest, capital works claimed as repairs, incorrect apportionment of expenses for holiday homes let out to others and omitted income from accommodation sharing’ it’s wise to ensure you are complying and working within the parameters of ATO legislation.
Given depreciation is such a large deduction, it’s important that it’s claimed while maintaining full compliance. When completing a tax depreciation schedule, BMT’s specialist site inspectors complete a physical site inspection. This substantiates any depreciation claim you make.
Prove it all with records
Maintaining accurate records is crucial. The standard rule is that if you can’t verify it, you can’t claim it.
MyBMT provides the perfect tax time solution, making it easy to track property income and expenses throughout the year. MyBMT can be used by property investors, accountants and property managers.
MyBMT allows you to track your rental income and property expenses such as loan interest, insurance, rates, body corporate fees and more. You can notify your accountant to keep them informed and download an annual report.
With MyBMT you can also upload property files, photos and receipts, ensuring you never have to worry about forgetting or misplacing receipts again.
Applying these financial tips and keeping records at the start of the financial year will streamline the tax time process and save you both time and money.
To find out more about how depreciation can help you save at tax time, Request a Quote or speak to our expert team on 1300 728 726 today.