June 15, 2017
by Duncan Melbin
No one wants a run in with the ATO and it’s Auditors, but at CapitalQ we believe you shouldn’t have to give up the tax savings you are entitled to, just to stay off the radar. So here are some Year End Property Tax Tips and Traps, both simple and perhaps some slightly more sophisticated, to help maximise your property tax deductions and minimise the impact of tax on your disposable income and wealth building this year …
So if you own a rental property in a location some distance from your own home, you will of course have noticed the announcement in May’s Federal Budget limiting deductions on travel related to your rental property.
It’s an interesting one, many people considered such deductions as a bit of a scam, but the reality is there are lots of people who genuinely own investment properties that they need to travel to from time to time and this new law will affect them.
So, if you do need to travel to address a matter at your distant investment property you need to incur the cost for that travel before 30 June! That actually doesn’t mean you have to travel before 30 June, you just need to have incurred the expense.
Oh and to confirm, if you are a non-resident of Australia, this law change impacts you as well!
Traditionally when an investor acquires a property they are able, with the help of a Quantity Surveyor, to apportion the purchase price across the plant & equipment that comes with the property (ie. Air conditioning, stoves, etc).
However effective Budget Night (May 9th) this is no longer possible!
But, if your contract to buy your property was signed prior to 7.30pm Australian Eastern Standard Time on the 9th, you snuck in just before its too late, and this is the case regardless of when you actually settle.
One of the key elements that make negative gearing an investment property work, especially in the early stages, is depreciation on fixtures and fittings as well as building allowance (in effect depreciation of the building itself, though technically dealt with separately by the tax law).
Depreciation is a non-cash deduction, it doesn’t cost you anything, yet it can reduce how much tax you pay substantially, especially in the early years, and tip the balance in your favour in terms of overall cash flow.
So don’t delay, get your Property Depreciation Report prepared asap to secure your plant & equipment depreciation deductions.
If you know you are going to need to spend some money in relation to your property soon, then if you can pay for it before 30 June, you get the tax benefit in this year’s return rather than having to wait till the second half of 2018. This can include …
Note the work doesn’t actually need to have been done by 30 June, you just need to have paid for it and committed to have it done. So if you know something needs to be done, now is the time to lock it in.
Purchase any replacement fixtures and fittings that cost less than $300 before 30 June. If the cost is under $300, you can write it off immediately, no need to depreciate over time.
(Note: Even items that cost more than $300 could give a small benefit this year, from depreciation, but as it is calculated based on number of days held, there is only limited advantage in bringing these particular items forward.)
Pay your insurance renewal before 30 June. If you use EBM they are pretty good at helping in this regard, even where premiums aren’t due till August or September they often send out renewals before 30 June to give their clients the chance to pay early (helps you with your tax deductions and of course helps them with their cash flow, so win win).
You must have evidence of the expenses you intend to claim, so get them together now, it will only get harder as time goes by. Most obvious evidence is invoices and payment receipts, though worst case transactions on a bank/credit card statement could be enough (we caution against just relying on this).
If you are unlucky enough to be selected for an audit, you may also need to provide some evidence the expense was actually used for/related to your investment property. If you are considering “trying things on” first picture yourself in the CapitalQ Boardroom, with two ATO Auditors sitting opposite you … could you put your hand on your heart, look them in the eye and tell them “the expense related to my investment property”?
Consider prepaying next year’s interest on borrowed funds used to purchase (or fund improvements) to your investment properties.
This strategy is not for everyone, it can become a bit of a slippery slope, and it involves dealing with the bank which is rarely a lot of fun. But if your income this year is higher than what you expect next year’s to be, it can be advantageous.
On that note …
This year will see the last of the Budget Deficit Repair Levy being the extra 2% tax those earning more than $180,000 pay. So next year those individuals will have an effective tax cut of 2%!
If you are in this category, this creates even more incentive to get this year’s income down, even at the expense of an increase to next year’s.
Some things to consider if you have a new, or first time, rental property this year …
If you purchased an investment property this year, you likely paid some Council Rates, Water Rates, Strata Levies and possibly Land Tax at settlement. Precisely what you paid should be detailed on your Settlement Statement.
The rest of the costs associated with the purchase of your property are not tax deductible (ie. Stamp Duty, Settlement Agents Fees and associated disbursements, Buyers Agents Fees), they must be added to your Cost Base, but the four items above can and should be claimed in this year’s return!
Initial repairs to a property you just purchased or that you have just made available to rent (ie. It was your home and then you moved out and put it on the market for rent) unfortunately can not be claimed. These must be added to your Cost Base of your property.
If you rented out a property this year for the first time, you will need to apportion expenses that relate to both the period it wasn’t available for rent and the period it was. This can include expenses such as Council Rates paid before the property was rented but that relate to the period it was.
If your property investment runs at a substantial loss and therefore you are due a large tax refund at the end of the tax year, you can consider a Pay As You Go Withholding Variation. This means your employer is authorised by the ATO to withhold less tax from your earnings and hence you receive the benefit of the negative gearing effect throughout the year, rather than having to wait until the end of the year.
There is a little bit of work involved in such an application, and it is important to get it right. If you get it wrong not only could you find yourself with a debt to the Tax Office at the end of the year but you could also be hit with penalties and interest.
Of course if you do apply for a variation, make sure the extra money in your hands each pay is used for the right purpose, ideally paying down debts. If not, you are better off waiting till tax time, consider it forced saving!
Some may be getting a little down of late when considering their property investing activities. Capital growth has been slow, non-existent or even negative in recent times. And on top of that rents have dropped. But remember why you started your property investment journey …
You are looking to build long term wealth, ultimately aiming to achieve independence and freedom through your property investing. That process was not going to be easy, nor without its difficult times. It was also never going to happen over night.
You need to stick to your plans, stay strong, and avoid following the crowds. When everyone else is losing their cool, selling out, jumping ship, that is often the time to do the opposite when it comes to investing.
We have seen it time and again over many years including numerous financial crisis’, the Clients who listen to the media, follow the crowd, never get anywhere, its those who make their own, considered decisions, who invest for the long term that ultimately achieve their goals!
We are members of the Property Investment Professionals of Australia (“PIPA”) in addition to have extensive personal experience in all matters of property investing including residential rentals and development and commercial rental and development. If you are considering starting your journey towards wealth and independence through property, or just looking to expand your existing holdings, we will help you make it a reality and ensure you achieve your goals. So don’t delay, Contact us now!