With the end of the financial year only a few weeks away, now is the time to make sure you are up to date with the tax matters associated with owning an investment property. And like every year, there are a few rules and changes to keep in mind so that you stay on the right side of the ATO.
Here we outline some key tips for making the most out of your investment property this end-of-financial-year.
Know what you can claim
This is probably the biggest point of interest (and confusion) for property owners. In its latest brief Tax-smart tips for your investment property journey, the ATO lists the most common tax deductions open to property investors, including insurance, property management fees, rates and taxes (for example council and water rates and land tax), body corporate fees, cleaning and gardening, repairs and maintenance required while your property was tenanted and interest paid on your mortgage.
These are all generally deductible at the end of each financial year.
You can also claim a tax deduction over a number of years (i.e. depreciation) for items such as capital or building works including renovations, and the cost of borrowing.
Even older properties may still be able to factor-in depreciation.
If you personally manage your property investments from home, you may be in a position to claim for home office expenses including equipment including computers, telephone, printers; business related expenses such as phone calls and postage, home office furniture and even proportion of heating, cooling and lighting your home office consumes.
There are rules regarding home offices however, so check with your tax agent, accountant or the ATO, and ensure you have the records to back up your expense claims.
Rule changes for travel expenses
The ATO is constantly on the look-out for illegitimate deductions, so make sure you only claim for costs incurred while the property was rented, or vacant and genuinely available for rent.
In 2017, the government removed a number of common deductions from the list.
Most notably was the claim for travel to and from a rental property. The amendment was designed to close a loop-hole that saw a number of property investors claim for the cost of travel to their ski chalets or sun-drenched short-term rental properties over winter – apparently to ‘conduct inspections’. Unfortunately, the blanket ban also affects majority of landlords (especially those who aren’t corporations or trusts) who legitimately travel to their tenancies in order to undertake maintenance, do inspections or meet with tenants.
There are calls from respected organisations such as CPA Australia to amend the rules, but for now if you are an individual it is best to not try and claim for travel expenses, but be mindful to check again for changes for next year.
Rule changes to depreciation
The other major change was to depreciating assets in established properties that investors bought after 9 May 2017. An article by Melissa Browne in the Sydney Morning Herald, outlined the changes well.
Under the old system (and for properties bought before May 9th last year), owners could claim depreciation on individual equipment and fittings in a ‘second-hand’ home, such as air conditioners, hot water systems, solar panels – even carpets and blinds – that were already in the home when purchased.
Under the new rules, such items bought with the property can no longer be depreciated.
The good news is that capital works, including renovations, fences, driveways and retaining walls, can still be depreciated. As can assets bought by the new owner to go into the property. Similarly, the new rules don’t apply to properties purchased before 7:30pm on 9 May 2017, or to new residential properties or existing commercial properties.
The other positive according to Browne, is that since owners cannot claim depreciation on existing equipment, capital gains may be lower when it comes time to calculate CGT, and thus lower your CGT liability.
Negative gearing is safe for now
Despite robust commentary from all sides of politics, negative gearing has not been amended, but it is impossible to predict its future. The major concern is that by removing the negative gearing benefits, everyday investors with smaller portfolios will be the real victims.
A recent study by the Australian Housing and Urban Research Institute has suggested there is a valid compromise that would protect smaller investors, by creating different ‘bands’ of investors and stepped deductions where only those property investors in the top 25% of income earners would lose all their negative gearing savings.
It must be remembered that this is simply a proposal, so again, be sure to check for any changes in this space next year.
Get professional advice
With tax rules changing constantly, even for seasoned property investors, the best advice is to get the best advice.
Tax professionals and accountants are, naturally, the experts in minimising property owners’ tax liabilities through legitimate deductions and claims on expenses from a property.
Providing them with all the receipts and other documents they need, means that they can help you claim all valid deductions, and enjoy even greater returns from your investment, which is what every property investor wants to see.
This article is intended to provide general information only. It does not take into account your own financial or personal situation and must not be relied upon or regarded in any way as financial or investment advice. RT Edgar strongly recommends readers seek professional, expert advice before undertaking any investment decision.