We’re just weeks away from the end of financial year, and for those who own an investment property, it’s an important time to ensure you’re fully prepared for tax season and plan for the year ahead.
Investment properties provide a number of tax benefits for their owners, but often investors are not fully aware of what they are eligible to claim or the intricate rules behind legislations the Australian Taxation Office (ATO) enforce.
To assist property investors, here are some tips to help get prepared for tax time, plan and save for the year ahead:
Discover what deductions you can claim
If you own an income producing property, you’re entitled to claim tax deductions for a number of expenses involved in holding the property.
Investors are usually aware of some of the deductions they can claim, such as interest on their loan, council rates, property management fees, insurance costs and repairs and maintenance. These are all cash deductions which can be claimed with the help of your accountant. However, property investors are also entitled to claim a non-cash deduction called depreciation. Because investors don’t need to spend any money to claim depreciation, a significant number are unaware of their eligibility and as a result they miss out on substantial deductions or can easily lodge incorrect claims.
What is property depreciation and how can you claim it?
Depreciation occurs as a result of the wear and tear which occurs over time to the structure of the building and fixed items as well as the plant and equipment assets the property contains.
To claim deductions for this wear and tear, the property owner must contact a specialist quantity surveyor to obtain a comprehensive tax depreciation schedule. Often investors assume their accountant will look after all of the deductions relating to a property, but when it comes to depreciation, a list of specific professionals are recognised under Tax Ruling 97/25 as having the skills necessary to estimate construction cost for depreciation purposes.
A comprehensive depreciation schedule will outline all of the capital works deductions an investor can claim for the structural components and all of the depreciation deductions which can be claimed for the plant and equipment components. The information in the schedule can then be used by the property owner’s accountant to process their depreciation claim when they complete their annual income tax assessment.
The fee for a tax depreciation schedule is also 100 per cent tax deductible. If you organise a schedule prior to June 30, this fee can be claimed back in the same financial year.
Discuss renovations with your quantity surveyor
Renovations can affect the likely deductions a property investor can claim. If you have purchased a second-hand property, work completed by a previous owner can be claimed on structural work which has been completed within the legislated dates enforced by the ATO.
The ATO stipulates that capital works deductions for the building structure and fixed items can be claimed for residential properties in which construction commenced after September 15, 1987. There are no such dates for plant and equipment assets. These items each have an effective life over which depreciation can be claimed set by the ATO and this effective life will be reset from the date of settlement.
If you’re planning on renovating an income producing property, speak with your quantity surveyor before starting any work. A depreciation schedule should be completed prior to starting the renovation.
If you already have a depreciation schedule in place and have completed any renovations to the structure of the building or replaced any of the plant and equipment assets, ensure to ask your quantity surveyor regarding updating your depreciation schedule prior to the end of financial year.
Additional deductions may be available for items removed and replaced during the renovation if they have any remaining depreciable value. A process known as scrapping allows investors to claim this remaining depreciation as an immediate deduction in the year the item is removed.
New items added during a renovation will also entitle the owner to claim depreciation, so an updated schedule will ensure investors receive the maximum deductions available during tax time.
Discuss capital gains tax (CGT) implications if you plan to sell
If you’re buying or selling an investment property, it’s important to discuss the implications of CGT with your accountant.
Currently, individuals or small business owners who hold an income producing property for more than 12 months from the signing date of the contract before selling a property will receive a 50 per cent exemption from CGT.
There are also other exemptions to be aware of if the property was your principal place of residence prior to becoming an investment property. A specialist quantity surveyor can also provide advice regarding depreciation in relation to CGT.
Ultimately, some knowledge of the tax deductions you can claim for an investment property and of these rules will help you to better prepared, plan for the year ahead and to save. Every deduction maximised results in more dollars in an investor’s pocket, which can help the owner to reduce their holding costs and save for the future.