With tax time just around the corner, now is the ideal time for property investors to prepare for EOFY. This means taking the right steps to maximise claims and tax benefits and getting your documents in order to ensure your return is accurate and prepared properly.
Here is our EOFY guide to help make tax time a breeze this year.
Choose the right accountant
EOFY can be a rewarding time for property investors but it can also be very complex so it is crucial that you choose an accountant to suit you and your investment needs. It pays to have the right accountant to give you appropriate advice at tax time and to ensure you make the most of the incentives and deductions that you are entitled to – choosing an inexperienced accountant could mean that you end up paying too much unnecessary tax.
Make sure you have an accountant who is knowledgeable in the area of property and the associated taxation laws. If you already have an accountant, be sure to verify their experience in property, and if you haven’t yet found an accountant, take the time to do thorough research before selecting one.
Claim your expenses
One of the many benefits of investing in property is the long list of expenses that can be claimed at tax time, helping to reduce your taxable income. As outlined by the ATO, expenses that are tax deductible can include: advertising for tenants; body corporate fees and charges; council rates; water charges; land tax; cleaning; gardening and lawn mowing; pest control; insurance (building, contents, public liability); interest paid on your investment loan; property agent's fees; bank charges; repairs and maintenance; and some legal expenses.
With EOFY only weeks away, now is the time for investors to attend to achievable repairs and maintenance so they can be claimed in your tax return. It is important to note that certain improvements to an investment property may not be tax deductible – according to the ATO, there is a difference between ‘repairs and maintenance’ versus ‘improvements’. Some improvements may be claimed as a capital works deduction or depreciation, depending on the type of improvement. Be sure to consult with your accountant and refer to the ATO website for more information.
For new investors and those who have recently refinanced, it is also possible to claim other deductions such as mortgage broker fees, valuation fees, loan establishment fees, and lenders mortgage insurance.
If your personal situation allows, it may be beneficial to pay your property loan interest in advance. Check with your lender or mortgage broker about whether you can do this – some lenders offer this option on fixed rate loans. Paying next year’s interest early means that you can claim it as a deduction this financial year.
Property investors can not only claim on expenses but also on the annual decline in the value of their property’s structure, fixtures and equipment. This is called ‘depreciation’ and can significantly boost your return, potentially saving you thousands of dollars every year. Areas that can decline in value can include washing machines, ovens, window furnishings and some furniture.
In order to claim depreciation, an investor will need a depreciation schedule. This is a report that outlines all available tax depreciation deductions for the property. While this can be drawn up by an investor, it is advisable to have one compiled by a qualified quantity surveyor to ensure its accuracy.
It is important for investors to note that they cannot claim depreciation on an existing residential rental property if they entered into a contract to purchase that property on or after 7.30pm (AEST) on 9 May 2017. Likewise, investors who turned their place of residence into a residential rental property on or after 1 July 2017 cannot claim a deduction for the decline in value for depreciating assets that were already in the home, but can only do so for any new depreciating assets that have been purchased.
What you can’t claim
Property investors need to be aware of what cannot be claimed – it’s important to know what the law entails so you don’t waste time and money on purchases and other decisions that you cannot recoup come tax time.
For instance, travel expenses to inspect a property can no longer be claimed, including investors with a property a fair distance from their place of residence. Admittedly, this expense was once claimable, however the law changed in 2018.
Investors should also be careful not to use an investment property for personal use. This could include as a holiday home over Christmas and school holidays or providing free accommodation for a friend or relative. Whether it is used for a day, a week or a month, investors will not be able to claim against the period the property was used for personal purposes. Note that your claim will be apportioned for the period the property was rented out, where you used the property yourself or rented it below market rates.
Likewise, if investors have used a portion of the investment loan for the property and a portion for personal purposes, i.e. for a car purchase, then the personal component cannot be claimed.
Preparing your documents for tax time doesn’t have to be stressful or time-consuming if you stay organised. While this is somewhat obvious, make sure your paperwork is stored together in one location and be sure to keep all documentation related to your property. This should include anything to do with rental income (i.e. bank account and rental income statements), expenses (i.e. receipts for repairs or maintenance) and evidence of any efforts to rent out your property. Legally, you are required to keep paperwork for five years so it pays to create electronic copies to make it easier to store and access. Remember – if you don’t have proof of your expenses then you may not maximise your claim potential.
Another handy tip is to try to keep investment property expenses and loans separate from your personal life. Ideally, this means loans and expenses should come out of a separate bank account than where your personal expenses do. This will make record-keeping easier and quicker come tax time.
For detailed information about how to maximise your claim, visit the ATO website and speak with a qualified and experienced accountant.