I can’t promise that this blog will make the process any easier …(if only it were a magic wand!) but it should act as a guide, to outline some of the major things you need to consider at tax time, when you are a property investor or home owner.
1. Negative gearing: Most property investors are familiar with this term. Negative gearing allows you to claim the difference between the income and the costs relating to the investment property, as a deduction. This reduces your overall taxable income.
2. Deductible costs: There are a wide-range of costs you can claim as deductions if they are directly related to the daily running and ongoing maintenance of your property investment. It is worth holding onto all the receipts for anything you spend in relation to your investment property over the course of the year and asking your professional tax advisor about what you can claim and what you can’t. You might be surprised by what’s acceptable.
3. Depreciation: This is an accounting term that relates to the way that assets decrease in value over time. Property investors can claim ‘depreciation’ as a deduction from their overall income.
There are 2 types of depreciation:
• Buildings and foundations - some investment properties qualify for ‘capital allowance’ or ‘building allowance’ depreciation. In this case, depreciation is related to the building itself. It is based on the cost of construction, rather than the acquisition cost.
• Other depreciating assets. A property will ‘depreciate’ over time and it will also have assets that ‘depreciate’ too, such as kitchen appliances, floor, wall and window coverings, hot water systems etc. Depreciation is based on the ‘cost of acquisition’ (the purchase price). Prices of all of these items can vary greatly and they all decrease in value at different rates, so you will need expert tax advice to work out what’s acceptable to claim.
4. Capital gains tax: Capital gains tax is paid on an investment property when it is sold or otherwise disposed of. Generally speaking, your principal place of residence is usually exempt from any capital gains tax liability upon its disposal.
SMSFs are subject to a different capital gains tax treatment. Currently they pay a maximum of 10%, on the sale of a property if it’s held for at least 12 months. There are other considerations if the property is sold and the beneficiaries are in ‘pension phase’. Super fund assets backing the payment of a pension for example are currently not subject to tax – including capital gains tax.
5. PAYG variations: It is worth noting that you can fill in a PAYG Withholding Variation form with the ATO to spread your tax refund throughout the year, rather than having it paid as a lump sum at the end of the year. This can greatly help cash flow if you need it.
6. 100% Offset Home Loans: Important to remember: When the interest you are earning on the offset home loan account is deducted directly from the interest charged on your actual home loan you do not have to declare the interest earned on the 100% offset account as income, because Government legislation treats it as “tax free”.
7. Home Office: There are no real tax benefits for homeowners with a mortgage, living in the property, unless you are self-employed and have a home office. If this is the case, then you can claim some deductibles consistent with the running of your business.
These are just some of the main things to consider. Of course, different property ownership structures (for example partnerships and trusts) will affect the way that claims are made and the tax benefits of the claims.
It’s critical to remember that the ATO enforces strong penalties for false or misleading claims. Tax can be complicated and confusing, but to maximize your tax benefits it is worth taking the time to find a licensed advisor you feel comfortable talking to, and whom you can understand.
There are a huge number of online calculators available for calculating such things as tax and depreciation relating to your property, but these should only be used as a guide.
Also beware of ‘scams and schemes’ and remember, if it sounds too good to be true, it probably is.
I wish you all the best with your tax return 2013 paperwork, and remember to keep it filed safely away in case you need to refer to it again, or in case the ATO needs more information.
Contact us to find out how we can review your existing financial situation with a view to making tax time easier next year.