Tax time is upon us, but be sure you know your rights and obligations before lodging a return with the ATO – your bank balance may well be the healthier for it.
Some property investors look forward to the beginning of a new financial year as a chance to tie up the previous year’s loose ends and claim what’s theirs; others dread it like they do a trip to the dentist. How painful it is tends to depend on how organised an investor has been during the year, and how easy it is to gather the necessary figures to fill in the tax forms required.
“Avnu’s landlord portal makes life so much easier at tax time,” says LJ Hooker Avnu head of property management Nick Georges. “It gives you instant access to repairs and maintenance records for the financial year, along with a clear record of rental income. All documents stored in the portal are downloadable and we can provide financial statements if required.”
What to claim… and what not to claim
Expenses are gold when it comes to reducing taxes and turning a property from positively geared to negatively geared, but being accurate is important to avoid attracting the unwanted attention of the tax office.
‘There’s no point paying more tax than you need to,” says Georges. “The biggest mistake investors make at tax time is not realising all the deductions they could be claiming, and how depreciation works when it comes to property.”
Property depreciation can be a handy tax break to know about because it allows investors to offset an investment property’s decline in value against the rental income. The ATO lets investors claim deductions on the decline in value of a building’s structure if it was built after 1985, as well as ‘plant and equipment’ assets inside such as flooring, blinds, dishwashers and ovens, no matter when a property was built.
Unfortunately, guesswork isn’t appreciated by the ATO. For residential rental properties built after 1985, the services of a quantity surveyor will be required to calculate the deductible construction costs and prepare a tax depreciation schedule. For properties older than that, using the services of a depreciation specialist is a worthwhile investment – and the fees are tax deductible.
“We connect landlords with the relevant depreciation experts as needed,” Georges says.
There are many other expenses landlords can claim, but you may have to prove how much of the year a property has been rented out to do so. “A factor to watch out for is the crackdown on how much of the year a property is rented out, and whether you have split up the associated expenses accordingly,” says Georges. “You can’t claim a full year’s council rates, for example, if you only rent out a holiday house for half the year and use it yourself the other half.”
If a landlord’s intention was to rent out the property for the full financial year but it stood vacant for part of it, the ATO will want evidence that the property owners (or their property manager) has made every effort to find tenants for it. This can include evidence that the property has been advertised for rent, that it’s in good enough condition to appeal to tenants, and that the rent being requested is realistic.
As well as rent, the ATO considers the following as assessable income:
- Rental bonds retained (if a tenant’s rental bond wasn’t returned to them because of damage to the property or because they stopped paying rent)
- Insurance payouts (any compensation granted by an insurance company for property damage)
Follow this checklist of expenses that can be claimed as deductions:
- Advertising for tenants
- Bank charges
- Body corporate fees
- Cleaning costs
- Council rates
- Electricity, water and gas bills not paid by tenant
- Gardening and lawn maintenance
- Insurance costs
- Interest on investment-related loans
- Pest control costs
- Property management fees
- Quantity surveyor fees
- Repairs and maintenance costs
- Cost of accommodating tenants if the property is temporarily unfit to live in
- Security patrol fees.
Beware the temptation to claim the following expenses, which are not allowable:
- Costs related to buying or selling the property
- Expenses associated with times the property was not available for rent
- Travel expenses to inspect a property before buying it (and travel costs to inspect, maintain or collect rent from a property)
As of July 1, 2019, Georges warns that landlords may not be able to claim deductions for repairs on a property unless a licensed tradesperson with an ABN has carried them out. “Rest assured that every contractor Avnu hires to work on properties we manage is both licensed and reputable. It is much less hassle to have a property manager provide this service, and now it can pay off at tax time too.”
The end of a financial year needn’t be all about tax obligations. It can also present a prime opportunity for investors to assess how they are progressing towards their goals.
Tax time is a great time to assess how your property investment is tracking, If you’ve held the property for more than seven years and it isn’t generating the rental returns you hoped it would, is it time to offload it? Is your investment still helping you reach your short and long-term goals? These are questions you should be asking yourself at the beginning of a new financial year.
If an investment property has some built-up equity, Maxwell says it may also be time to look at whether to expand a property portfolio by using that equity to invest.
“Equity can be a powerful tool in building wealth through property, as long as you build in enough of a buffer to weather any ups and downs in rental income or market fluctuations.”
Property investors have until October 31 to lodge their tax returns, but use a registered tax agent to prepare and lodge a tax return and the deadline may be more flexible.
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