Nine tax tips for property investors
With the end of financial year fast approaching, we thought we would provide some general tax strategies for property investors to consider:
1. Documentation: Keep summaries of all your rental income and expenses.
This is much easier if you have your management agent looking after your property where they pay all expenses and collect all income. They will normally provide a monthly and annual statement.
Ensure you have all bank statements showing interest expense. The annual statement should show a summary of interest expense.
A specialist property accountant can assist by ensuring all allowable tax deductions are made.
2. Depreciation: Only registered quantity surveyors are generally authorised to prepare depreciation schedules.
If you are contemplating a renovation a quantity surveyor can produce a scrapping schedule, which puts a value against all items to be thrown away. This value is expensed in the year of expenditure. The new items are then depreciated with a new depreciation schedule.
3. Travel: All your costs to inspect your investment property are tax deductible, including travel. Ensure you apportion any personal component.
4. Interest expenses: Only interest expenses on borrowed funds used to invest are deductible. It is the purpose of the loan that determines deductibility, not the security used to obtain the loan.
A split loan should be considered when a loan is used for both investment and private purposes.
If capitalising interest the Tax Office may require evidence of correct documentation and intention.
Interest deductibility should be easy but if not properly documented and managed this expense can cause frustration if the ATO decides to review and so the assistance of a specialty property accountant should be used.
5. Trusts: The use of a trust can be a major benefit to property investors by improving asset protection, estate planning and increasing flexibility. If using a trust ensure it has been correctly set up and operated to ensure you do not lose your interest deductibility, which is fully allowable by the ATO if you meet the requirements.
6. Pre-pay expenses: If you have a geared investment it is worth considering pre-paying next year's interest to gain an immediate tax deduction, especially if you're paying the flood levy this year. You can also get a deduction now by pre-paying next year's income protection insurance premiums. Also, consider bringing forward expenditure that would otherwise be spent after June 30. If you are planning on doing repairs on your property, note: Care should be taken in determining whether a maintenance or repair is deductible or if it is considered a renovation or of a capital nature. Consider pre-paying other expenses such as rates, levies or possibly even interest (in the right circumstances).
7. Manage capital gains: Capital gains generated during the year can be minimised by offsetting it against capital losses or trading losses incurred during the same year. To reduce capital gain generated on sale of property or other assets during the year consider selling any assets which have lost value and their future is bleak. The 50% discount on capital gains is available where an asset is held for longer than 12 months. As this is a considerable saving consider the timing of any sale. The relevant date for calculating capital gains is the contract date, not the settlement date.
8. Manage capital losses: Capital losses incurred in any year are available to be carried forward to future years if there are insufficient gains to absorb it in the same year. It can be carried forward for an indefinite period. Capital losses cannot be offset against other income such as business trading income if you've made a capital gain this year, review your portfolio to see whether it is worth realising a capital loss to offset the gain. You can't carry losses back. So if you've made a capital gain, you may want to trigger a loss to offset it against.
9. PAYG variation: Where you have negatively geared rental investments, the negative part offsets against your other income, e.g. salary, reducing your tax payable and resulting in a large refund when your tax return is lodged. This refund can be used to reduce your loan, pay your interest expense or help finance another investment property. To help with cashflow, would it not be great if you were able to access this refund throughout the year instead of waiting till the end of the year? This can help finance that extra property, which has potential to pick up some capital growth between the beginning and end of year. This can be done by lodging an application to vary the income tax withholding using a form from ATO. This can be done electronically on line or you can download the form, prepare and lodge it manually. PAYG instalment obligations should be reviewed and consideration given to varying the instalment for the June 2012 quarter, where the estimate of income tax payable for the year is less than the instalments raised by the ATO. This will reduce the impact of this instalment on your cashflow.
Ken Raiss is a certified accountant and director of Chan & Naylor national accounting firm. Ken’s experience lies in working with large publically listed multi-national companies, which gives Ken excellent insight into international market trends. Ken specialises in educating “mum and dad” property investors and small business owners with advice on wealth creation, asset protection, taxation, superannuation and compliance.