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Crucial tax factors to consider include the need to keep excellent tax record; to ensure as much interest as possible is deductible; to check whether your method of ownership is tax-effective; and to revisit your negative gearing strategies.
Paul Banister, director of taxation services for accountants Grant Thornton in Brisbane, says the first half of a new financial year is a great time for tax planning. By thinking about tax planning early, you have plenty of time to take any necessary action.
Banister names accurate record-keeping as a fundamental priority for property investors. Good records will help maximise your opportunities for tax deductions and make certain that non-deductible capital expenses are added to the property’s “cost base” to reduce capital gains tax (CGT) upon the property’s eventual sale.
As part of their tax-planning, Banister suggests that landlords prepare a checklist of allowable deductions.
“Basically, this checklist [compiled as early as possible in a financial year] will help give you the discipline of writing everything down,” he says.
Property management firms typically provide their investor clients with an endof-year financial summary, setting out the costs incurred in relation to a property – including for regular maintenance. Banister says that if your property manager hasn’t prepared such a summary in the past, make sure you receive one in future.
An essential part of good tax recordkeeping involves having an accurate and up-to-date depreciation report from a quantity surveyor. Banister says investors should obtain a depreciation report upon buying a property or at least before they lodge their first tax return after its purchase.
It is worthwhile checking whether you are holding your investment properties in the most tax-effective way. If not, the next question is whether it is financially feasible to do something about it.
As Banister explains, many investors choose to hold a property in the name of the spouse with the lower marginal tax rate in order to pay the least tax on rental income and capital gains.
But the most suitable form of ownership from a tax viewpoint will depend on personal circumstances. For example, high marginal taxpayers receive the biggest tax benefits from negative gearing.
When making recommendations about how a property should be held, tax advisers consider such issues as how long a property is likely to remain negatively geared and how long the property will be owned.
Property owners who are thinking about changing ownership of a property from one spouse to another have much to take into account. Expect to pay stamp duty and property transfer costs, and possibly CGT on the transaction, warns Banister. Further, the transaction should make sense from an investment perspective.
Banister says it is a matter of “running the maths” to calculate whether stamp duty, transfer costs and CGT exceed the potential future tax-savings of changing ownership.
He suspects that in many cases, it would not be worthwhile to switch owners. As part of your tax check-up on your investment property, you should ensure that your line-of-credit or investment loan to finance the property is being used in both a tax-effective and cost-effective way.
“One of the biggest nightmares in tax compliance is where investors attempt to claim deductions for interest on a line-of-credit or a loan with redraw facility where payments [into the account] have been made and then redrawn for personal purposes,” says Banister.
“Just think of how it can play out over the whole term of a financing facility if borrowers just drop money in and take it out again for personal purposes. A proportion of the loan is not deductible; the challenge is working out which proportion. It is very labour intensive to pull apart each of the transactions.”
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