How much of your “property education” is actually tax deductible?
Investing in property can be costly and time consuming - such as having to buy how-to books, attend seminars and pay consultants - so competent operators will welcome advice on which fees and charges they can claim through their tax.
Property taxation specialist Shukri Barbara said he was often asked which of these self-education programs are tax deductible.
They include:
- wealth creation using property as a class of asset
- learning about new trends in property values
- mentoring on property – both short and long-term programs
- consulting fees relating to management ‘assistance’ with property investments
To assist, Barbara has accessed ATO correspondence regarding an audit of a claim by a client. It helps explain which expenses are deductible and includes some of the ATO’s responses.
Basic principles of claiming deductions
An expense is generally allowed as a tax deduction if it is incurred in generating income - in this case rental income.
So, first, there has to be:
- Ownership
- A property has be owned before it can generate rental income, then there has to be
- Income
- Revenue from rent before a claim for a deduction is considered to have been incurred in generating that income. Finally,
- Nexus
- The expense has to have a nexus to earning the income i.e. incurred directly in generating the income e.g. agent fees, rates etc.
Timing is important if the expense is to be deductible. The expense has to be incurred after you own the property – usually after settlement.
Claiming deductions for education/mentoring/consulting fees
As regards coaching, some of the questions include:
- If the program relates to increasing wealth – no deduction
- If the program relates to acquiring/sourcing property – no deduction
- If the program relates to improving the value of a property – no deduction
- If the program relates to improving rental revenue – yes deductible
- If the program relates to reducing rental expenses – yes deductible
- If the program relates to getting better tenants – yes deductible
- If the program relates to better managing the agent – yes deductible
What if the coaching is for all of the above? – a proportion of the fees may be deductible
- What’s the ATO’s attitude? – If it sees expenses as capital related to increasing wealth the expenses are usually not deductible.
Unfortunately, as suppliers continue to change the descriptions on their invoices, and descriptions of their services, to enable the client’s fees to be deductible, some things still remain unclear as they have not yet been tested in the court.
The above approach is equally applicable to seminars and mentoring. A proportion of the fees will be allowed as a deduction where they relate to the revenue and expenditure side of rental properties. Otherwise they are not deductible. This is assuming the property is owned and earns rental income.
Sourcing fees
Sourcing fees – such as hiring a buyer’s agent - are considered a capital expense and part of the cost base of a property, along with property inspections and pest inspections. When calculating capital gains on resale, the CGT will be less as a result of this cost.
If the deal falls through and the property is not purchased, while the ATO will acknowledge that an expense has been incurred, it is not accounted for anywhere for tax purposes and cannot be claimed.
In which year is the claim deductible?
Where deductible, the expense should be claimed in the financial year in which it is incurred - usually the date on the invoice of the agreement with the provider. The contract/invoice date is the relevant one where payment is made by instalments.
What is the ATO’s view?
In an audit situation the ATO will review each person’s circumstances based on the facts. They will:
- look at the description of the services on the invoices from the providers
- test each claim and see if, in reality, that’s what is being charged
- look at whether the amounts are reasonable
- look up the provider’s website and see what they are promising and then compare it to the invoices
So, if the website only talks about wealth creation, while the descriptions on the invoices are very brief, the fees are likely to be not deductible. Otherwise, they may form part of the cost base for sourcing the property.
Barbara said investors could legitimately claim for the cost of ‘’lifetime membership programs’’ offered by spruikers even if they charge by instalment. The claim should be for the full amount at the time of the first instalment.
He said those generating income through real estate – such as real estate reporters – can claim for tickets for events such as home buyer ‘expos’.