Property investors can find additional tax deductions and expenses claims
Nelson Alexander is urging property investors to be on the look-out for additional tax deductions and expenses claims.
Investors need to take the time to regularly review property depreciation allowances, maintenance costs and other expenses.
According to quantity surveyors who prepare property depreciation reports, about 20 per cent of Australian property investors claim for less depreciation than they’re entitled to or don’t claim for depreciation at all.
This can mean missing out on deductions worth many thousands of dollars. To avoid costly errors, pay close attention to these key tax areas:
Negative gearing
Few Melbourne investors miss a trick when it comes to using negative gearing. But offsetting losses from an investment property against a salary to generate a tax deduction should never be the be-all and end-all of an investing approach.
The percentage able to be claimed back is based on investors’ marginal tax rate, so the lower a tax payer’s income the less effective negative gearing will be. The biggest beneficiaries of negative gearing are the 250,000 Australians who earn $180,000 or more a year
The Australian Taxation Office allows these high-income earners to gear properties at the top marginal tax rate (45 cents in the dollar) but these tax payers only account for 2.7 per cent of all Australian taxpayers.
Wear and tear
Obtaining the full tax deduction for wear and tear is critical. The most valuable property losses are those investors can generate at little to no cost, and being able to claim for the decline in the value of a building and for wear and tear fits squarely into this category.
If an investment unit or house was constructed after July 1985 the Tax Office lets investors claim a capital works allowance to depreciate the roofs, walls and ceilings. Buildings built before July 1985 cannot claim for capital works, but plant and equipment (carpets, lights, ceiling fans, new bathrooms etc.) in all residential dwellings can be depreciated over their effective lives.
If an investor installs a new kitchen in a rental property, it is vital to keep the paperwork and receipts so a full claim can be made.
Paperwork
Investors often have the potential to write-off depreciation against taxable income but haven’t been given the necessary paperwork on depreciation allowances by the previous owner of a property. In other cases, building developers will provide less-than-accurate depreciation reports to potential buyers to assist with the sale.
These reports can be incomplete and include “guesses” about values that may be wide of the mark. It’s well worth having them checked by an independent quantity surveyor. The same applies to properties built before 1985. The previous owner may have a depreciation schedule that claims for the hot-water service, carpet and lights but not for the post-1985 extension or an older house’s new kitchen.
Tax planning
Boosting the bottom line should be investors’ main focus. One way to increase cash flow is to set up a “Pay as you go” (PAYG) withholding variation with the ATO.
The PAYG system lets investors take advantage of deductions regularly and means they don’t have to wait for a lump sum refund at the end of the financial year. With a variation, an estimate is made of investors’ expected tax refund for the year and their employer is given the go-ahead to take out less tax from wages.
This can be very useful for small investors looking to buy additional properties. When regular tax payments are minimised, an investor’s personal cash flow is freed up because his or her tax liability has been reduced based on the anticipated deductions for the coming year.
Other expenses
Nelson Alexander provides reporting systems that help investors keep track of their outgoings. The company’s property managers can provide investors with detailed information sheets on management fees, repair costs, advertising-to-tenant costs and the details of any losses incurred by a property being vacant for a short period.
