Tax Deductions

Around April, May and June each year, Australian property investors should be looking at ways to minimise their tax. Capital growth or positive cash flow are the two main reasons why investors purchase residential investment properties. While tax minimisation should not be one of the main reasons for purchasing residential investment property, the claiming of tax deductions can improve your cash flow, making it easier to make the interest repayments and in turn assist you to hold the property for longer and enjoy the benefits of compound capital growth.

It is important for property investors to organise themselves before the 1st July each year.

While you should always consultant your accountant to develop your own strategies and take into account your own circumstances, many experienced property investors will prepay their interest for the next 12 months, prior to 30th June, especially if they have earnt an unusually higher income in the previous 12 months. By prepaying the next year’s interest before 30 June, you can claim it as a deduction against your income for the current financial year. In effect you are postponing your tax liability until the following year. Please consult your accountant to see if this is a suitable strategy for you.

Another area that residential investment property owners should focus on prior to 30 June each year is to complete any repairs and maintenance around the property. If done by 30 June, these expenses you can claim them as deductible expenses for the current financial year. To do this correctly, it is important to understand the difference between repairs and capital improvements because they are treated differently by the Australian Tax Office. Repairs usually result from normal wear and tear and are tax deductible in the financial year they occur. Capital improvements including structural renovations or major changes to the property are added to the cost base of the property and cannot be claimed as a tax deduction in the year they were occurred. Once again, check with your accountant to check whether your repairs constitute an immediate tax deductible expense or a capital improvement, before you do the work.

Every savvy residential property investor will have a depreciation schedule for each investment property they own. If you do not have a depreciation schedule for your investment property, engage a quantity surveyor to asses your property’s depreciable content and draw up a depreciation schedule for the property for the end of the financial year.

The Australian Tax Office lists 16 key areas in which rental property expenses can be claimed in Australia.

Many property investors are losing potential tax depreciation benefits by failing to take advantage of the taxation advantages offered through investment property ownership.

So, what can you claim?
You can claim expenses relating to your rental property but only for the period your property was rented or available for rent – for example, advertised for rent.

Expenses could include:
.: advertising for tenants
.: bank charges
.: body corporate fees
.: borrowing expenses (for example, stamp duty and legal fees on mortgages)
.: council rates
.: decline in value of depreciating assets
.: gardening and lawn mowing
.: insurance
.: land tax
.: pest control
.: property agent fees or commissions
.: repairs and maintenance
.: stationery
.: telephone
.: water charges, and
.: travel undertaken to inspect the property or to collect the rent.