Tax Returns for Property Investors Made Easy
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Tax Returns for Investors with 1-5 Properties
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Frequently Asked Question
Frequently Asked Questions (FAQ) pages contain a list of commonly asked questions and answers on a website about topics such as Loans, Finance, Accounting, and SMSF.
- Regular rent payments: Money paid by the tenant to the property owner as rent.
- Advance rent: Rent received in advance, for future periods.
- Late rent: Rent which is received after it was due.
- Insurance payouts: If you receive an insurance payment, for example, for missed rent or damages, this might be considered taxable income.
- Non-monetary rental income: If services or goods are provided in place of rent (barter transactions).
- Letting and booking fees: If you get these fees passed on to you by your property management agency.
- Reimbursements: If a tenant pays for a repair or some other expense and you then reimburse the tenant.
A property investor maybe able to claim a range of expenses related to their rental property to reduce their taxable income. Below is a list of common deductible expenses:
- Interest: Interest on loans used to buy the property or to finance property repairs or renovations.
- Agent’s fees: Fees paid to property management agencies for the collection of rent, property maintenance, and other related services.
- Repairs and maintenance: Costs related to maintaining, repairing, or replacing damaged areas or items in the property. However, the distinction between ‘repairs’ (which are deductible) and ‘improvements’ (which might be added to the property’s cost base for Capital Gains Tax purposes) is important.
- Depreciation:
- Depreciation on plant and equipment: For items like appliances, carpets, and fixtures.
- Capital works deductions: For construction costs of the property, renovations, or structural improvements.
- Insurance: Premiums for building, contents, and landlord insurance.
- Property utilities and services: If the landlord pays for utilities like water charges, these can be deducted.
- Council rates and land tax.
- Cleaning: Both periodic and one-off cleaning costs, especially after a tenant vacates.
- Pest control.
- Gardening and lawn mowing.
- Bank fees: Fees associated with the maintenance of accounts or loan facilities used for the rental property.
- Stationery and phone: Costs related to managing the property, like phone bills or stationery for record-keeping.
- Legal expenses: Such as eviction costs or expenses to recover unpaid rent.
- Advertising: Costs to advertise the property for rent.
- Body corporate fees: For properties in strata schemes or community titles.
- Lease document expenses: Cost associated with preparing, registering, or renewing a lease.
- Quantity surveyor’s fees: If you obtain a depreciation schedule for the property.
- Sundry rental expenses: Other miscellaneous expenses directly related to the rental property or the earning of rent.
It’s crucial to keep detailed records and receipts of all your expenses. Some deductions are claimed immediately, while others are spread over several years. Due to the complexity of property-related deductions and the potential for changes in tax law, it’s recommended that property investors consult with a tax accountant or advisor familiar with Australian tax regulations.
A depreciation schedule is a comprehensive report that outlines the tax depreciation deductions a property investor can claim on an investment property over the property’s useful life. It’s prepared by a quantity surveyor or a suitably qualified tax professional and is used to ensure property investors claim their maximum entitled deductions.
Here’s how the depreciation schedule works:
- Two Types of Deductions:
- Plant and Equipment (Division 40): This relates to the assets within the property, such as appliances, carpets, blinds, air conditioning systems, etc. Each item has a different “effective life” as determined by the Australian Taxation Office (ATO). The deductions are based on the individual item’s cost and its effective life.
- Capital Works (Building Write-off, Division 43): This relates to construction costs of the building itself, such as bricks, concrete, roofs, etc. For residential properties, it’s typically deducted at a rate of 2.5% per year over 40 years, provided the property commenced construction after the 15th of September 1987.
- Calculation Methods:
- Prime Cost (Straight Line): Deductions are claimed equally over the asset’s effective life. For example, an asset worth $1,000 with a 10-year life can be depreciated at $100 per year.
- Diminishing Value: Allows for higher deductions in the earlier years of the asset’s life. The deduction is calculated as a percentage of the remaining balance each year.
- Immediate Write-Off: Certain low-cost assets can be written off immediately in the year they are purchased.
- Low-Value Pooling: Low-value assets (those which have an opening value of less than a specified threshold in a particular year) can be grouped together and depreciated at a higher rate.
- Depreciation Schedule Report: This document, typically prepared by a quantity surveyor, will list:
- Details of the property and its owner.
- Methodology used for calculations.
- Detailed breakdown of deductions for both plant and equipment, and capital works.
- Yearly totals for depreciation claim amounts.
- Limitations:
- Changes introduced in the 2017-2018 Australian Federal Budget mean that owners of second-hand residential properties (where contracts were exchanged after 7:30 pm on May 9, 2017) can no longer claim deductions for plant and equipment. However, deductions for the decline in value of capital works (Division 43) remain unaffected and can still be claimed.
- Record Keeping: It’s essential to keep a copy of the depreciation schedule report, purchase contracts, and all related receipts. If there were renovations or additions, keep details of those expenses as well.
Property investors should ensure that their depreciation schedule is both comprehensive and compliant with current ATO regulations. It’s recommended to consult with a tax professional to ensure accuracy and maximum benefits.
Basic Concept: When the costs of owning an investment exceed the income it generates, we call it negative gearing. With property investments, this happens when the rental income is less than the sum of interest expenses and other property-related costs.
Tax Implications: If you have a net loss from a negatively geared property, you can offset this loss against your other income. This reduces your overall taxable income and can lead to a tax refund or a reduced tax bill.
For instance, if you earn a salary of $80,000 and incur a net rental loss of $10,000, you only get taxed on $70,000.
Strategic Approach: Many investors choose or even aim to make a short-term net loss (negative gearing), hoping the long-term capital growth of the property will outpace these losses. This can result in a net profit when selling the property, especially in rising markets.
Capital Gains Tax (CGT): If you sell a property that has appreciated significantly over time, you must consider the Capital Gains Tax (CGT). However, if you hold the property for more than 12 months, you can benefit from a 50% CGT discount, reducing the taxable gain by half.
Risks: Relying on property appreciation brings risks. If property values don’t rise or even fall, you might incur long-term losses without any anticipated capital gain. A rise in interest rates can also increase borrowing costs and deepen the net loss.
Changes to Legislation: Over the years, many in Australia have debated the merits of negative gearing and suggested reforms. As of 2021, no major changes had taken place, but you should always stay updated on tax laws and potential legislative shift.