Over the last 5 weeks you may have seen Goulburn First National Real Estate’s EOFY Segment featuring Jigsaw Tax & Accounting on our Facebook Page. There are many things to organise when it comes to tax time – but it doesn’t have to be stressful. Jo from Jigsaw Tax & Accounting has given 5 quick points to consider when getting your investment ready for that midyear craze.
1. BE AWARE OF THE CHANGES TO RESIDENTIAL PROPERTY TAX DEDUCTIONS
As a landlord it is important to be aware of the recent changes to the deductions on residential properties. The government announced in the 2017 Federal Budget that they have limited allowable depreciation on certain property repairs/improvements and travel deductions for your investment property.
Repairs and Improvements
In previous years, you could claim almost anything that was installed into the property to replace or make it ‘habitable’. Now, effective from 9th May 2017, anything purchased for the property (including ovens, dishwashers, air conditioners, etc.) must be brand new to be able to claim the expense.
In regards to travel, many investors own rental properties in other towns & states. The costs of travel to & from the property are no longer able to be claimed effective from 1st July 2017. You can still visit your investment property; however you just can’t claim it as an expense.
2. UNDERSTAND WHAT NEGATIVE GEARING IS & HOW IT WORKS
Negative gearing is something that’s often in the news. If you’re a current or potential property investor, it’s important to understand exactly what negative gearing is and the possible benefits and risks that come with it.
The concept is quite simple. The income of your rental property is less than the expenses on the property – so really it runs at a small loss. Negative gearing is based off the interest on your mortgage not the repayment – so any profits made is what is accounted for when being charged tax on your investment.
At the moment negative gearing is not as effective as what it used to be because interest rates are extremely low, however it is still worthwhile to make profit off your investment. Sometimes you just have to pay a little tax…
3. UNDERSTAND THE DIFFERENCE BETWEEN REPAIRS, MAINTENANCE & IMPROVEMENTS
As a landlord it is important to be aware of what property repairs, maintenance or improvements can be claimed.
The Australian Taxation Office (ATO) defines repairs as work completed to fix damage or deterioration of a property, for example replacing part of a damaged fence.
A deduction cost paid to repair a rental property can be claimed as an immediate 100% deduction in the year the expense is incurred.
Maintenance is defined as work completed to prevent deterioration to a property, for example mowing the lawns. Costs for maintenance of a rental property can also be claimed as an immediate deduction in the year the expense is paid.
Improving the condition or value of an item beyond its original state at the time of purchase is defined as an improvement.
These are classified as either capital works deductions or plant and equipment and must be depreciated over time.
Capital works deductions include renovations such as adding an internal wall and also includes items which cannot easily be removed from the property.
Plant and equipment items include removable items such as carpet and hot water systems.
4. WHAT TO TAKE TO YOUR ACCOUNTANT AT TAX TIME
When you are getting ready for the preparation of your Tax return it is essential that you provide your accountant with everything they may require to maximise your tax refund or minimise your tax liability.
It is imperative that you supply your accountant with detailed lists of all your income from the property and expenses, whether they be cash or non-cash expenses.
Cash expenses are expenses that are paid for in cash throughout the year like management fees and repairs.
Non-cash expenses are items which you can legally depreciate such as the actual building and fit out of the building.
Following is a list of the things you will need to collect and keep throughout the financial year to give to your Accountant at tax time.
For each investment property you own you will need to keep a separate folder to collate all your records.
•The address of the property
•The date of purchase of the property (preferably a copy of the contract)
•If you purchased a new property – a settlement statement & the purchase price of the property
•A copy of the depreciation schedule
•Copy of the council rates & the water rates & when they were paid
•The total income of the property (rental income statement)
•The total expenses incurred with all receipts
•Copy of your insurance statement/receipts
•A copy of your bank statement so your accountant can calculate the interest cost
•A list of any questions you may have of your Accountant
Without supplying all this detailed information to your Accountant they will not be able to maximise your return at the end of the financial year, and unless you do this you are inhibiting the rate at which you can reinvest. If you are ever unsure about what to take to your accountant – ask them, they are only a phone call away.
5. VACANT PROPERTY? RENTING TO FAMILY MEMBERS? HAVING MAJOR REPAIRS DONE?
It is important to understand the ins and outs of a vacant rental property, renting to a family member, temporarily removing your investment from the market and undergoing extensive repairs and maintenance.
The interest on the mortgage of your investment property can only be claimed if the property is legitimately available for rent. You will need to be able to prove that the property has been advertised for rent either privately or through an agency.
Renting to a friend or family member for below market rent?
The Australian Taxation Office states that if a property is rented at below market rent, only a percentage of your interest & expenses can be claimed.
The ATO has made a point that if the property is being rented for below market value it holds a share of ‘private interest’. When the property holds private interest it means you can only claim a percentage of the expenses because the market rate is higher than what you’re charging.
Deduction claims must be limited to the income earned while rented. This means that you aren’t actually claiming 100% of what you may be eligible for.
Having major repairs or works completed?
If you temporarily withdraw your investment from the rental market to renovate or complete major works, essentially the property is unavailable for rent.
The mortgage interest & expenses incurred during this time are not claimable. Even the council rates should be proportioned to be void for deductions during this time.
If you have made improvements in the property that can be depreciated over time, this can then be claimed once it’s back on the market.
For more information, click here to watch our 5 Part interview with Jo from Jigsaw Tax & Accounting Goulburn.