A tax guide for property investors
Well, the end of the 2023 financial year has clocked over and we are now in the heartland of tax return preparations. Advisors across the country, their heads stuffed full of numbers, are attempting to minimise your burden and/or maximise your refund.
I’ve met plenty of accountants and they’re a very special breed. Some genuinely love nothing more than to wade through a shoebox full of receipts while deciphering the mad scribblings of their clients.
But the fact remains, if you can be across your tax information it will make for not only a faster return from the ATO, but could also mean more sweet, sweet dollars in your bank balance.
One group that can make very impressive claims is property investors. Unfortunately, unless you are right across tax law – and hey, who doesn’t want to while away their spare time poring over confusingly-worded legislation – then you are at risk of missing out on significant upsides in your tax return.
To that end, I’ve come up with three key elements property investors must tick off their tax-time checklist.
Depreciable items
While I’ve been banging on about this for a while now, it can never be said enough: a professionally prepared depreciation schedule could be the difference between receiving cash back or having to pay a tax bill.
A depreciation schedule identifies and lists the improvements, fittings and fixtures throughout your investment property that attract tax-deductible depreciation.
These depreciable works are identified as either capital works, or plant and equipment.
A capital works deduction describes the building structure and other assets permanently fixed to your investment’s structure. A capital expense is a fixed amount that can be claimed each year for up to 40 years.
Plant and equipment (division 40) assets, on the other hand, are elements that are easily removable. You can claim depreciation for the wear and tear of plant and equipment.
Fortunately, depreciation schedules are prepared by qualified professionals like me, so you don’t need to understand all the details personally. Through our vast experience and knowledge of current tax legislation, our specialist quantity surveyors can categorise what items will qualify, to what extent, and the manner in which depreciation can be claimed.
Once prepared, the depreciation schedule can also be used by your accountant for up to 40 years (although if you conduct any upgrades to the home, you must update your schedule).
Perhaps the most compelling of all is that our analysis showed that commissioning a depreciation schedule reaps a massive and immediate benefit in relation to return on investment. Of all the residential depreciation schedules we did in the 2022-23 financial year, we found that the investor was returned 14.5 times our fee on average in the first full year and 370.8 times our fee over the full 40-year period. There are almost no other cost outlays I can think of delivering that level of return.
There are three triggers that should tell you whether a depreciation schedule is justified:
- The property commenced construction after 16 September 1987
- The property was renovated after 27 February 1992 by the previous or current owner with a renovation value exceeding $40,000
- You bought the property brand new
End-of-year statement
Ongoing repairs and maintenance conducted on your property are claimable against your income.
Repairs describe wear and tear or other damage that’s resulted from having the property rented out. For example, fixing a broken window. Maintenance describes works carried out to ensure you property remains in a rentable condition, such as repainting walls or resealing decks.
The key is to ensure you are correctly capturing and categorising your repair and maintenance expenditure.
Fortunately, most investors have a property manager looking after their investment. Tax time is when these professionals really come into their own. Your property manager will prepare an end-of-year summary of income and expenses that you can send to your accountant.
But as the investor, you are still responsible for helping identify what you have spent money on during the year. For example, a tradesperson’s work could be a repair, but it might include installing something like a ceiling fan or venetian blinds.
The best way to stay on top of this is to go through the monthly statements from your property manager. They should include invoices from suppliers and contractors detailing what their work has included. Your accountant will be adept at categorising how deductions should be applied to those expense categories.
Holding costs
Holding costs are the ongoing charges related to owning the property. These will include elements such as council rates, land taxes, insurance and utilities. If your investment is a unit or townhouse, there will be body corporate fees and special contributions as well.
But the number one expense is usually the interest you’ve paid on the property’s loan. Your lender will set out in your regular loan statement exactly how much your interest bill has been. The annual total is a deduction that can make a huge difference come tax time. In fact, interest deductibility is the foundation for those utilising negative gearing. However, regardless of whether you negatively gear or not, you should always accurately track your interest costs to ensure a maximum deduction.
Tax time is an essential time in your annual journey as a property investor. It is crucial you endeavour to cover all the bases and enjoy a bumper outcome from your ATO return.
Mike Mortlock is the managing director of MCG Quantity Surveyors.