Tax planning: Critical things investors can do to maximise returns and minimise liabilities

One of the most critical steps in tax planning is setting up your investments correctly from the start. Choosing the right structure – whether it’s a trust, company, or another entity – is crucial because it should align with your investment goals.

Waiting until after you’ve purchased the property can be too late, as restructuring can incur hefty tax implications, such as capital gains tax and stamp duty. For example, moving an asset from a trust to a super fund can trigger significant capital gains tax and stamp duty charges, making it financially impractical.

Therefore, being strategic and thoughtful when deciding on your investment structure initially can help to avoid future tax burdens.

Claim all eligible deductions and maximise depreciation deductions

As a property investor, it’s crucial to claim all eligible deductions to reduce your taxable income. These deductions include interest on loans, property management fees, repairs, maintenance, and insurance. It’s essential to diligently track these expenses and consult with your tax adviser to ensure you’re maximising potential deductions.

Maximising depreciation deductions can significantly impact your tax bill. Depreciation allows you to deduct the decline in value of your property and its fixtures over time. Engaging a quantity surveyor to prepare a depreciation schedule is crucial, as this schedule outlines the depreciation deductions you can claim each year, helping to offset your taxable income.

However, it’s important to note that the Australian Taxation Office (ATO) closely monitors these deductions. According to the ATO, the majority of rental property owners make errors in their tax returns. To avoid issues, ensure your claims are accurate and well-documented.

Keep comprehensive records

As previously stated, good recordkeeping is essential for tax planning and compliance. By maintaining detailed records of all your property-related expenses, including receipts, invoices and bank statements, it will be easier to claim deductions and ensures that you are prepared if the ATO decides to audit your returns.

Digital tools and software can help streamline this process, making it easier to organise and access your records. Regularly updating your records is also advised, as it will save you time and stress when tax season arrives.

Consider the impact of GST

Goods and services tax (GST) of 10 per cent applies to specific property transactions, especially for developers and commercial properties. Understanding its implications is crucial for effective tax planning.

Properly integrating GST into your pricing and cash flow projections helps prevent unexpected costs. Therefore, it is worth determining if you can reclaim GST on your purchase or if it’s applicable at all. Some properties may qualify for the margin scheme, which reduces GST during acquisition and sale. Even better, some commercial properties may be eligible to be acquired as a GST going concern, meaning there is no GST on the purchase cost.

Minimise GST liabilities by addressing any adjustments, such as the margin scheme, in your contract before signing. Neglecting this could result in avoidable additional costs.

Leverage capital gains tax exemptions and discounts

When selling an investment property, capital gains tax (CGT) is a crucial consideration, and understanding potential exemptions from the outset of property purchase is essential. These exemptions and discounts can significantly influence your decision-making process. Strategic planning ensures you maximise these benefits when it’s time to sell.

Key exemptions and discounts include:

Primary residence exemption: Ensure the property qualifies as your main residence to benefit from CGT exemption.

50 per cent CGT discount: Properties held for more than 12 months qualify for a 50 per cent discount on the capital gain.

Small business CGT concessions: Properties used for business may qualify for concessions such as retirement exemptions and rollover relief which can further reduce the taxable gain by 50 per cent, defer or even eliminate any potential capital gain.

By leveraging these options, you can effectively reduce CGT liabilities and optimise your overall investment strategy.

Stay informed on legislative changes

Tax laws and regulations are dynamic and can change frequently, impacting the effectiveness of your strategies. Therefore, staying informed and adapting to these changes is crucial for property investors.

Regular consultations with a tax adviser help you stay updated on legislative changes. While it is ideal for advisers to proactively inform you, maintaining regular touch points – at least before the end of the financial year and ideally in the first half – ensures you’re prepared for any regulatory shifts.

Similar to staying informed about the property market, incorporating tax updates into your ongoing learning is essential. Annual changes in tax laws can alter holding costs, emphasising the need for proactive awareness.

Tax exposures for foreign buyers

Foreign buyers face unique tax exposures that local buyers do not encounter, including:

Additional stamp duty: Foreign buyers may incur extra stamp duty for residential properties. For example, in Victoria and NSW, this additional stamp duty surcharge is 8 per cent.

Land tax surcharges: There are also potential additional land tax surcharges for foreign buyers. For example, in Victoria, while the standard land tax rate is 2.65 per cent, foreign buyers could face an additional 4 per cent surcharge.

Regulatory requirements: Foreign buyers must navigate specific regulations and taxes, such as Foreign Investment Review Board (FIRB) application fees and state-specific surcharges.

Understanding these costs and regulatory demands is crucial for effective tax planning. Consult with a tax adviser specialising in foreign investment to navigate these complexities and optimise your tax strategy.

Tax planning is a critical component of successful property investment. By being planned, prepared and proactive, you can maximise your returns and minimise your liabilities. Additionally, engaging a knowledgeable tax adviser will provide you with the guidance needed to navigate these complexities and achieve your investment goals.

Josh Chye is a partner and head of tax consulting at HLB Mann Judd Melbourne.