Frequently made mistakes on your investment tax returns

By David Shaw. 29/07/2014

As it is tax time for many property investors I thought that we might point out some of the most frequently made mistakes in respect to investment property tax returns. Be aware that there is only 2 years to lodge an amended return so it pays to have the return correctly prepared in the first place.
Five frequently made mistakes when preparing property investment tax returns are:

  1. Depreciation
Many investors often overlook depreciation that can be claimed on second hand properties as we often see new clients that have not had a depreciation schedule prepared by a quantity surveyor. You should note that in general, building depreciation can be claimed on any building constructed after the 19th July 1985. Although building depreciation can be claimed on the original cost only, even a building constructed 20 years ago may have a reasonable amount of depreciation which can be claimed. Plant and fitting depreciation can also be claimed and when you purchase the property a quantity surveyor can assign a market value to the plant and fittings.
  1. Interest during construction
Tax Ruling 2004/04 states that if the block of land is purchased to construct an investment property then the holding costs such as interest, council rates, water rates and other holding costs are deductible in the year that they are incurred. Clients have often informed me that their previous accountant made them capitalise these costs and hence the client has lost vital deductions in the year that they really needed them.
  1. Mixing deductible and non-deductible loans
If this area is not properly structured it can result in a large loss of deductions as Tax Ruling 2000/02 states how a mixed loan should be treated. The apportionment method that the ATO applies to this ruling is not favourable for the tax payer and can only be rectified by splitting out the components of the deductible and non-deductible loan.
Our tips for structuring loans for maximising interest deductions:
  1. Keep all tax and non-tax deductible transactions in different accounts
  2. Use offset accounts with a separate offset account for your investment properties and private transactions
  3. If you have excess funds, deposit these in an offset account against your principal place of residence. By using an offset account in this case you preserve deductibility if your principal place of residence becomes an investment property.

  1. Capitalisation of interest
In my view it is important that interest is not capitalised on your investment property loans, especially when principal and interest payments are being paid off your home loan.  Tax Ruling TD 2012/1 outlines the concept of a reasonable person test in determining where part 4a of the Income Tax Act might apply to unwind deductions on capitalised interest.
This ruling is still silent on whether the rent money should be paid against the investment account, although we always encourage our clients to take a conservative approach and make sure the rent goes against these accounts.
  1. Travel
It is essential with a travel claim in respect to your investment property that you are aware of the following:
  1. Travel can only be claimed on a rental inspection after the property is first rented.
  2. The predominant purpose of the travel must be to view the investment property otherwise you will only be able to claim the deductions that relate to the day of the inspection. Make sure you keep all your receipts for airfares, accommodation, car hire, and meals.  If you drive to inspect the property record the kilometres for the round trip.

If you believe you are not claiming the correct deductions please send us an email to  to arrange a complimentary initial appointment in our offices in Sydney, Newcastle, Brisbane or Melbourne or meet with one of our team in our serviced offices in Perth or Canberra.

David Shaw is the CEO of WSC Group: Certified Practising Accountants and Business Advisors, and was voted Property Tax Specialist of the Year in the Your Investment Property 2013 Readers Choice Awards (runner up in 2012 & 2014 ).

The above information is supplied by WSC Group.
Disclaimer: while due care is taken, the viewpoints expressed by contributors/sponsors do not necessarily reflect the opinions of Your Investment Property.

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