Our tax experts are on hand to answer any tax queries you may have regarding your property investments and wealth creation strategies.
If I signed up for property investment education before buying investment property, is it considered to be a tax-deductible expense? Or do I need to own investment properties before I do a course, in order to claim a deduction? Is this right?
The seminar organiser has told me that the cost of the educational program is tax deductible, but I would like clarification as my accountant says it is not. I am confused and would love to know the answer as it is a significant sum of money.
Many thanks, Rueben
A: The deductibility of education courses related to property investment has always been a polarising issue. Every ‘educator’ always promises full deductibility regardless of the course; however, when it is looked at more closely, there are many different outcomes.
In answering the first part of your question, the short answer is no. The reason is that like most costs incurred before an investment is made, the cost is effectively ‘black-hole expenditure’, ie not deductible, nor is it capital in nature.
As you are only just starting the investment journey and have not yet purchased anything, there is no direct connection between the course and the potential investment.
If the expense is incurred after your investment property is purchased, the course may be deductible, depending on the course content and provided it relates to the management of the property. This is outlined in the ATO’s ID 2003/324, whereby the taxpayer is entitled to a deduction for expenses incurred in attending a property investment seminar, but only to the extent that the expenses relate to the gaining or producing of assessable income from their existing rental properties.
It’s crucial that the invoice states clearly what the course covers.
Many courses will cover everything, including why, where, when and how. Only elements of the course related to the management of the property, including the maximisation of income and minimisation of expenses, will be deductible.
The clearest way of calculating how much is deductible is to work out the amount of time spent on each component, ie if one day out of a three-day course is spent on managing your investment property, then one third of the course fee will be deductible. Note that this also applies to flights and accommodation in relation to this.
As you’ve stated, it is a significant amount, so not only will the ATO closely scrutinise any claim but you should also get your accountant to review the course content first to ensure you are comfortable before outlaying any money.
Here is my scenario: I have an owner-occupied property that settled in July 2015.
In September 2015 a tenancy agreement was made to rent out 75% of the property to other family members. That tenancy agreement is still in place. As of July 2016, I am still living in the property and plan to keep the tenancy structure the same for some time.
Is the CGT exemption still valid as it has still been my principal place of residence for the 12-month period? For the 2015/16 financial year is it still tax deductible based on the 75% apportioning?
For capital gains tax (CGT) purposes, the applicable date is the contract date, not the settlement date.
Assuming you purchased your principal place of residence in your individual name with a three-month settlement, the contract date would have therefore been April 2015. This is important from a CGT perspective.
To be eligible for the full CGT exemption on your principal place of residence you will need to satisfy a few criteria, with the main ones being that the property must be in your own individual name(s); must not be used for income-producing purposes; and you must not nominate any other dwelling as your principal place of residence during this period.
“As you are renting your property to other family members, you must charge them rent at the full market rate”
That is, you can’t nominate more than one dwelling at a time as your principal place of residence.
There are two elements to this question, firstly the tax deductions that you are eligible to claim, and secondly the CGT considerations.
As you are using 75% of the property for income-producing purposes, you are eligible to claim 75% of all the total outgoings of the property, which includes but is not limited to interest on the loan, council and water rates, insurance, repairs and maintenance and depreciation.
However, as you are renting your property to other family members, you must charge them rent at the full market rate, on an arm’s length basis. You must ensure that you actually receive the funds and declare this as assessable income in your tax return, otherwise the amount of tax deductions that you will be eligible to claim will be reduced to below 75% of the outgoings of the property.
In relation to CGT, for the period between April 2015 and August 2015 (being the contract date to the end of August 2015, when you weren’t using the property for income-producing purposes), you will be eligible for the full CGT exemption, therefore CGT will not apply.
However, from September 2015 until the period when your property ceases to be used for income-producing purposes (whether rented to family members or otherwise), your CGT exemption will be reduced to 25% of the capital gain if you sell the property in the future.
For example, if you sold the property and the capital gain from September 2015 was $200,000, then the taxable capital gain would be $150,000 (being 75% of $200,000), and as you have held the property for more than 12 months then you would be eligible for the 50% CGT discount concession, which would then reduce your taxable capital gain to $75,000 (being 50% of $150,000).
The actual CGT would be $75,000 added to your other overall assessable income multiplied by your marginal rate of income tax – and say this was 37% plus 2% Medicare Levy, the tax payable on this capital gain would be $29,250 (being 39% of $75,000).
Q: I bought a three-bedroom house in Sydney last year, which settled on 21 May 2015 for $530,000 as my first investment property. I paid a surveyor to get a depreciation schedule report for me this year, so I didn't claim any depreciation for the last financial year, 2014/15.
The depreciation schedule summary told me I would be able to claim the depreciation for 10 years since I settled. So I assumed that for financial year 2015/16 I should use the value on 'Year 2' of the summary, even it is my first time to claim this deduction. Is that correct? Also, in this case, will I be able to use a portion of the value from 'Year 1' to backdate some of the deduction?
A: Congratulations on your property purchase last year! Many first-time investors aren’t aware of property tax depreciation and potentially miss out on thousands of dollars’ worth of tax depreciation deductions – so good on you for engaging a quantity surveyor to prepare a report/schedule for you.
In accordance with ATO guidelines, your depreciation schedule will always start from your specific settlement date. This is the case regardless of when the depreciation schedule is prepared.
As you mentioned, you settled on 21 May 2015, therefore Year 1 of your report will be the 2014/15 financial year.
Even though you had only owned the property for 41 days (21 May 2015 to 30 June 2015) of that financial year, I would still expect to see a significant amount of deductions available to you for that year. This is largely due to the items deemed as being under $300 in value, which are able to be claimed at a rate of 100% in the first year of ownership.
With this in mind, you should definitely begin claiming from Year 1, provided the property was available for rent from your settlement date. Don’t worry if you have already submitted your tax lodgement for the 2014/15 financial year without including your depreciation claim, as for individuals and small businesses the ATO will allow you to amend submitted tax returns for up to two previous years.
If you have used a reputable, experienced and qualified quantity surveyor firm and the report has been prepared for you specifically (as opposed to a generic or indicative schedule used for marketing purposes), the first-year figure shown on your report will already have factored in the ‘portion’ of the year that you are able to claim. If this isn’t the case, your accountant will be able to calculate the portion of this full-year figure that you are able to claim.