As we approach the end of another financial year, tax planning is on everyone's agenda. Eddie Chung from BDO Kendalls' Private & Entrepreneurial Client Services shares his top tax tips for property investors to maximise their tax savings.
- DO prepay expenses such as interest and insurance if you are eligible to claim the entire prepayment as a tax deduction upfront. Before you do, you need to see if you are eligible for the deduction, given that the prepayment rules have changed so many times. The current rule is that only individuals who are not carrying on a business or a "small business entity" can claim a tax deduction on prepayments upfront, provided the prepaid amount only relates to the next 12 months or less. For other taxpayers, a prepayment will only be immediately deductible if the expenditure is less than $1,000 or required to be incurred by a law. Also, it should be remembered that prepaying an expense only provides a one-off timing advantage and you need to keep doing it after the first year to ensure that the benefit is not negated.
- DON'T chase late paying tenants until 1 July. Unless you are carrying on a property leasing business, rent is generally derived and becomes taxable when you have received it. Therefore, for once, it might actually be beneficial if the tenant pays their rent late. Watch out for "constructive receipts" however - you are deemed to have received the rent if, for instance, the real estate agency which manages your property has received the rent on your behalf. On the other hand, even if you did get paid before June 30, is any part of the rent attributable to a period after that date? If so, the prepaid portion will not be assessable income until the next financial year.
- DO bring forward expenses that are tax-deductible. For instance, if the tenant has been hassling you to repair certain items on the property, bringing forward the expense now will directly reduce your tax bill. However, you need to differentiate repairs from improvements. Repairing something generally returns it back to its original condition while improving something enhances the asset beyond its original state, which may render the cost a capital expense and therefore not immediately tax-deductible.
- DO investigate to see if the investment allowance applies to you. This recently announced tax break is significantly attractive as it provides an upfront tax deduction in addition to depreciation on the full value of the asset. However, the tax break only applies to businesses, which means that passive property investors will not normally qualify. Having said that, the tax break may potentially apply to those with a property portfolio that is sufficiently large and extensive for it to be characterised as a business. If you are eligible for the tax break, make sure you are aware of the relevant qualifying conditions and time limits.
- DO spend on depreciating assets costing less than $300 if your property portfolio does not constitute a business and you are therefore not eligible to claim the investment allowance. The rule is if the cost of a depreciating asset that is used to derive rental income does not exceed $300, it will be immediately deductible, provided that the property holding entity is not carrying on a business. If a GST credit has been claimed on the cost, it is the GST-exclusive amount that is relevant in determining if it exceeds $300. However, if the asset is part of a set of assets, the immediate write-off will not be available if the cost of each individual asset does not exceed $300 but the entire set costs more than that amount.
- DON'T stop procuring tenants if your property is vacant. The tax deductions you may claim on a rental property will need to be apportioned if the property was not available for rent for some time during the year, eg, if you use the property for private purposes for a period. On the other hand, the fact that the property was vacant for a while does not mean that the apportionment of expenses is required. So long as the property was available for rent, eg, advertised by the local real estate agency, the expenses attributable to the vacant period will remain tax-deductible.
- DO consider carefully the timing of any property sale around this time of the year. If you are selling a passive rental property, it may be an idea to defer the sale until after 30 June. Be careful with the timing of when the contract is signed though - a property is generally deemed to have been sold on the date of the contract for capital gains tax purposes, rather than settlement date, so executing a sale contract on or before 30 June 2009 will amount to a sale in the 2009 income year, even if settlement does not happen until after that date. Obviously, the reverse applies if you are selling the property at a loss, which may be offset against other capital gains you may have derived during the year (if you are very lucky!). In which case, you will need to ensure that the contract is dated on or before 30 June 2009 to crystallise the capital loss in the 2009 income year.
- DO consider making superannuation contributions if you are eligible. Yes, most superannuation investments have lost value this year but superannuation is still an attractive low tax environment, which may be an appropriate and tax-effective saving vehicle in certain circumstances. Coupled with the fact that the maximum amount of tax-deductible superannuation contributions will be reduced from 1 July, it may be sensible to maximise your deductible contributions before this date. However, you need to bear in mind that a deduction for a superannuation contribution is only available for the 2009 year when the superannuation fund has received the funds before 1 July 2009. Making the contribution on or after that date will defer the deduction to 2010, which may mitigate the tax benefit of the contribution this year.
Eddie Chung from BDO Kendalls' Private & Entrepreneurial Client Services
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