To help get your affairs in order regarding your investment property, here are the top tax-saving tips from our trusted tax expert, Eddie Chung of BDO (Qld)
1. Leave your tenants alone
As long as tenants have not paid rent to you or your property agent by 30 June 2014, the rent will not be assessable for income tax until you receive it in the next financial year. It is the time of year when you don’t actually want to chase your tenants for rent.
2. Don’t pay tax on prepaid rent
If you have an obligation under the lease to refund a tenant’s prepaid rent that is received by you on or before 30 June 2014, until the period to which the rent is attributable in the next financial year has elapsed, you do not need to include the prepaid rent as income until the next financial year.
3. Look out for the contract date
If you are thinking of selling your property, be aware that the time of sale for capital gains tax (CGT) purposes is the date on the sale contract. If the contract is signed after 30 June 2014, the CGT event happens in the year ending 30 June 2015, which means you have effectively deferred the CGT for 12 months.
4. Don’t forget to claim expenses in settlement adjustments
This is applicable if the expenses were adjusted in the other party’s favour. Likewise, if the expenses were adjusted in your favour, the amounts will need to be included in your assessable income. Check the settlement statement issued by your conveyancing lawyer for these details.
5. Spend big for a change
But only do so on expenses that are not ‘capital’ in nature, with a few exceptions. Generally, capital expenditure relates to costs of something that provides an enduring benefit, as opposed to having been ‘consumed’. Examples that are not capital in nature include repairs and maintenance, cleaning, gardening, pest control, tax advisor’s fees, etc. Once incurred, these costs are immediately tax deductible. The only exceptions are depreciating assets that cost $300 (GST inclusive) or less – you can claim these up front as well.
6. Prepay non-capital costs
If you own an investment property in your own name as an individual and as a passive asset, you can claim a tax deduction on prepaid expenses related to the property, as long as the prepayment covers a period of no longer than 12 months. The most common prepayment is prepaid interest on borrowings to acquire the property. Prepayments of less than $1,000 will still be immediately tax deductible.
7. Claim a tax deduction on costs before you pay them
This applies if you have ‘incurred’ non-capital costs that are related to your investment property and you do not carry on a business that returns income on a cash basis. ‘Incurred’ usually requires a definitive commitment to the expense.
A good example is land tax. If you become liable for land tax at a certain time of the year based on the land tax law in your state or territory, you can claim the land tax liability as a tax deduction for the year, regardless of whether you have paid it or even received an assessment.
8. Order a capital works and depreciation report
Ensure that you engage a qualified quantity surveyor. Provided that you incurred the cost of the report on or before 30 June 2014, you can also claim the cost of the report as a tax deduction for the year, in addition to the actual capital works and depreciation deductions.
9. Don’t forget to claim penalty interest
If you have repaid a fixed loan on an investment property early and have incurred penalty interest (otherwise known as ‘economic cost’), the penalty interest is tax deductible.
10. Don’t redraw for private purposes
Once a loan repayment is made on an income-producing loan, don’t access it. This is because any redraw from the loan will take on a different character, rather than being related to the original purchase of the investment property.
If the redrawn funds are used for non-income-producing purposes, the interest attributable to these funds will no longer be tax deductible.
11. Don’t forget to claim the interest on a loan associated with a sold property
Whether or not the original loan has been refinanced or kept on foot, you are still allowed to claim the interest on the loan, even though the related property has been sold, as long as the reason for kepeing the loan on foot or refinancing the loan is related to the original income-producing purpose of the loan. The most common scenario is if you sell the property and there are insufficient proceeds to pay off the loan.
12. Don’t buy into ‘split loan’ arrangements
Eve though some financiers allow you to apply your loan repayments on the split loan (which comprises both private and income-producing loan accounts) solely to the private loan account, this allows the interest on the income-producing loan to be capitalised, creating a scenario in which the capitalised interest gives rise to further interest in the future. The fax office has challenged the tax deductibility of the interest on the capitalised interest in this type of arrangement, which should be avoided.
13. Inspect your property before year-end
Any travelling expenses you incur for the purpose of inspecting an investment property that you already own will be tax deductible. However, you cannot claim a tax deduction on any property that you have not yet bought or that is not available for rent.
14. Delay initial repairs
If you incur repair costs not long after you have bought an investment property, these constitute ‘initial repairs’. They are usually included in the cost base of the property for future CGT purposes and are not tax deductible. Delay the repairs until after the property has been tenanted for some time, which should strengthen your argument that the repairs are associated with the wear and tear caused by the tenant, meaning that the associated costs are therefore tax deductible.
15. Claim home office costs
If you use a home office to manage your property, you can claim the running costs (eg electricity, heating) associated with your home office, but not occupancy costs such as interest on your mortgage, council rates, etc. You need to apportion the costs to reflect the portion of the costs that relate to managing your investment property (or other income-producing assets for that matter, eg share portfolio).
16. Make concessional superannuation contributions
If you need to reduce your taxable income,you can make contributions to your super. However, ensure that the total contributions made on your behalf for the year do not exceed your contribution cap. Also, you are only eligible to claim the deduction if you are self-employed or substantially self-employed.
17. Keep the property available for rent
Even though your property may be vacant, you can still claim all the tax-deductible expenses that are attributable to the vacant period, as long as the property is available for rent. To show evidence that the property is available for rent, keep advertising the property for rent and maintain records of the advertisements.
18. Adjust for private use
If you have used your investment property for private purposes, which is common in short-term holiday accommodation, you need to either apportion the expenses associated with the property to exclude a tax deduction claim on the private-use portion of the expenses, or include market rate as assessable income for the period during which you used the property privately (and claim 100% of the expenses).
19. Make a written trust distribution resolution
If you have a discretionary trust, you need to ensure that the trustee has made a trust distribution resolution on or before 30 June 2014. Otherwise, the trustee will be taxed on the undistributed income of the trust at the highest marginal tax rate of 46.5%. If you consult your accountant to put the resolution together as part of year-end tax planning, the accountant’s fees will also be tax deductible. Ask them to issue a bill on or before 30 June 2014 to ensure that the tax deduction is not deferred until the next financial year.
20. Keep documentary evidence
You need to keep your documents fo rfive years from the date you lodge a tax return, just in case the tax office carries out a tax audit or review of your affairs. Special rules apply to depreciating assets – you should keep records of these assets for five years from the date of your last depreciation claim. If you acquire a CGT asset (eg an investment property), you need to retain the purchase records indefinitely or, if the asset is sold, until after five years from the time the asset is sold. Electronic records are acceptable, provided that the electronic copy is a true and clear reproduction of the original document. last but not the least, work with your accountant, who is best placed to provide you with trusted advice, as they are most likely the only person who knows your affairs inside out.
Eddie Chung is Partner, tax & advisory, property & construction, at BDO (QLD) Pty.
Important disclaimer: No person should rely on the contents of this article without first obtaining advice from a qualified professional person. The article is provided for general information only and the author and BDO (QLD) Pty Ltd are not engaged to render professional advice or services through this article. The author and BDO (QLD) Pty Ltd expressly disclaim all and any liability and responsibility to any person in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this article.
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