The end of the financial year (EOFY) is fast approaching and property investors need to equip themselves with the right knowledge to help them correctly file their income tax returns and claim refunds and deductions.

Recent events, notably the COVID-19 outbreak, have made a substantial impact on the housing market, particularly on investors. How will these events change the way Australian investors prepare for their tax filings?

Your Investment Property reached out to Mark Chapman, director of tax communications at H&R BLOCK, to know how current issues might affect the filing of taxes this year and how property investors can best navigate the changing environment. 

Mark Chapman, director of tax communications at H&R BLOCKHow will the coronavirus outbreak affect your tax claims and returns?

The COVID-19 outbreak has significantly impacted the finances of many Australians, including property investors. While state governments have placed a moratorium on evictions, most landlords and tenants were encouraged to make their own arrangements in terms of rental repayments.

Chapman said you will still be able to claim the expenses you incur in your property even if you have arrangements with your tenants to defer or reduce rent.

"If you later receive back-payments of rent after the crisis has passed, these amounts will be taxable when received," he said. "If your bank defers loan repayments because of COVID-19, the expense is still regarded as incurred by the landlord and therefore a deduction can still be claimed for the interest element."

What is the most crucial thing you should know about your taxes?

Organisation is crucial for property investors when filing their claims and tax returns.

"The golden rule is: if you can't substantiate it, you can't claim it, so it's essential to keep invoices, receipts and bank statements for all property expenditure, as well as proof that your property was available for rent, such as rental listings," Chapman said.

Property investors need to make an effort to ensure that all records are available and in good shape. They should also track down copies of missing invoices for them to maximise the refunds they can get.

"Also, be aware that both your income and expenses may look very different to normal because of the impact of COVID-19," Chapman said.

What are some of the things property investors can claim during tax time?

For Chapman, the most substantial expenditure you can claim when you file your taxes is the amount you pay on your mortgage. Take note, however, that only the interest is deductible.

"In addition to interest relating to the property acquisition, you can also claim a deduction for interest on loans taken out to: carry out renovations; purchase depreciating assets — for example, furniture; make repairs or carry out maintenance; or purchase land on which a property is to be built," he said.

Here is an exhaustive list of costs you can claim:

  • Advertising for tenants, including costs passed on by letting agents
  • Cleaning at the end of a tenancy (including removal of rubbish)
  • Estate and letting agents (including management fees)
  • Gardening and lawn mowing (including felling or pruning trees)
  • Secretary and bookkeeping fees associated with the collection of rent and payment of property expenses
  • Bank charges on the account used to receive rent and pay expenses
  • Council rates and land tax
  • Insurance (building, contents or public liability)
  • Credit checks
  • Pest control
  • Bank or solicitor fees for keeping title documents safe
  • Taxation advice relating to the property
  • Legal expenses to eject a tenant for non-payment of rent
  • Hiring a debt collector to collect rent arrears
  • Getting new keys cut
  • Servicing items such as hot water heaters, smoke alarms, air-conditioning systems and garage door mechanisms
  • Water supply charges (to the extent that they aren’t paid by the tenant).
  • Quantity surveyor
  • Security patrols
  • Security system monitoring and maintenance

What are some of the tricks investors might not know when filing for claims?

Chapman said a tax agent can help you determine everything that you are entitled to claim on your tax return. However, some investors might not know that they can claim prepaid expenses.

"If you pay an item of expenditure this year that wholly or partly relates to next year, you can a claim a deduction for the full amount this year. This is particularly useful with expenses that straddle the tax year, such as insurance policies or subscriptions," he said.

You can also claim the expenses on your home phone, computer, internet services, and mobile phone if you used them as part of your property management.

Property investors can also consult a quantity surveyor to help you with your depreciation claims.

"Depreciation is generally one of the larger deductions, it is difficult to work out correctly, and many homeowners miss out on potential deductions by incorrectly claiming," Chapman said.

What mistakes should investors avoid when claiming tax deductions?

Property investors are prone to make mistakes when filing their tax returns and claiming for deductions. If you do not want to trigger an audit from the tax office, Chapman said you need to avoid committing these mistakes:

  • Claiming excessive interest expenses, such as where property owners have tried to claim borrowing costs on the family home as well as their rental property.
  • Incorrectly apportioning rental income and expenses between owners, such as where deductions on a jointly owned property are claimed by the owner with the higher taxable income, rather than jointly.
  • Claiming deductions for investment properties that are not genuinely available for rent. Rental property owners should only claim for the periods the property is rented out or is genuinely available for rent. Periods of personal use can’t be claimed. This is particularly important for holiday homes, where the ATO regularly finds evidence of home-owners claiming deductions for their holiday pad on the grounds that it is being rented out, when in reality the only people using it are the owners, their family and friends, often rent-free.
  • Claiming repairs for newly purchased rental properties. The costs to repair damage and defects existing at the time of purchase or the costs of renovation cannot be claimed immediately. These costs are deductible instead over a number of years or are added to the cost base of the property for CGT purposes. Expect to see the ATO checking such claims and pushing back against claims which don’t stack up.
  • Incorrectly treating properties that are rented out to friends or family at a discounted rate. This will be regarded as a non-commercial rental. The income will still be taxable but you’ll only be able to claim deductions up to the amount of rent you’ve received. You won’t be able to make a loss; if you were relying on negative gearing, that isn’t a desirable outcome.