Do: Leave your tenants alone
As long as your tenants have not paid rent to you or your property agent by 30 June, the rent will not be assessable for income tax until you receive it in the following tax year. This is the time of year when you don’t actually want to chase your tenants for rent. Note that rent collected by your property manager that has not been paid to you by 30 June will need to be included as income.
Don't: Pay tax on prepaid rent
If you have an obligation under the lease to refund any rent paid in advance by the tenant, you do not need to immediately include this rent as income. Any amount received by you on or before 30 June 2016 will not be assessable income until the period to which the rent is attributable in the next financial year has elapsed.
Do: 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, not the settlement date. If the contract is signed after 30 June 2016, the CGT event happens in the year ending 30 June 2017, which means you have effectively deferred the CGT for 12 months. The same goes for counting the 12 months to determine your eligibility for the CGT discount. The discount is generally only available when the CGT asset has been owned by the taxpayer for at least 12 months. To satisfy the 12-month requirement, you need to ensure that a period of 365 days (or 366 in a leap year) have lapsed between the day on which the CGT asset was acquired and the day on which the CGT event happens (ie when the property is sold).
Don't: Forget to claim expenses in settlement adjustments
This is applicable if the expenses have been adjusted in the other party’s favour. Likewise, if the expenses have been adjusted in your favour, they will need to be included in your assessable income. Check the settlement statement issued by your conveyancing lawyer for these details.
Do: Spend big for a change
This is the time of the year to spend on expenses that are not ‘capital’ in nature, subject to a few exceptions. Generally, capital expenditure relates to costs associated with something that provides an enduring benefit, as opposed to the thing acquired having been ‘consumed’. Examples of expenses that are not capital in nature include repairs and maintenance, cleaning, gardening, pest control costs, tax advisors’ fees, etc. Once incurred, these non-capital costs are immediately tax deductible. The only exceptions are depreciating assets that cost $300 (GST inclusive) or less – you can claim these costs up front as well.
Do: 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 (but generally not on capital expenditure) related to the property, as long as the prepayment covers a period of no more 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.
Do: Claim a tax deduction on costs before you pay them
A tax deduction is available if you have incurred non-capital costs that are related to your investment property. ‘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. This is regardless of whether you have paid it or even received an assessment, provided that you have definitively committed to the payment or completely subjected yourself to it.
Do: Order a capital works and depreciation report
Provided that you engage a qualified quantity surveyor and you have incurred the cost of the report on or before 30 June 2016, 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.
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.
Don't: Redraw for private purposes
Once a loan repayment is made on an income producing loan, don’t redraw it for private purposes. 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.
Don't: Forget to claim the interest on a loan associated with a sold property
After you have sold your investment property and regardless of whether the original loan has been refinanced or kept on foot, you are still allowed to claim the interest on the loan, as long as the reason for keeping 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.
Don't: Buy into ‘split loan’ arrangements
Be aware of split loan arrangements where the financier allows 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, which allows the interest on the income producing loan to be capitalised and creates a scenario in which the capitalised interest will give rise to further interest in the future.
The tax office has challenged the tax deductibility of the interest on the capitalised interest in this type of arrangement, which should be avoided.
Do: 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 you have not yet bought or that you already own but is not yet available for rent.
Don't: Conduct initial repairs
If you incur repair costs not long after you have bought an investment property, these constitute ‘initial repairs’. These costs are usually included in the cost base of the property for future CGT purposes and are not tax deductible. However, repair costs incurred after the property has been tenanted for some time that are associated with the normal wear and tear caused by the tenant may be tax deductible, provided that the repair work restores the efficiency or function of the property without changing its character.
Do: 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, rent, 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.
Do: Make concessional superannuation contributions
If you need to reduce your taxable income, concessional superannuation contributions can be made to your superannuation fund account. 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 for the contribution if you are self-employed or substantially self-employed. Otherwise, negotiate with your employer for them to make the contribution on your behalf through a salary sacrifice arrangement and pass on the benefit of the contribution to you through your salary package.
Do: 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 evidence that the property is available for rent, keep advertising the property for rent and maintain records of the advertisements.
Do: 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 deductions for expenses that are attributable to your private use, or include market rent as assessable income for the period during which you used the property privately(and claim 100% of the expenses).
Do: 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 2016. Otherwise, the trustee will be taxed on the undistributed income of the trust at the highest marginal tax rate of 47%. If your accountant usually puts 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 2016 to ensure the tax deduction is not deferred until the next income year.
Don't: Discard documentary evidence
You need to keep the documents for five years from the date you lodge your 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.
Eddie’s top tip
Work with your accountant, who is best placed to provide you with tax planning advice before the end of the year to ensure you are optimising your tax position.