It’s hard to believe, but we’re approaching that time of the year again – tax time!
As the end of the financial year draws closer, you’ll likely start thinking about that big fat tax refund and what you can do with it. But first you need to make sure you maximise your cheque.
To help property investors get their fair share of the tens of billions in tax refunds handed back each year to individuals and put themselves in good financial stead for next year, we’ve put together the following tips:
Maximise your deductions
The easiest way to maximise your tax return is to maximise your deductions.
As a property investor, know all of the expenses you can claim as a deduction and make those payments before the end of the financial year.
Claim for everything you’re entitled to, no matter how small it is. Every dollar will contribute to your investment’s return – and your wealth.
As a guide, landlords can usually claim the following as tax deductions:
Interest on an investment loan
Holding costs, including council/water rates and body corporate bills
Tenancy costs, including property management fees and the cost of advertising for a tenant
Insurance premiums, such as landlord insurance
Legal costs for troublesome tenants
Repairs and maintenance caused by tenant wear and tear
Some tax deductions allowed for investment properties are often overlooked and some, such as the cost of renovations, are included when they shouldn’t be. To get it right, consult a professional.
Don’t forget about depreciation
Up to 80 per cent of property investors are missing out on thousands of dollars in tax savings because they fail to take maximum advantage of depreciation.
Depreciation is a reduction in the value of an asset over time due to wear and tear, and for income-producing assets, can be claimed as a tax deduction.
There are two types of depreciation allowances for investment properties. The first is plant and equipment, which covers removable items such as dishwashers. The second is capital works on the building, covering the property’s structure. If the property was built after July 1985 depreciation can be claimed on both elements. (Deductions for plant and equipment items may only apply if you bought the property prior to May 9, 2017 – Read about the Budget changes here).
Depreciation is one of the key ways to maximise tax returns, and it can be done without spending a cent because it’s a non-cash deduction.
Get a professional quantity surveyor to prepare a depreciation schedule for you to maximise your deductions, with the fee also being tax deductible.
If you expect to have a lower income next year then consider prepaying expenses on your investment property, such as interest or other holding costs – for up to a year in advance – before June 30. This will give you greater deductions to reduce the tax payable on your higher income this year.
Consider delaying income
Minimise this year’s tax liability by delaying income until after July 1. For property investors this will largely be applicable to property you’re selling – if you know you’ll be up for capital gains tax, consider delaying the sale until next year.
Seek the help of professionals
Getting advice from a great accountant or tax specialist will pay off, saving you both time and stress, while also maximising tax return.
The fee will be tax deductible and if they do a good job you’ll get your money’s worth by getting the best possible refund.
Often a good accountant will find deductions you never even knew existed, and they’ll also make sure everything you claim is legal. This will avoid a visit from the taxman down the track.
Keep good records
Do you always find yourself scrambling to sort through the piles of papers at the end of the financial year, desperately trying to find receipts for your tax deductions, let alone trying to make sense of them?
While it can be tedious, you’ll find it’s much easier to be organised throughout the year. File away your tax documents so you know where they are come June 30.
This will enable you to maximise your deductions, as you’ll have every receipt and will be able to claim every single penny you’re entitled to. You’ll also be more accurate in what you claim and will have good records to substantiate your claims.
Do everything by the book
Investment properties can sometimes be targeted by the ATO, so make sure whatever you do to maximise your tax return is legal.
An accountant can make sure you claim only the deductions you’re entitled to claim, in the right way.
Remember, if you get audited it could cost you significant sums of money, so it’s not worth fudging the figures.
In an attempt to “reduce pressure on housing affordability” the Government has announced dramatic changes to the way depreciation is claimed on property.
Let’s start with the good news:
1. Any existing investment properties purchased (contract exchange date) prior to May 9 2017 are not affected (unless they were not income producing in the 2016/2017 financial year).
2. Commercial, industrial and other non-residential properties are not affected.
3. Capital works deductions have not been affected. This means you will still be able to claim depreciation on the structure of the building provided it was built after the 16th of September 1987. And you will still need a Quantity Surveyor’s depreciation schedule to do so.
Now that we know what isn’t affected, let’s look at what has changed…
The government will limit plant and equipment depreciation deductions to outlays actually incurred by investors. In essence, unless you as the buyer had physically purchased the items – you can no longer depreciate them. This is a massive change to what you can claim – there by reducing investors’ cash flow.
Originally I thought a quick fix would be to structure the sales contract so that the plant and equipment is separated. But I suspect that the legislation will be worded such that if the plant and equipment was in situ at the time of purchase, you can no longer claim it.
You see, under the recent changes, I suspect the developer will be deemed to have bought the plant and equipment – not you.
However, the acquisition of existing plant and equipment will form part of the cost base, thus reducing your capital gains liability. So investors who hang on to their properties long term, will no longer reap the benefits of depreciating plant and equipment.
So in summary: if a residential property was built prior 1987,and has not been renovated – there will be no depreciation claim.
This is very rare as most pre-1987 built properties we inspect have had some renovation carried out.
If built after 1987 – only the construction costs can be claimed.
Whilst there is still much uncertainty regarding the specifics of this budget’s depreciation-related changes, one thing is crystal clear: If you own a residential investment property and haven’t had a depreciation schedule prepared, now would be a good time to get a quote!
Developers, Project Marketers and Property Sales Agents – If you are selling property and using depreciation numbers that include plant and equipment: STOP NOW! This element needs to be removed from the selling equation, at least until the legislation is finalised.
Here is why I think this is dumb policy.
The proposed changes are being made to “reduce pressure on housing affordability.” In my opinion, it will have the opposite effect for 3 reasons:
Property investors may now feel the need to hang onto their existing properties to continue claiming depreciation because if they sell that property they won’t be able to get as many deductions on the next one.
Developers rely on high depreciation figures in the early years to show investors how affordable an investment property can be. If the allowances are taken away, they will struggle to get pre-sales which are required by banks to fund the deal.
These budget measure are forecast to save $260 million over a 3 year period. I suspect far more will be lost if developers can no longer get new projects off the ground.
Whilst I believe housing affordability is a major issues, this appears to be policy on the run…so the Government can be seen to be targeting property investors, when changes to negative gearing could have been more effective.
I will provide a further update once the legislation is finalised.
Learn how to stay under the ATO’s radar by watching this video
A depreciation schedule on your investment property can generate significant tax savings – as long as it has been complied correctly. In my experience there are three areas the ATO tends to target come tax time. One of them is whether you’ve claimed repairs and maintenance correctly. This can be tricky.
Your property must also be income producing in order to claim depreciation.
For instance, if you make a repair while living in the property, then move out 2 months later, you can’t claim it.
The third area of concern is in relation to the building allowance.
The building allowance refers to the wear and tear on the actual building – things like bricks and concrete. You have to make sure they’re being claimed in the right category and not alongside items like carpets and blinds, which are considered plant and equipment.
The building depreciation allowance must also be claimed on construction costs – NOT the purchase price of your property. A mistake I see time and time again.
And that’s where we can help. Quantity Surveyors are recognised by the Australian Tax Office as the right people to estimate these costs. NOT valuers nor real estate agents.
So there you have it. To stay under the ATO’s radar, make sure:
Your repairs are being claimed correctly The property is an income producing asset The building allowance is based on the construction cost. And most importantly, use a qualified quantity surveyor.
If you need a depreciation schedule for your investment property – get a quote here or work out how much you can save using our free calculator.
So, when should you split your depreciation report:
If you have purchased a property with a friend or family member, your depreciation schedule should be separated into individual reports that reflect how much you each own of that property.
This will not only save you money in terms of accounting fees – but can save your hard-earned dollars as the table below shows.
Comparison of combined and separate report:
Because the television costs over $300 it can’t be written off immediately. Read our article about items being immediately written off under $300 here. By splitting the report, the television price now reflects the investors’ individual ownership. This enables each investor to claim the television as an immediate deduction.
Having said that depreciation deductions are pro-rated depending on when you take ownership of a property, I’ll now give you an example that proves an exception to the rule.
A Sydney client of ours settled on a one-bedroom Chatswood unit on June 25th last year. The property was built in 1999 and the purchase price was $450,000. Yet, their total tax deduction, which was for five days only remember, was more than $5,000.
“What’s the catch?” I hear you ask. Well, there isn’t one. The ability to make such a significant deduction for just a short period of time is due to the immediate write-off and low-pooling of items that are classified as plant and equipment.
The costs of ‘small items’ (valued at $300 or below) and ‘low-pooled items’ (totalling no more than $1,000) should not be pro-rated, they can be written off immediately. You can maximise these items whether the property has been owned for 1 day or 365 days. And the age of the property is not relevant to claiming small items or low-value pooled items. Plant and equipment in properties of any age are eligible for depreciation allowances.
There is a saying that goes, “a dollar today is worth more than a dollar tomorrow”, so deduct these items as quickly as possible.
But what if you are a joint owner? For example, say an electric motor to the garage door cost the owners of an apartment block $2,000. If there are 50 units in the block, your portion is $40. You can claim that $40 outright as your portion is under $300. Provided your portion is under $300 you can still write it off.
Another tip is to buy items that depreciate faster. Items costing between $300 and $1,000 fall into the low-pool category and attract a higher depreciation rate. A $1,200 television attracts a 20% deduction while a $950 TV deducts at 37.5% per annum (more about this later).
Every one exchanges and settles a property on different days. However, the end of the financial year only occurs once.
Your report should calculate exactly how much you can claim for building allowance depreciation, based upon the number of days you have owned the property in that financial year.
For instance, if you settled on June 30, you should only be claiming 1 / 365 of any value attached to, say, the oven or the carpet (see this post on small items and low-value pooling for exceptions to this rule). Some reports don’t do this calculation for you. This will cost you money in terms of accounting fees.
One thing I’d like to point out on the timing of your depreciation report is that you should get it sooner rather than later. Don’t wait for the end of financial year deadline when everyone is scrambling to get a report. If you have settled on a property late in the year (say around November or December), order a depreciation report right away so you can avoid the June rush. In some circumstances, you are also able to request monthly deductions, rather than wait until the end of the financial year, and having the depreciation numbers included in your tax variation will assist you.
From a quantity surveying point of view, it’s never been a better time to invest in property… and in this week’s QS corner, I’ll tell you why.
We depreciate investment properties based on the construction cost – not the purchase price. And since the GFC I’ve seen many cases where the purchase price is actually close to or even below, the construction cost.
As a general rule, the construction cost of a property is roughly 50% of the purchase price.
So let’s say a newly built property was purchased for $500,000. We can assume the construction cost was about half of that – around $250,000. Sometimes a little more, sometimes a little less.
Post GFC we’ve seen sale prices come down. That same property might now be re-listed for $400,000 or even $350,000. But it still cost $250,000 to build.
So not only has the investor paid less stamp duty and increased their chance of a capital gain – their depreciation relative to the purchase price has increased.
Here are some examples.
This house in Orange, NSW, was first purchased in 2003 for ninety five thousand dollars.
Our client bought the property recently for forty six thousand dollars. We estimated the original construction to be fifty two thousand dollars!
And there’s this one.
This house in Noosa originally sold for one point one five millions dollars. Our client just paid four hundred and fifty thousand dollars for it.
Guess what – we estimated the original building costs to be five hundred and forty six thousand dollars!
Remember, if you qualify for the building allowance, that’s 2.5% you can claim per annum. On a construction cost of, say, $200,000, that’s $5000 in the first year alone.
Then you’ve got all the internal plant and equipment that can be depreciated. Carpets, blinds, lights, white good. It all adds up.
In my view if you buy property at close to the construction cost – it’s really hard to lose money because you’re basically getting the land for free.
If you don’t know how to track down the original construction costs, research data companies like RP Data are a good place to start.
You can search for past sale prices – and using the 50% rule – make a rough assessment of the construction costs. You’ll be surprised at how many properties have re-sold for 10, 20 and 30% less since the GFC.
If all that fails – then come see us. As quantity surveyors we often find ourselves playing detective…
So make the most of property conditions post GFC.
Look for properties where the purchase price has fallen close to construction costs.
Use data research agencies to track down past sale information.
And enlist a quantity surveyor to maximise your depreciation claim.
It’s tax time and I thought I’d provide a list of some things that may help you save some money.
If you’ve been reading this blog, you’d know by now that some things, name depreciation, cannot be claimed as an immediate deduction, however, there are some that can be.
So what are these expenses that can be written off immediately? Well here’s a list that will save you immediately and make sure your accountant is claiming these for you!
Acquisition and Disposal Costs incurred to gain a tenant.
Charges and fees such as body corporate charges and fees, council rates, lease document expenses, legal expenses, mortgage discharge expenses, tax related expenses, insurance, and interest on loans.
Fees related to hired services such as property agents’ fees and commissions, quantity surveyor’s fees, pest control, cleaning, gardening and lawn mowing, and secretarial and bookkeeping fees.
Expenses that cover utility bills such as water charges, electricity and gas, and telephone calls.
Installation and activation charges for items in the property such as in-house audio and video service charges and servicing costs.
Other miscellaneous expenses such as travel and car expenses (although not since the 2017 Budget changes), and stationery and postage.
Remember that you may only claim these expenses if they were directly incurred by you and not the tenant.
So if you are renting out your property, now is the best time to go over your receipts and check which expenses fall under the list and before you know it, you’ll have more deductions than you bargained for!
If you need a depreciation schedule for your investment property – get a quote here or work out how much you can save using our free calculator.
Let’s get into the tips & tricks of property investing:
1. The higher the building, the higher the depreciation
Why? Because it has more of that plant and equipment stuff that I’m talking about and this stuff depreciates faster. It also has things like gyms, pools, etc.
(UPDATE: Deductions for plant and equipment items may only apply to commercial properties, brand new properties, if you bought the property prior to May 9, 2017, or some other exceptions – Read about the Budget changes here).
2. Old properties depreciate too
You’ve already paid something for it. So while you can’t claim the structure of the building, you may be able to claim the ovens, the dishwashers, the blinds, etc. because the plant and equipment is based upon what you pay for it and the effective life of each item can be a benefit. That means that if the carpets is going to last two years, you may be able to claim it over for 50% each year.
And at Washington Brown we are so confident that we actually guarantee our results. So if we can’t get you at least twice our fee in the first year, we won’t charge you!
3. Buy items that actually cost you under $300
For instance, if was going to buy a microwave, I wouldn’t buy one that costs $330 because I would have to claim it at 20% per annum. However, I’d buy one at $295 because I would be able to claim it immediately.
4. Sometimes furnishing your property can actually result in a greater depreciation deduction
Why? Because the furniture depreciates rather quickly compared to bricks and concrete. So putting things like dining tables, bedding and all that stuff into a furnished property can actually accelerate your claim to the point that if you were to buy $20,000 worth of furniture, you could possibly get a $10,000 deduction year 1 alone! But you’ve got to be smart about this. You can’t furnish all properties as it really depends on the location. This tip does not apply to all properties.
5. The actual construction cost must be used
Now that’s not a tip, that’s in the law. But what we found lately is that there are a lot of properties out there that are actually being sold close to their construction cost – certainly in some areas.
For instance, a property is sold at the original selling price of $95,000 in 2004. Our client just paid $45,000 for it. The original construction was $52,000. Now, I don’t know any other way that you can get a deduction greater than what you pay for something.
6. Utilise the residual value write-off
If you were to renovate a property that was built after 1985, you should get a quantity surveyor out before you do the renovation so that we can put some values onto items that you are about to remove and you can get a written down value of those items and claim it immediately as a tax deduction.
So if you remove the kitchen, the light fittings, the shelf screens, etc., all that stuff can be written off if your property was built after 1985.
For instance, you bought a property that was built in 1989 and in that property there was a kitchen that was originally installed and you now wish to upgrade it. If you were to demolish now halfway through its effective life, you could get a $10,000 immediate tax deduction for it! However, just remember that the property needs to be income producing before you rip it out.
So the tip here is to get a quantity surveyor out before you renovate a post-1985 property.
7. Always use an expert
Quantity surveyors have been recognised by the Australian Taxation Office to estimate construction costs where the costs are not known. Accountants and valuers for instance, are not allowed to estimate costs unlike quantity surveyors and not all quantity surveyors specialise in this service, Washington Brown certainly does.
Also, as far as I know, a depreciation report is the only tax deduction that can be subjective and open to interpretation skill. Every other tax deduction is based on what you pay for it.
8. You get more depreciation on a new property
Now let’s have a look at the difference between the depreciation of a new property versus that of a four-year old property. It’s very similar to the effective lives of the property, that in fact, you’ll be surprised. Now, most of the deduction within a property is actually related to the building allowance. However, you’ll definitely get more depreciation on a new property compared to a pre 1985 property.
9. Use the Washington Brown Depreciation Calculator
Now, this is a good tip. You can go online and check the depreciation available on your own property using our calculator, the first calculator that uses live data! You can check new versus old properties, get an accurate depreciation assessment, and the great news is that it’s free!
Now, here are some bonus tips:
Bonus tip #1: Don’t use a builder’s depreciation schedule
Builders are good at building. They miss out items and they sometimes don’t understand the design and council costs can be included. Let a quantity surveyor do the depreciation schedule for you.
Bonus tip #2: The type of materials is a huge factor
If you renovate, you might want to consider the type of materials you are going to use. For instance, carpets depreciate over 10 years but the floor tiling will depreciate over 40 so it can add up.
As another example, various types of partitioning may yield varying depreciation allowances. Some depreciate a lot quicker than others.
Moreover, we have air-conditioners and fans as examples too where the depreciation differs…
The types of materials used may vary and in turn, may change the depreciation allowance you can claim. So it pays to consider the item you’re about to install.
Bonus tip #3: You can claim renovation even if you haven’t done the work
If you buy property that was built in 1900 for instance, but was renovated in 1990 not even by you, you can still claim depreciation. You can claim the renovation cost even if you didn’t do the renovation
Bonus tip #4: Get Mobile
Our iPhone app is downloadable from the iTunes store for free, enabling you to get numbers at the tip of your fingers! This great app also works on the iPad.
If you want to crunch the numbers yourself, you need to input the 5 information below:
The year it was built
State of the finish within the property
Then, click calculate and Bingo! You can compare the depreciation deductions between the diminishing value method and the prime cost method! And if you’re happy with the results, simply get a quote from us and give us a call and we can discuss the property over the phone. It’s all in the power of your hands!
Here are five things for you to take away today:
Old properties depreciate too
You don’t have to buy new to claim renovation
Renovation helps your cash flow
If you’re about to renovate a property that was built after 1985, get us out before you do so