Tax season is upon us. For many Australians, this is a stressful period with lots of paperwork to sift through and looming deadlines.
However, this season also has a silver lining in the form of tax refunds. The Australian Tax Office gives out $27 billion annually in tax refunds to about 75% of taxpayers. The average refund per person is estimated at $3600. The sad part is, many taxpayers do not take advantage of all the deductions available for maximising your tax return. The reasons vary from ignorance of tax laws to lack of proper records and even blatant tax evasion strategies.
As a smart investor, you should be aware of every deduction you are entitled to that can help you minimise your investment tax. Every dollar you get back in tax returns is a dollar you can invest elsewhere.
In this article, we discuss seven tips for maximising your tax returns for property investors as well as a few other general tax tips.
1. Maintenance and repairs
Repair and maintenance costs are expenses that go towards ensuring your property is in a habitable condition. Repairs involve fixing and replacing damaged items as and when the need arises. Maintenance costs are regularly incurred to keep the property in good shape, e.g., landscaping, utility bills, e.t.c. These expenses are tax deductible and help minimise your investment tax, but there are specific conditions where this applies.
- The repairs must be related to property wear and tear caused by your tenants. These specific tax returns for property investors cannot be claimed if repairs are done when you initially purchase a property.
- The repairs must be to restore your property to its original condition. They cannot include improvements on the property. For example, replacing worn out carpets counts as a repair but upgrading the broken A/C unit counts as an improvement.
- The repairs and maintenance costs must be deemed reasonable. The ATO conducts regular audits on properties to ascertain their repair claims are legitimate. The costs of repair should, therefore, be spread out over time.
Keeping all contractors receipts for any repair and maintenance work helps in maximising your tax return and minimise your investment tax.
Assets on your property that don’t count as fixtures and fittings depreciate over time. This depreciation is tax deductible as it is considered an expense that will minimise your investment tax. The depreciation rate is calculated using your estimates or the ATO’s suggested depreciation rates for assets. The cost of depreciation is deducted over the lifetime of the asset, not upfront.
Assets can be depreciated using the diminishing value or prime cost methods. This deduction only applies to assets valued at over $300, further maximising your tax return. Examples of assets that increase tax returns for property investors through depreciation are carpets, solar panels, clothes washers, and dryers.
Many owners miss on these deductions and we recommend getting a depreciation schedule to ensure it is correct and you are maximising the deductions.
3. Property Management Costs
There are several costs associated with management of rental property that can help minimise your investment tax and which you should be keen on if you are interested in maximising your tax return. These include:
- Tenancy costs: these are costs incurred when letting a house such as advertising for vacant houses and commissions given to realtors or property managers.
- Legal fees: These are costs incurred for administrating lease agreements and any other legal procedures related to tenant disputes, evictions e.t.c.
- Insurance premiums- any insurance payments related to your property go towards maximising your tax return.
- Travel costs: if the investment property is not within proximity of the owner, travel costs incurred to administrate the property can be counted on to minimise your investment tax.
(Please Note: Travel costs can be claimed in the 2016/17 financial year, however as it was changed in the last budget, it will not be a tax deduction from the next financial year onwards.)
These expenses are all tax deductible. They comprised a large part of tax returns for property investors if well documented and filed appropriately.
4. Mortgage and Loan interests
If you are still repaying the mortgage on your investment property, you will be happy to note that the interest paid helps in maximising your tax return. The same applies to any loans you’ve taken out for repairs, maintenance work or to upgrade and improve the property. Even if you use another property such as your home for security, the interest incurred is still deductible as it counts as an expense against your rental income.
However, you have to prove that the entire loan amount was utilised for property related expenses to enjoy these tax returns for property investors.
Deducting interest on loans will significantly minimise your investment tax and facilitate your loan repayment efforts.
5. Carrying Costs
Property investors often buy properties to flip for a profit. Any costs incurred in the period of ownership are known as carrying costs or holding costs. These include maintenance costs, management fees, insurance premiums, property taxes and local or association fees and levies. Carrying costs can be deducted from your taxes upfront. This provision for tax returns for property investors is aimed at reducing the cost of owning property not intended for a leasing business.
6. Capital Costs
These are investment costs incurred on building and construction or purchase of equipment to ensure your property is in an operable state. It includes structural changes or additions to the buildings that are considered permanent. Capital costs are a one-time expense that minimises your investment tax, but they are claimed once the construction or installation work is completed. These tax returns for property investors are deducted at a rate of 2.5% per year until fully recovered.
7. Tax Costs
Yes, you can minimise your investment tax by paying your taxes! When you use a tax agent to file your taxes, you don’t just enjoy the benefits of a thorough tax report that will maximise your tax return. The tax agent’s fees are also tax deductible. Tax accountants know all the loopholes to exploit and increase tax returns for property investors. They can also ensure you don’t miss out on any deductions for which you are eligible. Most importantly, they can ensure that you don’t incur fines from undeclared income or unsupported claims.
Other Deductible Expenses
The Australian Tax Office provides fact sheets for deductions available to taxpayers in various industries on their website. There are also generic deductions available to all taxpayers. Among the general tax deductions that apply to everyone are:
- Education: If you are enrolled in a course related to your work, you can maximise your tax return by claiming for amounts above $250. You can also file for travel expenses incurred getting to and from your place of study.
- Subscriptions: If you subscribe to magazines, websites and other publications related to your work, these subscriptions are tax deductible. Journalists can even deduct cable TV subscriptions which help them stay informed on their field of work.
- Office Expenses: If you work from home, you can deduct almost all your office supplies, furniture, and equipment to minimise your investment tax. Reporting the purchase of home office stationery, computers, furniture and other such expenses can help you maximise your tax return.
- Car maintenance: Taxpayers who use their car for work can claim up to 66 cents for every kilometre with a limit of 500 km per year. This is a legitimate source of tax returns for property investors.
- Political Donations: If you make donations to political candidates in federal elections, this can be a useful way for maximising your tax return.
- Electricity: If you run a home office or frequently carry work home, you can claim for up to 45 cents per hour in electricity.
- Sunscreen: For employees who work outdoors, the ATO rewards sunscreen usage, providing a very rewarding way of maximising your tax return.
- Dogs: Your family pet may not earn you a tax deduction. However, you can claim for dogs used in businesses such as farming or security. Expenses such as food and vet fees are tax deductible over the lifetime of the dog.
- Phone bills: If you use your mobile phone for work or your internet connection, your phone and internet bills are tax deductible, within reason. This can be a creative source of tax returns for property investors.
- Laundry: For workers who wear uniforms, maximising your tax return can be as easy as claiming for laundry fees for your uniform. They are tax deductible at $1 per load, provided you have all receipts. Your laundry bill should also not exceed $300.
- Investment Seminars: As an incentive to attend investment seminars, you can claim the seminar fees in tax returns and minimise your investment tax. This only applies to property owners, not everyone planning to venture into property investment.
- Work Shoes: Employees who require work boots can file for tax refunds on their work shoes.
- Income insurance: If you’ve insured your income, you can deduct your premiums from your tax.
- Handbags: Ladies will be happy to know that you can claim for a handbag that you use for work purposes such as carrying your laptop or other work-related items.
- Charitable Donations: Donating to registered charities doesn’t just help good causes but can be deducted from your taxes too.
- Most of these items can be deducted upfront provided that they are less than $300, in which case you would have to pro-rate them yearly.
As you can see, most of your expenses can be used to offset your income, maximising your tax return. Despite the fact that 75% of Australians use tax agents or accountants, it is still possible to incur tax avoidance penalties. If you fail to furnish the accountant with adequate proof of your expenditure, you will either miss out on tax returns for property investors or incur penalties.
Dutifully filing your receipts and invoices can help your tax agent file accurate returns and minimise your investment tax. Also, if you get too creative with your deductions with the aim of maximising your tax return, the ATO will audit you. Your deductions should be relatively similar to other taxpayers in your occupation or with similar investment properties.
For any further information, please contact a professional Tax Accountant as the deductions may vary depending on your individual circumstances. Alternatively, if you are an Infinite Wealth client, contact us right away, and we will ensure you are maximising your tax return.