While the rewards of property investment can be high, it doesn’t come cheap. Most investors will pay several thousand dollars per year in property management fees, maintenance costs, council and water rates, insurance and loan interest expenses while waiting for their asset to grow.
Your rental income will cover a significant proportion of these expenses but tax deductions are very important too, especially if your holding expenses are higher than your income.
Australia’s tax system provides generous tax concessions for investors and taking advantage of this will help you save significant money. Most expenses associated with running your investment are tax deductible either in the income year incurred, or over a period of several years.
Most investors are unaware of the many small deductions available to them and these can add up to a lot of money. Hiring an accountant to do your tax return is the best way to ensure nothing is missed, however if you want to do it yourself, then you need to educate yourself.
There are three types of property investment expenses.
1. Expenses you can claim as an immediate deduction in the income year incurred
2. Expenses you can claim a deduction for over several years
3. Expenses that are not deductible at all
In order to maximise your deductions, the most important thing you have to do is keep good records. You don’t have to be super organised to achieve this. Over the year, just throw every receipt into a box and hand it to your accountant after June 30. Pretty simple.
If you’ve lost some receipts but you paid with a credit card or EFTPOS, the tax office will accept bank statements for individual tax payers as proof of purchase, so make sure you scour them at year’s end for any expenses you don’t have separate receipts for.
Investors really need professional advice to ensure they don’t make mistakes. There have been changes to allowable deductions in recent years, such as no longer being able to claim travel costs when you visit your investment property to inspect it or attend to a repair.
Your accountant or the tax office can provide this advice. Don’t be afraid to contact the ATO – they appreciate people checking the rules so feel free to ring them and ask questions if there is something you don’t understand.
Here is a list of immediately deductible expenses that can be claimed in the year incurred.
• Advertising for tenants
• Bank charges
• Normal body corporate fees
• Cleaning costs
• Council and water rates
• Gardening and lawn mowing
• Insurances – building, contents, public liability
• Interest on loans
• Lease document expenses – preparation, registration, stamp duty
• Some legal expenses
• Pest control
• Property agent’s fees and commissions
• Quantity surveyor’s fees
• Some repairs and maintenance costs
• Bookkeeping fees
• Servicing costs – eg service to a water heater
• Stationery and postage
• Telephone calls
• Some tax-related expenses
Some costs that you might assume are deductible are not. Here are a few that stand out.
• Quarterly body corporate administration and sinking fund fees are tax deductible, whereas special levies for a particular capital expenditure are not (in this case, you are usually able to claim a capital works deduction instead)
• Some legal expenses are deductible – for example, the cost of evicting a non-paying tenant. However, most legal expenses are of a capital nature and are therefore not deductible, such as conveyancing costs. Instead, these costs usually form part of the cost base of your property, which might reduce your capital gains tax when you sell
• You cannot claim the cost of a buyer agent’s fee. Again, this cost will usually form part of the cost base of your property, which might reduce your capital gains tax when you sell
• Only the interest paid on the loan for your investment property is deductible. If you are paying principal and interest, you cannot claim the principal portion
A word on depreciation
Many investors do not understand depreciation but it is arguably the most valuable of all deductions in monetary terms, especially if your investment property is a relatively new build.
Before leasing your property, have a quantity surveyor inspect it and provide a report, which will detail how much depreciation on both the building and your property’s fixed contents you can claim each year. It can amount to thousands of dollars per annum so it is crucial not to skip this step.
All the information above is general in nature. Use it as a guide only. As with most tax matters, it is best to get professional advice.
For more information, download the ATO’s Rental Properties Guide.