The Australian Taxation Office (ATO) recently performed a review of individual tax returns and found that an astounding 90 per cent of investment property owners were making mistakes in their tax return. The most common errors were around loan interest, borrowing expenses, repairs and improvements.
If you’re a property investor, here are some tips from our business partners at BMT Tax Depreciation for the new financial year that could help you avoid mistakes and save you thousands next tax time.
Understand loan interest and how it can be claimed at tax time
If you obtain a loan to purchase an investment property, the interest charged on that loan can be claimed as a tax deduction. However, there are some rules around this:
- The property must have been rented, or genuinely available for rent, in the income year the deduction is claimed
- If the property was used for private purposes at any time throughout the year, the interest will be apportioned accordingly
- If the loan was used for more than one purpose, such as to buy the property and a car, the interest must be apportioned into deductible and non-deductible amounts
Don’t forget, you can deduct interest on loans for other purposes including:
- loans taken out to finance renovations
- loans taken out for repairs to the property
- loans to pay for depreciating assets, such as air conditioners
You can also pre-pay next financial year’s interest in a lump sum and claim it at tax time this financial year.
Tip: Ensure you can provide proof that the property has been genuinely available for rent for vacant periods for your investment property.
Borrowing expenses are expenses that are directly incurred in taking out a loan to buy an investment property. If over $100, they can be claimed over the course of five years. If under $100, the full amount can be claimed in the year the expense was incurred.
Borrowing expenses include:
- lenders mortgage insurance
- stamp duty charged on the mortgage
- title search fees
- mortgage broker fees
- valuation fees
- loan establishment fees
- costs for preparing and filing mortgage documents
They don’t include:
- costs involved in buying your property such as conveyancing fees and stamp duty
- the amount you borrow for the property
- loan balances for the property
- interest expenses (these are claimed separately)
Please note, this isn’t a comprehensive list. For more information on what can and can’t be claimed at tax time as a borrowing expense, visit the ATO website.
Repairs, maintenance and capital expenditure
When it comes to tax deductions, there are differences between repairs, maintenance and capital expenditure.
- Repairs are generally made to fix the wear and tear or damage that occurs to your property as a result of renting it out. If you are replacing something that’s worn out or damaged, it’s likely to be a repair. An example of a repair is fixing a broken kitchen cupboard
- Maintenance, as the name suggests, generally involves keeping the property in a good and tenantable condition. If you’re preventing or fixing deterioration of an item, it’s likely to be maintenance. An example of maintenance would be painting an interior wall
- Capital improvements occur when the condition or value of an item is improved beyond its original state at the time of purchase. Structural additions and renovations like adding a wall are considered capital works deductions. Adding removable or mechanical items like carpet, hot water systems and stoves are considered plant and equipment
Repairs and maintenance costs may be fully tax deductible in the year they were incurred, so long as the expense occurred as a result of you renting out the property and the property was rented on an ongoing basis or was genuinely available for rent.
Capital improvements must be depreciated or claimed as capital works deductions or as plant and equipment depreciation over time.
If you made an initial repair or improvement to a property after purchase but before renting it out, you can’t claim the cost as a standard tax deduction. These costs instead will be classed as capital works and claimed at 2.5 per cent per year over forty years.
Don’t forget to claim depreciation at tax time
Research shows 80 per cent of property investors fail to take advantage of property depreciation at tax time and therefore miss out on thousands of dollars in their pocket.
Depreciation is most often missed because it is a non-cash deduction, meaning you do not need to spend any money to claim it.
During FY 2017/18, BMT found residential property investors an average first year deduction of almost $9,000.
A comprehensive depreciation schedule for an investment property will help support any deductions you claim for the wear and tear of structures and assets in the property in the event of an audit.
And for those who haven’t been claiming depreciation, a BMT Tax Depreciation Schedule can help you claim back missed dollars and amend your tax return for the previous two financial years.
Stay compliant at tax time
The ATO audited more than 1,500 taxpayers with rental claims in the 2017-18 financial year and issued penalties worth $1.3 million.
This year, it the ATO plan to extend its program of audits and reviews of rental properties and more than double the number of property investor audits to 4,500.
With the focus now on “over-claimed interest, capital works claimed as repairs, incorrect apportionment of expenses for holiday homes let out to others and omitted income from accommodation sharing” it’s wise to ensure you are complying and working within the parameters of ATO legislation.
Prove it all with records
Maintaining accurate records for tax purposes is crucial. The standard rule is that if you can’t verify it, you can’t claim it.
MyBMT provides the perfect tax time solution, making it easy to track property costs throughout the year.
MyBMT enables property investors to track their rental income and property expenses such as loan interest, insurance, rates, body corporate fees and more. You can notify your accountant to keep them informed and download an annual report.
With MyBMT you can also upload property files, photos and receipts, ensuring you never have to worry about forgetting or misplacing receipts again.
MyBMT can be used by property investors, accountants and property managers.
Applying these financial tips and maintaining strict record keeping practices at the start of the financial year will streamline the tax time process for you and potentially save you both time and money in the long run.
To find out more about how depreciation can help you save at tax time, Request a Quote or speak to the expert team at BMG on 1300 728 726 today.
About the author
BMT is a Quantity Surveying company who specialise in tax depreciation with a personalised approach to every tax depreciation schedule prepared for investment, commercial and rental properties.