Property Investor - Tax Tips 2019

MUST KNOW

TAX TIPS FOR PROPERTY INVESTORS HOW TO LEGALLY MINIMISE YOUR TAX AND MAXIMISE YOUR PROFITS

What is deductible & What’s not ….

For Property Investors?

Whether it is end of the financial year or during the financial year there are rental knowledge that are beneficial to property investors. Most property investors should be planning for maximizing their property investment deductions.

Below is a list of items which you can claim as a deduction against rental income for this year. Further below is a list of items which are not What is deductible & What’s not ... for Property Investors? deductible, usually questioned by ATO or deductible over a number of years. I trust this help you compile your information and make it easier to prepare your income tax return and improve your decisions in relation to managing your rental properties.

Immediate DEDUCTIBLE Expenses…

Property management & maintenance expenses

Property Agent

o Advertising for tenants – directly by you or where the agent charges you o Body corporate fees or Strata Title fees and charges o Special levies for capital works on a building can only be depreciated at 2.5% o Cleaning o Gardening/Lawn Mowing o Pest control o Security patrol fees o Smoke alarm inspection

o o o o o o

Rates & Taxes o Water rates, charges & usage o Council rates o Land tax – first time owners have to lodge an initial land tax return with the Office of State Revenue in each state – YOU have to initiate this.

Insurance o o o o

Landlords Building Contents Public liability

Fees/commissions – including GST Postage & Petties, Statement fees and Bank charges/fees Lease document expenses Letting fees

Administration expenses including o Stationery used to maintain your rental records etc. o Postage on documents relating to property management o Telephone calls relating to property management – ATO prefers to see a diary o Legal expenses relating to debt collection or tenant problems o Electricity & gas – where not covered by tenant Quote of the year

“A successful man is one who can lay a firm foundation with his bricks others have thrown at him.”

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2019 News: ATO Focus area

In the 2017-18 financial year, more than 2.2 million Australians claimed over $47 billon in deductions and the ATO believes that is too much - one in ten is estimated to contain errors.

What you can claim for your rental property has been significantly curbed. For example, you can no longer claim deductions for the cost of travel you incur relating to a residential rental property, such as travelling to inspect the property. And, you can no longer claim depreciation deductions for second hand plant and equipment.

Previously, you could for example, buy a rental property from someone else and then claim depreciation on the assets already in the property such as the kitchen appliances and carpet. From 1 July 2017, you can only claim deductions for assets you purchase new and install in the property. Please speak to our trusted property tax specialist advisor if you have any question. We want to help you achieve the best result possible.

2019 News: Regarding Rental Properties Your Property must be available for rent From 1st Just, 2019 you are only entitled to claimed rental expenses associated with the property if it is genuinely available for rent.

Interest & Loan a/c fees on loans to finance investment properties. o For the interest to be deductible the loan must have been applied to acquire an income producing asset ie. rental property o Where loans used for both investment property and private assets the interest has to be apportioned based on how much of the principal was used for which purpose.

- This usually happens when people are using a Line of Credit facility

NEW Travel expenses Rules From 1 July 2017, travel expenses relating to inspecting, maintaining, or collecting rent for a residential rental property cannot be claimed as deductions by investors. The travel expenditure is also not recognised in the cost base of the property for CGT purposes.

You can continue to deduct travel expenditure if: • the losses or outgoings are necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income; or • you are an excluded class of entity (company, super plan, public unit trust, managed investment trust, unit trust/partnership

2019 News: Regarding Rental Properties Travel to inspect rental property is no longer tax deductible

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Example: Fixing broken glass on a window is considered a repair. Replacing the whole window frame is an capital improvement which will be depreciated at 2.5% Repairs made immediately after purchase of the investment property or maintenance to make the property suitable for rental are considered to be of a capital nature - part of the cost of the property and can be depreciated. They are not deductible as ATO considers the lower price of the property reflects its state of disrepair.

Repairs & Maintenance – relating to wear & tear or damage as a result of renting out the property.

The idea is that an expense is considered a repair when the functionality is being restored. Generally, repairs include o Plumbing o Electrical o General o Handyman o Etc.

On acquisition – from the solicitor’s settlement letter o o o o

Balance adjustment of council rates Balance adjustment of water rates Balance adjustment of body corporate fees Balance adjustment of land tax

ATO is particularly vigilant to catch people who are claiming expenses described as repairs when they are considered to be improvements.

Seminars – cost of attending property investment seminars – only to the extent that they relate to operating or maximizing the return on currently owned properties o Where money is spent on relevant seminars before any property is acquired, there will be no deduction available

Quantity Surveyor’s report - cost of preparing a report showing depreciation expenses and Special Building Write-off.

DEDUCTIBLE Expenses – OVER a NUMBER of YEARS Borrowing Expenses – deductible over the period of the loan where the loan is less than five years. Otherwise deductible over five years. Expenses deductible include: o Loan Application fee o Lenders legal fees o Title search fees o Lenders mortgage insurance o Stamp duty on mortgage o Mortgage registration fees

Depreciation on Plant & Equipment–

ATO calls it Decline in Value of depreciating assets. From 1 July 2017, decline in value of second-hand depreciating assets no longer can be claimed.

Depreciation on the building construction – ATO calls it Capital Works deduction

Cost of installing any plant & equipment such Hot Water Systems – are considered part of the cost of system – to be depreciated

Set of assets e.g. dining table and 6 chairs – is to be depreciated in accordance with their effective life o Each item cannot be separately deducted for being under $300 Copyright ©Lee & Lee Accountants

Pre-Purchase NON-DEDUCTIBLE expenses? … expenses

including (especially if property was not purchased) o Attending seminars to acquire more property The following items are either not deductible or considered to be of a capital or private nature by the o Cost of reports on property prior to purchase ATO. o Travel to inspect property prior to purchase

On Purchase o o o o o o o o

Purchase price Stamp duty on purchase Legal/conveyancing fees Title search fees Pest & Property inspection Sourcing Fee Renovations immediately after purchase Repairs immediately after purchase

On Sale of a property o Legal/conveyancing o Advertising o Agent fees

Cost of improvements or renovations can only be depreciated over 40 years at 2.5% p.a.

Where the property was not available for rent, then all the expenses described in the above deductible section are not deductible o Particularly relevant where the property is used as your personal holiday accommodation. o Listing with agent and rental documentation helps prove its rental availability

Disallow the deduction of travel expenses On 9 May 2017, the government announced that from 1 July 2017 all travel deductions relating to maintaining, collecting rent or inspecting for an investment property will be disallowed.

Where the property was not available for rent, then all the expenses described above are not deductible: o Particularly relevant where the property is used as your personal holiday accommodation. o Listing with agent and his documentation helps prove its availability for rental.

With today’s technology, it is easy and convenient to capture and store most of your information electronically. So, make sure you have either old-style paper or electronic images of all receipts and invoices. It makes evaluating the information and processing the return more effective and efficient. Where you are using electronic banking, download and store the bank and loan statements for the entire 12 months to 30 June 2019.

Especially important for rental properties in SelfManaged Super Funds – which have to be audited by independent auditors.

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Individual tax rates 2018/19 & 2019/20 To help you estimate the tax savings from any expenses spent on the property below are the individual tax rates and thresholds which applied from 1 July 2018 to 30 June 2019.

2018/19 & 2019/20 Rates - Resident Individuals Taxable Income 0 - 18,200 18,201 - 37,000 37,001 - 90,000 90,001 - 180,000 180,001+

Tax Payable ¹ Nil 19% of excess over $18,200 $3,572 + 32.5% of excess over $37,000 $20,797 + 37% of excess over $90,000 $54,097 + 45% of excess over $180,000

¹ The above rates do not include the Medicare levy of 2.0%

When you incur a rental expense, the tax savings is not the total amount but the amount multiplied by your marginal tax rate as shown above.

Checklists and Templates To make the compilation & reporting task for 2019 tax returns easier, clients will receive checklists and templates to facilitate the process ... saving them time and money ... the ‘right’ way is having clear documentation and substanitation.

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