- Initial repairs – Any repairs to rectify damage, defects or deterioration that are carried out immediately after acquisition of a rental property are generally not deductible, even if you carried them out to make the property suitable for renting. This is because the Australian Taxation Office considers the purchase price has been discounted to reflect the needed repairs. Consider delaying non-critical repairs. Later, if the tenant requests a repair you are in a better position to claim an outright deduction.
- Extensions & alterations – While extensions, alterations, structural improvements and initial repairs become part of the building cost, you can still claim a deduction for those costs under the special building write-off provisions. Document the work done and keep the receipts.
- Tax depreciation schedule – Property buildings constructed after 18 July 1985 are eligible for their construction cost to be claimed as a tax deduction over a number of years. Even though you don’t have original construction cost details, it can still be done. All you need is a tax depreciation schedule prepared by a quantity surveyor who is qualified with the Tax Practitioners Board.
- Prepay interest – If you are expecting that you will have a lower income next year (due to factors such as maternity leave or redundancy) then consider prepaying interest up to 12 months in advance before year end, to provide a greater deduction against your higher income this year.
- Timing of property sale – If you hold your investment property for more than 12 months you will reduce your Capital Gains Tax (CGT) bill by half. Also, if you are marketing your house for sale around May/June, the CGT payment date can be extended by at least another year where the sale contract is signed on 1 July compared to a contract signed a day earlier.
- Minimise CGT – If possible, sell the property when you have lower income compared to the higher income earning years during the peak of your career. That way, the assessable part of the capital gain is taxed at lower marginal rates of tax.
- Minimise your risk – Each year the ATO contacts many thousands of taxpayers with rental properties. It’s important you keep your receipts and explanatory documentation to justify your claim. In the event of an audit by the Tax Office you will incur tax agent fees (and possibly, legal fees) even though your claims may be well supported by documentation. Consider tax audit insurance to cover these costs.
- Time is money – Rental properties provide you with rental income and capital growth. The capital growth component builds over several years. The sooner you invest, providing it is an appropriate investment in your circumstances, the more time you are allowing for capital growth. To access the CGT discount, the owner must own the investment rental property for at least 12 months.
- Get good advice – Avoid paying too much in tax, exposure to the ATO and the hassle of doing rental property tax returns yourself. Use an accountant/tax agent to help you achieve the most from your rental property and their fees are tax deductible.
Tax rules relating to rental properties can be complex and we recommend you obtain get professional tax assistance before committing to any property investment.
Written by Chieftains an accounting firm that exists to help business owners increase profits and reduce risks allowing them to astutely provide for their retirement.
This article is for guidance only, and professional advice should be obtained before acting on any of its contents. Neither the publisher nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication. Liability limited by a scheme approved under Professional Standards Legislation.