With property remaining a high-priced asset, it’s more important than ever for investors to ensure their property investments are a financial success.

The latest data demonstrates property’s popularity. One-in-five households (21%) owns a home in addition to their primary residence.i

Maximising taxation benefits is one key element. However, the Australian Taxation Office (ATO) recently found 9 out of 10 returns were incorrect, so it’s essential to check your paperwork as we approach the end of the financial year.ii

Get your structure right:

As with any investment asset, ensuring the right ownership structure for a property asset is vital as this can make a big difference to your tax position each financial year.

It’s also sensible to check if you’re using the right structure to help protect your investment from creditors, provide income in retirement, or cope with the unexpected death of a part-owner.

Managing the loan:

Once you establish your investment loan, tax still remains a consideration. Any deductions you claim for your loan expenses must directly relate to earning assessable rental income.iii

In cases where money from the loan is used for both private and income-producing purposes (such as a property partly used for rental and partly as your home), you must split your claims into deductible and non-deductible amounts.

If you use the redraw facility on your home’s mortgage to fund an investment property, you won’t be able to claim the interest as a deduction if you subsequently use your family home as a rental. There are also capital gains tax (CGT) implications with this strategy.iv

Costs related to loan establishment fees cannot be claimed as a deduction upfront and must be spread over the term of the loan or a five-year period, whichever is shorter.v

Rental deduction dangers:

Although many investors focus on the tax deductions they can claim from a property asset, both rental income and deductions are key areas of ATO interest.

Detailed records are required to substantiate all claims and any rental income from short-term arrangements, and insurance payouts must be included in your return.vi

You also need to be careful not to overclaim. Many new investors make the mistake of claiming an immediate deduction for initial repairs after purchasing a property. Existing damage must be claimed over several years as a capital works deduction, and is used when working out your capital gain or loss when selling.vii

Deductions such as advertising for tenants, professional property management, council rates, land tax and strata fees, building and landlord insurance, as well as pest control – can only be claimed for time periods directly connected to earning income.

Depreciation or capital works?

Property investors can claim a wide range of deductions for expenses associated with maintaining and financing property assets, but care is needed.

Claims for depreciation of assets with a limited effective life (such as freestanding furniture, washing machines and TVs), can be made each year, but deductions for capital works must be spread over 40 years following construction. Capital works include improvements or alterations such as adding a driveway or altering the building.viii

Improvements such as renovating a bathroom, are a building cost and must be claimed at 2.5% annually over 40 years from completion.ix

Check your CGT:

When it comes time to sell your investment, an important consideration is CGT. The key to making your investment tax-effective is to ensure you have identified all legitimate expenses contributing to the property’s cost base, so you can correctly calculate the capital gain or loss.

The property’s cost base includes the price paid plus your buying and selling costs (such as stamp duty, legal fees and the agent’s commission). You are not permitted to include amounts already claimed as a deduction, including depreciation and capital works.

Any capital gain must be included in your tax return for the income year the property is sold, while capital losses can be carried forward and used in future years.

To ensure you are making the most of your investment assets, please call our office today. Our team of licensed advisers and leading industry experts is here to empower your financial journey and ensure optimal wealth outcomes for your future.

Housing Occupancy and Costs, 2019-20 financial year | Australian Bureau of Statistics (abs.gov.au)
ii https://www.ato.gov.au/Media-centre/Speeches/Commissioner/Commissioner-s-address-to-the-Tax-Institute-s-Tax-Summit-2022/
iii, iv https://www.ato.gov.au/api/public/content/530c1d629e07404aa4405dbe664b8011?v=0ced7a8c
https://www.ato.gov.au/individuals-and-families/investments-and-assets/residential-rental-properties/top-10-tips-to-help-rental-property-owners
vi https://www.ato.gov.au/Media-centre/Media-releases/Get-your-rental-right-this-tax-time/
vii, ix https://www.ato.gov.au/Individuals/Investments-and-assets/Residential-rental-properties/Top-10-tips-to-help-rental-property-owners/
viii https://www.ato.gov.au/tax-and-super-professionals/for-tax-professionals/prepare-and-lodge/tax-time/tax-time-toolkits/tax-time-toolkit-for-investors

Information contained in this document is considered to be true and correct at time of publication. In addition, the information provided is general information only, and does not take into account any individuals’ objectives, financial situation and needs. Before acting on any information contained herein, you should consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs.