7 tax tips for your investment property
As the financial year draws to a close, it’s time to start thinking about tax planning. If you’re a property investor, or a self-managed superannuation fund trustee with funds invested in geared property, you need to start thinking of some strategies you can undertake before 1 July ticks over. There’s certainly nothing worse than waking up on that day to realise that you are too late for what could have been some benefits, or, worse still, haven’t crossed some important t’s to ensure you are tax office compliant!
So, here is your end-of-year checklist to ensure you’re prepared;
1. Think about any repairs and maintenance which might be needed, and do it before June 30. Any expenditure on items under $300 (such as new light fittings, tap fitting etc.) is an immediate write-off in the year that it is incurred. If you can’t get the work done prior to the 30th, at least try to order, and pay for, any of the materials you’ll be needing.
2. Consider pre-payment of interest. You can pre-pay up to 12 months’ worth of interest on your investment debt and claim the deduction on that interest immediately. This strategy is not necessarily useful to those who plan to earn the same income every year, as all you are doing is bringing forward that deduction and then not having access to it the following year. However, if you have a year where you may have been pushed into a higher tax bracket due to a bonus or wage rise, or if you know that in later years your income may decrease and you may fall into a lower bracket, it can be useful to bring forward the deduction to a year where it may be worth more to you. It’s also useful to those who may have access to some extra cash now, but know that they are headed into a time where cash may be tighter – you essentially give yourself a 12 month repayment holiday.
3. You can pre-pay lots of things – insurances, rates, body corporate levies to name a few. At the very least, look ahead a month or two and see if there are any expenses coming up, and elect to pay those prior to June 30.
4. If you have not already done so, contact a Quantity Surveyor and have a depreciation report prepared. A depreciation report will identify the present values of the plant and equipment and the original construction costs of the building, each of which can be written down as a deduction. The effective life of each item is prescribed by the tax office and depends upon the item, but can be anything from an immediate deduction to possibly a 20-year life. Essentially, you get a one dollar deduction for each dollar of value loss, for the number of years of effective life. For buildings, it is 2.5% of the original construction costs, every year for 40 years! If you think about all of the items which may be included in your investment property, such as light fittings, curtains, blinds, carpets etc., this can work out to be quite a large deduction. Depending upon your marginal rate of tax, you could receive up to 45 cents tax refund for every one dollar in lost value.
5. Ask your property manager to have your annual statements emailed to you as soon as possible. These statements should cover all of the management fees as well as rent collected. You will need these to pass on to your accountant so that your tax returns can be accurately prepared and so you want these statements as soon as you can get them. Equally, for a strata titled property, ask for your annual body corporate levy statement to be provided as soon as possible.
6. While you’re talking to your property manager, carry out a rent review. Some property managers prefer to set and forget and you could be due a rent increase. Where vacancy rates are falling and low, don’t lock yourself into any long-term leases – you want to be able to increase rent every 6 months in line with market value, rather than be locked into a lower rent for a long period of time.
7. Finally, once your tax return is prepared, consider completing and submitting an Income Tax Withholding variation (ITWV). This allows you to estimate the coming years’ deductions and begin to claim them on a weekly basis, every time you receive your pay. Having your deductions up front in this way can help you to manage payment of your property related expenses and potentially make extra loan repayments, reducing interest so that you own the asset sooner. Be careful though – if your estimations are too far out either way, you can be penalized, so it’s best to have an accountant make these estimations for you.
Start out the new financial year organised so that the following years’ returns are easy to prepare for.
Shoeboxes full of paperwork are so last century – get yourself a great on-line property expense tracking tool (such as Destinylive®) and start out next financial year digitally. You’ll save a lot of time and money too, and you will always know exactly where you stand with regard to your property financials.