How property investors should get ready for tax season - April 2020
April 21, 2020 / Written by Rich Harvey
By Guest Blogger, Mike Mortlock,
MCG Quantity Surveyors - www.mcggs.com.au
It's a perennial subject that us tax nerds prattle on about ad nauseum, and for that I apologise in advance. However. this season it’s perhaps more important than ever before. That's right kids, tax season is coming up!
If you're looking for advice on how best to prepare for the tax season, you need only go on Facebook, or any accountant’s website and you’ll find a myriad of articles available. However, as a property investor specifically, it all comes down to a few key fundamentals for me.
The first port of call ought to be to your property manager, where you can get your rental statement. This will show you the payments made by the tenant, your property management fees and any bills or repairs that the property manager is paying on your behalf. A tip for young players too; it’s much easier to have them pay everything out of the rent so you have an absolute record of things. Even tax people misplace receipts and invoices!
You’re also going to need your mortgage statements to provide to your accountant to deduct the interest component of your loan where applicable, as well as fishing out your shoe box of receipts for any repairs and maintenance expenses. Of course, if you want to maintain a cordial relationship with your accountant, it’s best to put it in excel format (item, date and cost).
My last major suggestion is to contact a quantity surveyor to assess whether a tax depreciation schedule would provide some worthwhile deductions for you. Given the major change to the rules in May 2017, this conversation needs discover some key elements like the age of the property, any improvements etc. Any good quantity surveyor will guide you through this and only recommend a schedule where there is a clear benefit. Example: benefit - cost = happiness.
Now for a word of warning. A vast number of property investors are getting their tax returns wrong. Last year the ATO announced that they doubled the number of in-depth audits to 4,500 due to an error rate of just under 90% on a “sample of investor returns”. If you crunch those numbers (I can’t help myself it’s a sickness) the number of property investors therefore would equate to 0.2% receiving an in depth audit, but based on the posturing of the ATO Commissioner, it would be safe to assume that the sample sizes are going to be on the increase. As for where investors are going wrong, we'll keep this snappy:
1. Number one is interest deductions. Essentially, incorrectly claiming interest on equity redraws for things like boats, cars, holidays and jet skis. Only the interest portion of your loan on your investment property is claimable. If you extend the value of your loan with a redraw for another purchase, you’ll need to carefully consider where that money is being spent. If it's not attributable to an income producing property. You can't claim it as a tax deduction.
2. Number two is repairs and maintenance claims. Investors are claiming repairs and maintenance at 100% where these items don't qualify. There are some simple rules. Firstly, the property needs to be rented at the time of the incurred expense. You can't do some work to your investment property while you're living in it and then claim that as an expense. Secondly, if you're replacing an asset rather than fixing something that's already there, it's most likely going to be a depreciable asset that needs to be written off over time, rather than an immediate deduction.
On top of this, there are a few issues with holiday homes and Airbnb where homes are being let to family members for a reduced rate or for free. Owners need to of course ensure that they're not claiming for periods when they're occupying the property themselves. The ATO has some sophisticated data matching so it's important to know that the ATO is probably going to know what colour underpants you’re wearing on any given day.
Many investors leave the tax planning to the last minute, but careful forethought is likely to provide you with better outcomes. We find that on average investors wait just shy of two years between purchasing an investment property and engaging a quantity surveyor to do their depreciation schedule. That fact alone, says that there's some ground to make up in preparing for what is an important part of your financial position.
Given the situation with the pandemic, this tax season is likely to be as important as any in recent memory for investors in maximising their deductions and getting some much-needed cash back in their pocket. It’s all about weathering the storm right now.
As for the property market, it's important to understand that you probably invested for a long-term outcome, and the pandemic will unlikely change that unless you're forced into a situation where your buffer doesn't cover the expenses. That's really where the power of tax depreciation comes into the play. It is an opportunity to maximise your cash flow by claiming your legitimate deductions on your investment property.
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