As we reach for the blankets and rug up for winter, accountants around town polish up their door signs and get ready for the annual onslaught of business. The winter months bring with it one of life’s certainties: tax. While most of us dread tax time for its seemingly endless paperwork and potential for a hefty bill, savvy investors can walk a little lighter at this time of year, provided they’ve done their homework beforehand.
Investing offers all manner of tax perks, as well as potentially opening you up to financial liability. For this reason, it’s important to engage a competent professional to give you a hand. Secure an accountant with an interest and demonstrated experience in dealing with property tax matters. This fundamental basic will get you started with good habits that will reward you come June 30.
Despite the seemingly scary name, negative gearing is actually a positive for investors. The basic premise is that as an investor who owns a property running at a loss – think when rent doesn’t cover mortgage repayments – you can claim your loss as a deduction. Claiming this difference will reduce your taxable income, which of course reduces the amount of tax you pay.
Other things you may be able to claim as deductions include anything related to the running costs of your property. Some things seem obvious like body corporate fees, council rates and insurance costs, while others are a bit less obvious including a magazine subscription, and travelling costs to and from your investment property.
Offering another way to reduce taxable income, depreciation is good tool for claiming the gradual wear and tear on your investment assets. Depreciation falls into two categories: ‘depreciating assets’ and ‘capital works deductions’. Depreciating assets cover investment household fixed furnishings with limited lifespans, like carpets, cooktops, dishwashers, air-conditioning units and hot water systems. An allowance on depreciation values is calculated for these items (and this is where your qualified accountant really comes to the fore) that varies according to the asset type and the original quality.
On the other hand, capital works deductions are available on building costs of new investments. This is calculated according to the original building costs, and is allowed over a period of 40 years. For example, a new building that cost $200,000 to build would give you a $5,000 tax claim each year for 40 years (i.e. 2.5% per year). That’s quite a hefty deduction to add to your annual return, especially over a long term investment. Along with your trusty accountant, consider hiring a quantity surveyor to organise a depreciation assessment. The small cost outlay of a professional surveyor will be quickly subsumed by valuable deductions.
General tips for winning at tax time
It’s tempting to stuff every receipt in a shoe box under the bed, but poor organisation will only end up costing you money in the long run. Records of rental incomes and your investment deductions need to be kept for five years, on the off chance the taxation department needs to audit your returns. Along with receipts and records, keep all your purchasing or selling cost paperwork for the same period of time.
Having these documents on hand and easily accessible (which generally means in a filing cabinet, not your shoebox) will make an accountant’s job easier, clearer and faster.
Finally, consider what you want from your property in the long term. While claiming a tax loss is great for reducing your income, ultimately you want your investment to form part of your path to income-generating financial freedom. Partnering with a professional to discuss your long-term goals will ensure you have the right short-term strategies in place to achieve your goals and financial dreams.