Every end of financial year, property investors are able to claim a variety of deductions and tax benefits for out-of-pocket expenses and losses associated with residential investment property. Property investors must be extremely careful in ensuring they understand what can and can’t be claimed.
Concerns about housing supply and affordability have prompted new measures in government policy and extra attention from the ATO on what claims and deductions property investors make this tax season. Below we look at what can and can’t be claimed so you can make the most out of tax benefits this year.
What Can You Claim?
So long as the property exists for income producing purposes and is ‘available for rent’, investors can make deductions relating to:
- cleaning expenses
- land tax
- pest control
- interest on loans
- lease expenses
- property management fees
- council rates
- building, contents, public liability and landlord insurance
The following deductions may also be made but are subject to strict or changing rules:
- Travel expenses – From July 2017, investors can no longer claim deductions for travel expenses related to “inspecting, maintaining or collecting rent for a residential rental property”. However, travel expenses incurred in the 2016-17 tax year is still claimable.
- Plant and equipment – Investors who purchase plant and equipment (e.g. washing machines, dishwashers, ceiling fans etc.) for their residential investment property after 9 May 2017 can claim a deduction over the life of the asset unless they were already in the property when you acquired it.
- Restoration repairs – You may claim for any restorative repairs or need to return the property to the condition it was in before it deteriorated. If repairs or restorations involve improved parts or materials however, it will be considered a new asset.
Property investors cannot make claims on the following:
- Acquisition or disposal – You cannot claim a deduction for expenses related to acquiring or disposing of your property, which are capital expenses.
- Initial repairs – Repairs undertaken within 12 months of purchase are not allowed as a deduction, even to make the property suitable for renting. Instead, property investors should claim depreciation as a capital works deduction over 40 years.
Once you know you are entitled to a deduction, you should be aware of when it can be claimed. For example, your property needs to be available for rent to enable many running expenses to be claimed from them.
Additionally, some repairs and maintenance cannot be claimed in the first year as the price paid for a property reflects the condition before tenants move in. There are also timing issues when claiming certain expenses at the end of a tenancy.
It’s a good idea to organise a depreciation schedule if your property was built after 18 July 1985. Engage a registered quantity surveyor to value the building plus and fixtures and fittings. This allows you to maximise the deduction claims you are entitled to. The cost of the property valuation is also deductible in most cases!
Be Honest and Keep Records
The ATO is paying very close attention to deductions being made by property investors. Ensure you can substantiate any expense claims you make by keeping all of your receipts. Bank and credit card statements often suffice; however, receipts offer concrete security.
This year, the ATO will pay special audit attention to:
- Excessive deductions being claimed for holiday homes (e.g. deductions that exceed the amount of income earned or the number of days the property was rented out)
- Partners inappropriately splitting rental income and deductions for jointly held properties
- Interest deductions claimed for the private proportion of loans
- Travel claims for visits to rental properties
- Claiming deductions for a rental property before it is available for rent or has been rented out.
Every year the ATO contacts thousands of property investors to closely inspect their claims. Avoid making any deductions you can’t prove you’re entitled to in order to avoid finding yourself in trouble.
Some Additional Tips
There are a range of other ways you can reduce your overall amount of tax you pay. Depending on your circumstances, you may want to prepay interest for the next financial year to reduce your tax liability in the current year.
If your property is negatively geared, it may be worth submitting a PAYG withholding variation, allowing you to reduce the amount of PAYG tax that comes out of your pay. If you’re trying to sell your property, consider exchanging contracts after 1 July to defer tax for another year and achieve strong capital growth.
Please note the information in this article is intended to be of general nature and does not take your personal circumstances into account. Consider consulting a registered accountant or tax agent for specific advice.