Tax Planning – Tips for Property Investors – 2018
Planning to keep tax at a minimum is an exercise that should be carried out throughout the year and not rushed at the end.
But with the financial year rapidly approaching its end, NOW is the perfect time to not only review the performance of your assets so far, compared to the budget prepared in 2017. but more importantly to start planning for minimising your tax bill for the financial year ending on 30 June 2018.
How – Review your figures over the last 9 months, estimate the next 3 months, then discuss with your property tax specialists or accountant where you are likely to be at the end of the financial year 2018.
But more importantly where you would like to be …. as well as to plan out strategies for the coming 2019 financial year.
To help, see below for some tax tips. To discuss further, call us on .. 02 9411 8133
- Minimising Tax – using timing
- Capital Gains/Loses & Timing
- Prepayment of Expenses – when should I do it
- Repairs & Maintenance
- Refinancing – Penalties on early repayment
- Depreciation Schedules – Quantity Surveyor’s reports
- Annual rent statement from the Agent – Accountants Templates or Cloud based software
- Vary your PAYG Withholding
- Contribute to Super
- Contribution caps – property in Super
- Other CGT situations we have advised on
- Log Book – new rules – need to start now
- Two Heads are better than 1? Discuss your plans? Call to chat …
- Financial Planning with your tax planning
- Refinancing – Alliances with brokers who understand tax planning
Minimising Tax – using timing
As the financial year moves to an end, whatever expenditure is incurred in June is considered part of that financial year and is reflected on the tax return – in this case the 2018 tax return.
Where the expenditure is tax deductible, this reduces the taxable income for that year. So the tax payable is also reduced.
Tax Tip – If you lodge your tax return early in the new financial year, then the tax saving can take effect quickly as you receive your refund. So the time taken between spending the money and getting a tax deduction is the smallest. This should help your cash flow. Property Tax Specialists emails Checklists and Templates to clients in the first week in July to facilitate this process.
Capital Gains/Losses – Timing
Capital gains generated during the year can be minimised by offsetting it against capital losses or trading losses incurred during the same year.
Tax Tip – To reduce capital gain generated on sale of property or other assets during the year consider selling any assets which have lost value and their future is bleak.
Tax Tip – the 50% discount on capital gains is available where an asset is held for longer than 12 months. As this is a considerable saving consider the timing of any sale.
The relevant date for calculating capital gains is the CONTRACT date and not the settlement date.
Capital losses incurred in any year are available to be carried forward to future years if there are insufficient gains to absorb it in the same year. It can be carried forward for an indefinite period.
Capital losses can not be offset against other income such as business trading income or salary income.
Prepayment of Expenses – when should I do it
Prepaying expenses up to 12 months ahead are allowed as a deduction in the earlier year. In this case 2018.
Prepaying expenses increases your deductions, reducing your tax.
Most people prepay the following types of expenses
- Rates – Council & water
- Strata Levies
- insurance – landlord, income protection
Before prepaying deductible property expenses, it is prudent to check on how your tax return may look for that financial year. Do a bit of forecasting. Property Tax Specialists does this with clients who are on annual support programs.
If you have investment properties – which are negatively geared (the interest and expenses are larger than the rental income) the negative component will be offset against other income such as salary, reducing your taxable income – reducing your marginal rate of tax and your tax liability.
In previous years, one of my clients had about $13k taxable income. If he were to prepay expenses – bringing the deduction forward to 2015 year instead of leaving them for 2016 – he would lose money.
Why? Because at $13k taxable income – no tax is payable. From 1/7/2013 the tax free threshold has increased from $6k to $18.2k. So claiming more deductions will NOT produce more refunds. It will however lose the opportunity of claiming the deduction in the next year.
Tax Tip – review your personal circumstances before prepaying any rental expenses.
Repairs & Maintenance …
If you are likely to have a high taxable income then you may like to bring forward repairs and maintenance for the investment property into 2018 financial year instead of leaving them to 2019. This will generate a deduction and save some tax.
Tax Tip – Care should be taken in determining whether a maintenance or repair is deductible or it is considered a renovation or of a capital nature .. depreciable
If the work is fixing up damage caused by wear and tear, the expense is likely to be a repair. But where new materials replace the old, the item is likely to be considered of a capital nature and depreciated instead.
The difference is, the amount that can be claimed as a deduction and therefore tax savings.
Renovations are depreciated at 2.5% pa as building construction write-off.
Example – If you repair the broken glass of a window – that’s a repair. If you replace the whole window that’s an improvement to the property – depreciate at 2.5% pa
Refinancing – Penalties on early repayments
With low interest rates, you may be considering refinancing. Where you have not used an Offset type loan facility, you may be up to pay a penalty for early termination of a fixed interest loan or interest and principal loan . This generally represents the loss the bank makes where they have borrowed and on lent at a high interest rate and now they can only re-lend at the lower rate.
The additional fee, call it a penalty or additional interest on the termination is tax deductible in the year it is incurred. To maximise the tax deduction do it before 30 June.
Caution – Before terminating, calculate the penalty and compare it to the savings particularly where the loan has a long term to run.
Depreciation Schedules – Quantity Surveyor’s Reports
Depreciation is the wear and tear on building and equipment. Claiming a tax deduction for this expense does not require any cash payment. You get a tax saving without paying any additional cash money.
To maximise your deductions it is prudent to get a Quantity Surveyor to produce a report for you as they are skilled cost estimators. You get a nice report which minimises your accountants time and cost in preparing your tax return.
Tax Tip – A tax deduction is available, where you pay for this before 30 June 201 … useful where you purchased a new property & interest expense was lower than expected.
While continuuing the deduction for depreciation on the construction (Building Allowance/writeoff), note the 2017 budget has limited depreciation to new plant & equipment from 1/7/2017. So where a second hand investment property is purchased a deduction for depreciating plant & equipment is no longer available.
It is available where a new plant is purchased e.g. stove, hot water system etc.
Annual Rent Statement from the Agent – Accountants Templates
Most agents now send out Annual rent statements summarising the rental revenue collected and expenses paid on behalf of the landlord. These save a lot of time.
Make these available to your tax agent.
Take care when using these statements to prepare your 2018 tax returns. Real estate agents do not always pay for all rental expenses including land tax and insurances. Landlords usually do that. Also many landlords pay for rates.
Tax Tip – Use your accountant’s rental templates to summarise all expenses and present a complete picture of each property’s situation.
Clients of Property Tax Specialists get these rental templates and others as part of their year end package.
Tax Tip – Scan your original documents and send to your accountant. This ensures you have access to original documents to check on reports produced by the accountant and in case of a tax audit.
Vary your PAYG Withholding
Where you have negatively geared rental investments, the negative part offsets against your other income e.g. salary, reducing your tax payable and resulting in a large refund when your tax return is lodged.
This refund can be used to reduce your loan, pay your interest expense or help finance another investment property.
To help with cash flow, would it not be great if you were able to access this refund, throughout the year instead of waiting till the end of the year? This can help finance that extra property which has potential to pick up some capital growth between the beginning and end of year.
This can be done by lodging an application to vary the ‘Income Tax Withholding’ using a form from ATO . This can be done electronically on line or you can download the form, prepare and lodge it manually.
If you need help, contact your accountant. Property Tax Specialists provide this service. www.propertytaxspecialists.com.au
Tax Tip – Depending on your personal circumstances the additional refund from negative gearing may not be substantial. If the savings are small you should consider saving the cost of preparation and claiming the deductions at year end when lodging the tax return.
To get the maximum benefits out of the cash flow savings, late May/early June is the best time to prepare and lodge the Application for ITWV – because then you can get the full effect of lower tax deductions by the employer. ATO takes about 2-3 weeks to process the application.
Tax Tip – When lodging electronically ensure you keep a copy of the electronic receipt or make a record of receipt reference number. It helps when chasing up ATO.
Contribute to Superannuation
Tax can be minimised by making contributions to a super fund before 30 June 2018.
Changes in law mean that everyone can now contribute to a super fund directly and receive a tax deduction – not only the self employed or employed by your own company.
Superannuation contributions are deductible in the year that the contribution is received by the fund’s trustee.
Tax Tip – Be sure to check how long your payment method takes to process – if you’re paying one or two days before the end of the financial year the payment may not be received by the Trustees until the new financial year – therefore, the deduction for the contribution cannot be claimed this financial year.
Where you are an employee check with your employer what salary sacrifice arrangements can be made before 30 June 2017. Because ATO wants these arrangements in advance of the sacrifice being made, this is a good time to plan for sacrificing income for the 2018 financial year.
Contribution Caps – Property in Super
From 1/7/2017 deductions for contributions to super are capped at $25,000 for the 2018 tax year.
This amount includes the SGC payments made by the employer.
Tax Tip – before making additional contributions, check with you fund or employer to ensure the $25k cap is not exceeded.
For people aged over 49 years on 30 June The concessional contributions cap was $35,000. Now they join everyone else at $25k
Additional contribution to a Self Managed Super Fund (SMSF) maybe necessary to make up for any rental losses/cash deficit in a property owned by a super fund
With the aging population, more older Australians are trying to buy property in their SMSF.
Due to the non-recourse loans which are forced on super funds by the legislation, banks are only willing to lend between 65-70% of the value of a property. Where a fund wants to buy larger property or a second property in the super fund or they seek a positive cash flow to pay a pension, then a non-concessional contribution (non-deductible) may be required. From 01/07/2017 the caps on these has been reduced to $100K from $180k the previous year.
Tax Tip – If you are able to make non-concessional contributions to your SMSF and you want a larger deposit for a purchase the time to make these contributions is
- $100k before 30 June
- $100k immediately after 1 July
- It is possible to contribute 3 years worth with one payment = $300k making a purchase possible.
- the above caps are per member .. where other fund members contribute, there would be additional cash to fund a property .. or maybe reduce a rental loss with a lower loan component
Tax Tip – using spare cash available outside Super to lend to an SMSF to acquire negatively geared property, will make the money available for another project on sale of that property. At the same time the profits will be retained in the fund being taxed at the concessional rates. However ATO have just released new guidelines to manage the excess in this area. Get advice first
Concessional contributions over the caps are taxed at 32.5%.