What’s Deductible or Not?

What’s Deductible & What’s not … for Property Investors?

Below is a list of items which you can claimed as a deduction against rental income for this year. Further below is a list of items which are not deductible, usually questioned by ATO or deductible over a number of years. I trust this will help you compile your information and make it easier to prepare your income tax return and improve your decisions in relation to managing your rental properties. Are you relying on Negative Gearing?

Deductible – Immediately

  • Property management & maintenance expenses
    • Advertising for tenants – directly by you or where the agent charged you
    • Body corporate fees or Strata Title fees and charges
      • Special levies for capital works on a building can only be depreciated at 2.5%
    • Cleaning
    • Gardening/Lawn Mowing
    • Pest control
    • Security patrol fees
  • Rates & Taxes
    • Water rates, charges & usage
    • Council rates
    • Land tax – first time owners must lodge an initial land tax return with the Office of State Revenue in each state – YOU have to initiate this. They will not chase you up but they will charge additional interest for late lodgement.
  • Property Agent
    • Fees/commissions – including GST
    • Postage & petties,
    • Statement fees and
    • Bank charges/fees
    • Lease document expenses
    • Letting fees
  • Administration expenses including
    • Stationery used to maintain your rental records etc.
    • Postage on documents relating to property management
    • Telephone calls relating to property management – ATO prefers to see a diary
    • Legal expenses relating to debt collection or tenant problems
    • Electricity & gas – where not covered by tenant
  • Insurance
    • Landlords
    • Building
    • Contents
    • Public liability
  • On acquisition – from the solicitor’s settlement letter
    • Balance of council rates
    • Balance of water rates
    • Balance of body corporate fees
  • Repairs & Maintenance – relating to wear & tear or damage as a result of renting out the property. The idea is that an expense is considered a repair when the functionality is being restored. Generally, repairs include
    • Plumbing
    • Electrical
    • Handyman
    • Etc.

ATO is particularly vigilant to catch people who are claiming expenses described as repairs when they are considered to be improvements.

Example – fixing broken glass on a window is considered a repair. Replacing the whole window frame is an improvement which can be depreciated at 2.5%

Repairs made immediately after purchase of the investment property or maintenance to make the property suitable for rental are considered to be of a capital nature – part of the cost of the property and can be depreciated. They are not deductible as ATO considers the lower price of the property reflects its state of disrepair.

  • Interest & loan a/c fees on loans to finance investment properties.
    • For the interest to be deductible the loan must have been applied to acquire an income producing asset e.g. rental property
    • Where loans used for both investment property and private assets the interest has to be apportioned based on how much of the principal was used for which purpose.
      • This usually happens when people are using a Line of Credit facility.
  • Interest drawn from cash in an offset a/c attached to a Main Residence loan may not be deductible – consider refinancing reducing Home loan and taking a larger investment loan.
  • Travel expenses to –
    • Inspect property
    • Maintain property
    • Collect rents

A full deduction can only be claimed if the sole purpose of the trip relates to the property.

  • Where the inspection is combined with a holiday, expenses must be apportioned, where you visit an investment property during 1 of 10 days you are in the holiday location ATO says you are only allowed the cost of travel from your accommodation to the rental property and return
  • Cost of preparing a Quantity Surveyor’s report showing depreciation expenses and Special Building Write-off
  • Seminars – cost of attending property investment seminars – only to the extent that they relate to operating or maximising the return on currently owned properties
    • Where money is spent on relevant seminars before any property is acquired, there will be no deduction available 

Deductible … OVER A NUMBER OF YEARS

  • Borrowing Expenses – deductible over the period of the loan where the loan is less than five years. Otherwise deductible over five years. Expenses deductible include:
    • Loan Application fee
    • Lenders legal fees
    • Title search fees
    • Lenders mortgage insurance
    • Stamp duty on mortgage
    • Mortgage registration fees
  • Depreciation on Plant & Equipment– ATO calls it Decline in Value of depreciating assets – Capital Allowance
  • Depreciation on the building construction – ATO calls it Capital Works deduction
  • Cost of installing any plant & equipment such as Hot Water Systems or air conditioners – are considered part of the cost of system – to be depreciated
  • Set of assets e.g. dining table and 6 chairs – is to be depreciated in accordance with their effective life
    • Each item cannot be separately deducted for being under $300.

NOT Deductible

The following items are either not deductible or considered to be of a capital or private nature by ATO

  • On Purchase
    • Purchase price – forms part of Cost Base reducing Capital gain on sale
    • Stamp duty on purchase
    • Legal/conveyancing fees
    • Pest & Property inspection
    • Sourcing Fee
    • Renovation during ownership period
    • Renovations immediately after purchase
    • Repairs immediately after purchase
  • On Sale of a property
    • Legal/conveyancing
    • Advertising
    • Agent fees
  • Pre-Purchase expenses including (especially if property was not purchased)
    • Attending seminars to acquire more property
    • Cost of reports on property prior to purchase
    • Travel to inspect property prior to purchase
  • Where the property was not available for rent, then all the expenses described above are not deductible
    • Particularly relevant where the property is used as your personal holiday accommodation.
    • Listing with agent and his documentation helps prove its availability for rental
  • Cost of improvements or renovations can only be depreciated over 40 years at 2.5% p.a.

Documentation

With today’s technology, it is easy to capture and store most of your information electronically. So, make sure you have either old style paper or electronic images of all receipts and invoices. It makes evaluating the information and processing the return so much easier taking less time.

Where you are using electronic banking, download and store the bank and loan statements for the entire 12 months to 30 June 2016. Especially important for rental properties in Self-Managed Super Funds – which have to be audited by independent auditors
In the event of an ATO audit having the right documents facilitates the process to a faster conclusion.

Audit Insurance

Managing the accountant’s fees to deal with ATO on your behalf, in case of an ATO audit, can be managed with tax deductible Audit Insurance offered by the tax agent.

CGT questions we help resolve include …

Rising property values over the last couple of years has provided many people with opportunities to exit or restructure their property positions. We have been responding to enquiries for solutions to the following situations:

  • Subdividing and selling the vacant land
  • Subdividing and constructing a rental property
  • Exiting private arrangement e.g. family members financing while ownership is in another’s name
  • Creative solutions to maintain the MR exemption e.g. constructing a duplex to function as one property
  • Maximising sales on subdividing & Selling out of pre-1985 property OR
  • Holding onto pre-1985 property – especially where situated in a great location and owned by a trust
  • Transferring from parent to children while parent moves to retirement home
  • Correctly calculating CG – maximising exemptions
  • Accessing concessions – 50% discount
  • Property owned overseas & occupied as MR & returning to Australia
  • Selling/purchasing property owned overseas
  • Non-residents and MR exemption
  • How to establish a property as a MR to obtain CGT exemptions
  • Clear advice and planning (before purchase) to minimise CGT on selling

Two heads are better than 1? Discuss your plans?

Call to chat … 

Contact us if you would like to

  • Review & discuss your current property & tax situation … maybe the next deal or
  • Whether to sell a property, which one in the portfolio should be sold
  •  Your asset protection strategy. What is your risk profile? High…medium …low
  • Structuring your next investment property. In whose name, should it be?
  •  Planning to legally minimise your tax position or just to explore the possibilities
  • Subdividing a block or your Main Residence … Capital Gain or Main Residence
  • Capital Gains on selling a previously Main Residence … estimate tax
  • Is your Self-Managed Super Fund ready to acquire a property
    1. with limited recourse loans
    2. from lending institutions or yourself
  • Prepare your next tax return or application to reduce your PAYG

Financial Planning with your Tax Planning

Tax planning should ideally form part of your overall financial planning, as it may well have an impact on your overall financial situation.
As we are not licenced to give investment advice, we have created alliances with licenced Financial Planners and Advisers as an additional service to clients. They add an important dimension to tax planning. Call the office on 02 9411 8133 for more details.