Year end Tax Planning – Tips for Property Investors
With the hot property market, particularly in Sydney, new investors have entered the market.
With the hot property market, particularly in Sydney, new investors have entered the market. Others who have been in the market have taken opportunity to sell out of mediocre properties at a profit and re-invest in properties with improved potential. This is facilitated by the very low interest rates.
An ever vigilant and active ATO, has been pursuing tax debts faster and harder as they outsource their debt collection. ATO has also conducted a project chasing up substantiation of ‘Borrowing Expenses’ for 2012 year. If unable to substantiate with documentation, tax returns have been automatically amended. This highlights the need to keep records, summarised and original. ATO has also pursued people with undeclared foreign income including rental.
With the news focusing on leaks from the budget my only concerns for property investors centre on
- Interest – Shukri view – likely to stay low
- Removing rental losses (negative gearing) as a deduction – Shukri view they have to want to lose the next election to do this. Risk around valuations and bank system stability
- Attacking superannuation for people with high incomes – Shukri view most likely
With the financial year rapidly approaching its end, now is the perfect time to not only review the performance of your assets compared to your budget prepared in 2014 but more importantly to start planning for minimising your tax bill for the financial year ending on 30 June 2015. See below for some tax tips. To discuss further, call us.
Financial Year End Tax Planning – Tips for Property Investors
Planning to keep tax at a minimum is an exercise that should be carried out throughout the year and not rushed at the end.
To minimise your tax position for the year taking advantage of any benefits, NOW is the time to start reviewing your figures over the last 10 months, estimate the next two months, then discuss with your accountant where you are likely to be at the end of the financial year 2015. But more importantly where you would like to be …. as well as to plan out strategies for the coming financial year.
Below are some of the issues involved and some tax tips to help property investors save some more tax by better 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 2014 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 in the first week in July to facilitate this process.
Capital Gains/Losses & Timing
CAPITAL GAIN
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
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.
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 2015.
Prepaying expenses increases your deductions, reducing your tax.
Most people prepay the following types of expense
- Rates – Council & water
- interest
- Strata Levies
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.
Last year, one of my clients had about $13k taxable income. If he were to prepay expenses – bringing the deduction forward to 2014 year instead of leaving them for 2015 – 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 2015.
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 planned for the investment property into 2015 financial year instead of leaving them to 2016. 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.
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 repayment
With falling 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 the 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 2015 … useful where you purchased a new property & interest expense was lower than expected.
Disclaimer:
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.