An important factor in any property investment is ensuring that you’re not paying more tax than you should be, and as the end of the financial year looms closer, many investors are turning their minds to their tax returns. But with the ATO increasingly turning its sights towards landlord tax deductions, it’s now more important than ever to ensure your expense claims are not only accurate, but allowed under the current tax laws.
To help take the guesswork out of deductions, we’ve assembled a list of the most common legitimate claims and the most common mistakes.
A good record keeping system will help you manage your organisation’s tax obligations and make it easier to report to the ATO. Generally, for tax purposes, you must keep records for five years. With assets such as investment property, the purchase records must be kept for up to 5 years after the sale date. That means that if you sold the investment property after 20 years, then the records will be required to be kept for 25 years.
Claiming interest as a deduction. If you take out a loan to help pay for your investment property, you may claim that interest as a deduction, but only the proportion of the loan which was actually used to buy the property. If you used some of the loan for personal use (e.g. pay for a holiday, wedding, new car etc) that proportion cannot be included in your claim.
Repairs or renovations? The costs associated with regular maintenance on existing parts of your property, or repairs to any damage or deterioration since you bought it, can be claimed immediately. On the other hand, renovations, extensions or repairing damage that existed when you bought the residence, are treated as capital works and should instead be claimed as depreciation over a number of years.
As they are regarded as ongoing maintenance, the costs of paying a gardener or for pest control can also generally be deductable.
Rental property or holiday home? Unless you rent it out, a holiday home is regarded as a private asset and not an investment property, which means you cannot use it to claim deductions. However, if your holiday house is genuinely made available to the public for short-term rental, is normally available over holiday periods, and is kept in a condition that would make it attractive to holidaymakers, you should be able to treat it as an investment property. If your holiday home is used for both rental and personal use as well, then a portion of the deductions can be claimed.
Listing and management expenses. Often these are bundled where a rental manager handles the listing and vetting. Marketing your property, paying for photographers and copywriters, and then paying ongoing fees for a property manager are legitimate costs incurred in getting rental income for your property, and can generally be claimed. If you list with short-term sites such as Airbnb, any fees you pay should be deductable, as would cleaning and servicing costs.
Council rates, body corporate fees and land tax. Statutory fees such as council rates, water rates and land tax on investment properties are expenses incurred by your investment. While the latter is generally only deductable on land that generates an income, the Victorian State Government announced in its 2019 Budget, that if you own individual but adjoining titles, where one is occupied and the other is vacant land, then the vacant land will attract land tax. Therefore, it should follow that if the occupied block has a rental property on it, then the land tax on the vacant block should be deductable.
Similar to council rates, strata or body corporate fees can also be claimed on rental properties in most cases.
Insurance. If you own an apartment or property covered by a body corporate, the building’s insurance should be covered by your annual body corporate fees. What won’t be covered is your landlord insurance, for anything within your individual property, as well as rent losses and legal liabilities. If your property is freehold, then all insurance is your responsibility. As landlord, and (delete) private building and contents insurance is a business expense, it should be included in your deductions.
Insurance payouts. Unlike insurance you receive to repair your primary residence, insurance payouts you receive as a result of damage to your investment property may be viewed as income (even though it is usually off-set by the cost of repair), and your tax return needs to reflect this.
Utilities and amenities. This is particularly important for short-term lettings where you, as the owner, will pay for services such as internet, electricity, water, gas etc. But if you use the property for your own private use at all, always make sure you only claim utility costs for the time the property was available for rent.
Some long-term rental agreements put the cost of water and/or sewer connection back on the landlord. If this is the case with your property, don’t forget to claim a deduction for this.
Administration expenses. The cost of actually running your investment can often be claimed as a deduction. These are items such as postage and stationery, printing, even phone calls, but make sure you maintain detailed and accurate records of every business phone call you make. The ATO can be pretty strict on this.
Professional expenses. It’s important to note that legal and conveyancer fees associated with the initial purchase of a property are generally not deductable These costs are generally regarded as capital expenses and are included in the cost base of the property. Ongoing legal fees (e.g. for evictions or court actions) may be deductable. And remember, the fees you pay your accountant to prepare your tax return, are also deductable.
Depreciation. Assets, the building itself and even items you discard when renovating, may all be subject to depreciation. This is a highly technical area, and since different assets may have different depreciation rates it’s strongly recommended that investors engage an accountant such as the tax experts at WhiteStar Group to prepare your tax return if you wish to make the most out of the tax advantages of depreciation.
• Don’t try to claim deductions for travel. While they may seem like a legitimate expense in running an investment property, new laws introduced in 2017 no longer allow private property investors to claim travel expenses for carrying out inspections, repairs or maintenance of investment properties.
• Don’t try to trick the ATO. Handling over 2 million tax returns claiming a deduction each year, the ATO pretty much knows all the tricks tax-payers try to use to overclaim expenses. And while it can be quite forgiving to those who voluntarily amend their genuine mistakes, very hefty penalties await those who deliberately try to mislead the ATO. Already, Assistant Commissioner Gavin Siebert has announced that the ATO will be increasing its scrutiny of rental deductions this year.
“We expect to more than double the number of in-depth audits we conduct this year to 4,500, with a specific focus on over-claimed interest, capital works claimed as repairs, incorrect apportionment of expenses for holiday homes let out to others, and omitted income from accommodation sharing,” he said.
“Once our auditors begin, they may search through even more data including utilities, tolls, social media and other online content to determine whether the taxpayer was entitled to claims they’ve made.”
Two important recommendations:
• Maintain detailed, accurate records. From invoices and receipts to phone-calls and emails (make sure these are backed-up or printed off) proper record-keeping not only assists if you are ever queried by the ATO, but knowing that you have all relevant information at your fingertips, also gives you peace of mind.
• Use a tax professional. Equally important in avoiding sleepless nights – and legitimately maximising the tax benefits of owning an investment property – is trusting an experienced tax professional with your claims and deductions.
To make EOFY a little less taxing, we are offering all first-time WhiteStar Accounting clients a 10% discount off this year’s tax return* if they are currently a WhiteStar Finance or WhiteStar Property client. Remember, the cost of preparing your tax return is a deductable expense.
To discuss your tax return needs and enjoy greater peace of mind at tax time, contact the investment tax experts at WhiteStar Group today.