There is over 2.88 billion dollars worth of tax deductions that investors are leaving on the table.
With a little knowledge and planning in the lead-up to June 30, there are key decisions that investors can make today that will pay dividends when they meet with their accountant in July.
Here are 5 tips to boost your tax deductions this tax season.
1. Not understanding the eligibility of the investment property
There's a common misconception that if a property is not recently built, it won't have any significant depreciation deductions.
For example, properties built in the 50s, 60s, or 70s.
The reality is that, yes, whilst the original building needs to have been constructed after the 16th of September 1987, the property may have had extensive improvements, extensions, or renovations by the previous owner.
These improvements may attract significant depreciation deductions.
The best way to tell if you need a schedule is via three qualification triggers.
- You buy a brand-new property.
With a brand-new property, you will have depreciation claims on the original building structure and depreciation deductions on the plant and equipment items like the carpets blinds, air conditioning, hot water system, etc.
- You buy a property that has commenced construction after the 16th of September, 1987.
This means that you will be able to claim depreciation deductions on the original building structure, and if this is the case, it's generally always worthwhile getting a tax depreciation schedule done.
- If the property was built prior to 1987, you need to look for renovations or improvements by the previous owner.
If the property has had a new kitchen or bathroom, an extension, new roof, or anything of that sort, it may be worthwhile, on the basis of those improvements to have a tax depreciation schedule prepared.
Generally, we like to see at least $40,000 worth of structural improvements to a property as $40,000 divided by the 2.5% depreciation rate equates to $1,000 worth of depreciation deductions, each financial year from the date of works for 40 years.
That is about the breakeven point for a tax depreciation schedule.
2. Clarifying repairs and maintenance, from depreciable improvements
The ATO has signaled very strongly in the last couple of years that they are coming after property investors that don't accurately apportion costs in the correct category.
Repairs and maintenance expenses are attractive for investors because they are an instant deduction, meaning you can claim 100% of the money spent in the year in which the cost was incurred.
It should be noted, that does not include replacing an asset.
If you are making improvements or repairs to a hot water system and the original unit stays in place, that could be considered repairs and maintenance.
If you are removing the original hot water system and replacing it with a new one, that would not be repairs and maintenance, but a depreciable item added to the property that would need to be written off over its effective life.
3. Not engaging as a suitably qualified expert
Believe it or not, there are still accountants preparing tax depreciation schedules for their clients and estimating the costs of assets.
Whilst accountants are extremely specialized professionals, they are not recognized as qualified to estimate construction costs.
So, if you purchase an existing property or an older property that's had renovations or improvements, you need a quantity surveyor to be able to estimate the costs of those assets.
What's even more important is that often unqualified people will assign costs that are not maximized with the view that it lessens the likelihood of an audit.
Qualified Quantity Surveyors work in the interests of the investor rather than the Tax Office.
Whilst there is a strict set of rules.
Our job is to maximize the depreciation deductions for investors.
4. Not keeping adequate records of improvements made to the property
If you have made additions or improvements to your property, it's important to keep records of those so you can claim the depreciation deductions, come tax time.
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Outside of that, it is important also to consider what has been done.
If you've added an air conditioning split system, for example, you will have the date of installation and the total cost of the asset as well.
In this case, the information can be given to your accountant to depreciate as there's no cost estimating required.
However, if you pay a company $90,000 to renovate your kitchen and bathroom, it's unlikely that they will itemize the costs of plant and equipment assets, such as ovens, cooktops, range hoods, heated towels rails, exhaust fans, and the like.
The importance of this is that the plant and equipment items depreciate at a much faster rate than structural improvements.
Take for example tiles.
You can install $1,000 worth of tiles in your property, and you will get 2.5% of that cost each financial year for 40 years.
Whereas, if you elect to install carpet in lieu of tiles, you will get a 25% deduction in the first year.
That’s 10 times more deductions in the first year!
In this way, you can front-load the tax deductions.
Often the hardest time to hold on to an investment property cash flow-wise is at the beginning.
Over time, your rent may increase your mortgage repayments may drop.
So not only is it harder to manage the cash flow at the beginning, but you must also calculate the time value of money, and deductions today are always going to be worth more than deductions in 10 years’ time.
5. Not getting a tax depreciation schedule where there's a benefit
Our research shows that 6.7% of property investors that come through our doors have waited too long to engage a quantity surveyor to prepare their tax depreciation schedule.
You can back claim up to two financial years’ worth of deductions, so we're talking about people that have waited more than two years and missed out on potential back claims.
The 6.7% may not sound significant.
However, this is 6.7% of investors that eventually came to the realisation that there was value in a schedule, there are potentially many more investors out there, not claiming their entitlements.
If you take our 6.7% of property investors, and extrapolate the average losses from waiting too long, (which was $20,537 per investor), that equates to over $2.88 billion dollars’ worth of missed tax depreciation deductions out there.
So, my best advice tax time advice is to contact a qualified quantity surveyor to obtain a free estimate of the depreciation deductions.
The Bottom Line:
Year after year we see investors not claiming their entitlements.
As the CEO of your property investment enterprise, a little knowledge of your entitlements ensures that you’re empowered to hire experts that can help to drive your portfolio forward by maximizing your deductions and increasing your cash flow.