Although the end of the financial year is still a couple of months away, there are steps property investors can take now to get prepared for tax time.
Regardless of how many rental properties you have, the key to an efficient EOFY is organisation. The more forward planning, the less time your accountant needs to spend on paperwork and the greater the potential result for you. It also pays to understand what you can – and can’t – claim as a rental provider.
Ed Beasley, manager at accountancy firm Smith Feutrill, says shrewd investors shouldn’t wait to think about tax.
“Generally, June 30 rolls around and so many people say, ‘I’ve got to get my tax done!’ But remember that tax is historical, it’s all about what has happened,” he says. “The savviest investors are those who are very futuristic and are constantly thinking ‘what can I do now to help me out in the future?’”.
“Once July 1 arrives, it’s a long wait if you want to claim on additional expenses like maintenance or refreshing your investment.” he adds.
While most investors are aware of claiming expenses such as property management fees, rates, home loan interest and insurances, many rental providers overlook the importance of depreciation. For the average Australian rental provider, tax allowances such as depreciation actually make property investing affordable.
Put simply, depreciation is how much the ATO says an asset decreases in value over time. And there are two ways investors can claim depreciation;
- Capital works allowance (division 43) – Covers the value of a building’s structure. This depreciation is spread over a 40-year period.
- Plant and equipment depreciation (division 40) – Includes removable fixtures and fittings with a limited lifespan. These are expected to decline in value over time and the ATO has a list of effective “lifespans” per item.
Mr Beasley says while it’s best practice for a rental provider to obtain a tax depreciation schedule at the point a property becomes an investment, it can be done at any time.
“You can still get a report done after the property has been rented out for a number of years, it will just mean you’ll have lesser depreciation than you would have originally had,” he says, adding that rental providers should be aware of how much they can actually claim before they start spending.
“The biggest misunderstanding we see involves taxpayers thinking if they spend $1,000 and claim $1,000, then they’ll be getting $1,000 back in cash. Instead, legitimate claims against a rental property actually reduce the taxable income your investment property has generated, and therefore your tax obligation,” he says.
“Depreciation can be one of the more powerful claims to reduce your taxable income, it is also a non-cash claim. What this means is the taxpayer isn’t out of pocket and it can greatly benefit their tax position year on year.”
When it comes to tax depreciation, Mr Beasley says rental providers should discuss the big picture with their accountant.
“There’s the chance that the depreciation claims you make against the property along the way will get added back to your cost base. So, it actually comes out in the wash with regard to your capital gains,” he says.
“Say you claim $50,000 in depreciation over 10 years, then any capital gain you make in that time is going to be adjusted by that amount. Potentially tax depreciation is great, but just keep in mind it does have the ability to impact your gain in the long run. This should always be consulted with your trusted advisor.”
Ultimately, Mr Beasley says both timing and a trusted professional team are essential ingredients to successful property investing.
“As accountants, and for your property managers, we’re at our most helpful when decisions and situations are run past us before anything has been set in stone,” Mr Beasley says. “We can’t do much to change a poor decision once a transaction has already been made, but if we know what you’re considering we can give advice on how your future assets can be structured to get the best possible results.”
Kay & Burton’s property management division provides all rental providers with an end-of-financial-year statement detailing all income and expenditure to assist with tax time. Our property managers can provide details of a qualified quantity surveyor to assist in obtaining a depreciation schedule should you require.