When it comes to Investment Property tax you can’t be set up for success without at least knowing the basics.
‘In this world nothing can be said to be certain, except death and taxes.’
While property investment is undoubtedly one of the most exciting ways to create wealth, the taxman always looks for his pound of flesh too! That being said being up to date with your investment property tax knowledge may allow you to get back more than you lose.
But of course, smart Aussie property investors can strategize, plan, and conduct their activities in such a way that they maximize the tax efficiency thereof as much as possible.
Please continue reading for a birds-eye view of property taxation in Australia, and some helpful hints on going about your business in that space.
Property Taxation – The Big Picture
Fixed property owners in Australia are up against at least five key categories of taxation that may affect them:
- Capital Gains Tax (CGT)
- Property transfer tax or ‘stamp duty’
- Land tax
- Council rates
- Income tax on rental properties.
Capital Gains Tax (CGT) was introduced in Australia in the year 1985. Generally, it does not affect a property that is the taxpayer’s principal place of residence. However, all other fixed property purchases after 20 September 1985 may be subject to CGT.
Stamp duties are levied by state and territory governments on the sale of properties and businesses. The amount payable is normally calculated as a percentage of the transfer price. Please refer to the NSW Government website for Taxes, duties, levies and royalties as an example.
Land tax is also a state tax that is levied on fixed property owners. It includes both vacant and occupied land (i.e. with dwellings). However, many categories of property are often exempt from land tax, which includes land used for a principal residence.
Council rates are levied by local municipalities and it typically represents a major source of revenue for them. The amount payable by property owners is normally based on the value of the land owned, but sometimes other criteria might also come into play.
Income tax on rental properties is payable by investors. And while there is not much room for manoeuvring in terms of the various other property taxes discussed in the preceding paragraphs, investors can certainly benefit from smart moves in the rental property space. Let’s take a closer look.
Tax Tips on Rental Income
Even though we normally declare our property rental activities on the same investment property tax return as all the other categories –e.g. salaries, interest received, etc.- it is important to administer it as a separate ‘business’, i.e. don’t mix it with your personal stuff.
And make sure to keep detailed accounting records and proof of all rental income and expenses, also agreements with tenants, and the exact lease periods for each, also the precise dates and reasons for removing your property from the rental market should that be the case.
Like any other business, all the income in your property rental business has to be fully declared for tax purposes. And all the expenses that you include in your return must be relevant, valid, fully substantiated, and provable, otherwise, the ATO is likely to query and/or disallow them for tax purposes.
Here are more helpful hints:
- Deductibility of expenses – the ATO will consider all reasonable expenses that demonstrate an acceptable nexus/relationship with the production of income in your rental property. Be as detailed as possible on your accounting records and tax return. The easier it is to understand and verify the nature of each expense that you wish to claim, the quicker your tax return can get assessed and approved, alternatively lengthy queries and/or rejection may be the result
- Always demonstrate that you are active in the rental market – especially for the periods that your property is vacant while you’re looking for suitable tenants, make sure that you can demonstrate to the ATO –upon request- that you were continuously pursuing rental income –e.g. by placing advertisements- and that you were not unreasonably shunning the available market
- Use industry lingo as far as possible – by appropriately using easily recognizable terms and definitions on your accounting records and tax return, it further streamlines the assessment thereof and reduces queries. Examples of regular industry expense categories are: management costs (property agent fees and commission), body corporate fees and charges, insurance (building, contents and public liability), interest expenses on investment loans, depreciation, land tax, municipal rates and taxes, water rates, property maintenance costs (e.g. cleaning, gardening, pest control, repairs & maintenance), bank charges, advertising costs (for finding tenants), administrative costs of leases, and legal fees
- Depreciating assets – for non-direct property expenses such as appliances/renovations/remodelling where the full cost cannot be claimed all at once, do make sure that a proper record is kept and that you do claim the maximum allowed within each tax year
- Keep proper records of your CGT base – to minimize CGT payable when the day comes, keep a detailed and comprehensive record of any and all additions that you make to the rental property. Remember to also include all costs associated with the purchase or sale of the property as these are often overlooked by owners. The more legitimate items you can add to the CGT cost base of your rental property, the better, as it may ultimately reduce your overall CGT liability
- Negative and positive gearing – when you borrow money to invest in a rental property, make sure that you choose wisely between negative and positive gearing strategies! It’s not the same for every individual person. The option that leaves you –personally- with the highest after-tax income in your pocket is often the best for you.
The ATO has indicated recently that up to 90 per cent of tax returns contained errors in terms of rental property activities. The Dept. therefore plans to double-up on the number of rental audits, checking claims in real-time, and prosecutions.
Of course, property investment is fun! But for your own financial benefit and ongoing peace of mind, do make sure that you’re also on top of the tax side of things.
By all means, dig in, enjoy, and do your own research. But when in doubt, do not hesitate to check in with a licensed professional to make sure you maximize all available tax breaks. And, of course, that your claims are legit and accurate.
Just starting out? Here are three beginner mistakes to avoid that could save you thousands. Happy investing!