A tax-time mistake can be a costly one for Australian property investors, so here are some tips to help you navigate the devil in the details.
In March 2020, ATO Commissioner Chris Jordan revealed that an audit of property investors found errors in just shy of nine out of every 10 returns reviewed.
While the ATO set to scrutinise returns to a greater degree than prior to the start of the coronavirus pandemic, property investors are also expected to come under the microscope this time around.
Here are five things that property investors should keep in mind ahead of this year’s end-of-financial-year period.
If an investment property is jointly owned, then the rental income and expenses from the property must be divided among the co-owners according to their legal interest in the property.
“Make sure that your interest expense claims are correctly calculated, rental income is correctly apportioned between owners, claims for costs to repair damage and defects at the time of purchase are depreciated and that holiday homes are genuinely available for rent,” said CPA senior manager of tax policy, Elina Kasapidis.
Regardless of whether a property buyer is an owner-occupier or a landlord, Ms Kasapidis emphasised the importance of correct record-keeping when it comes to depreciation.
“Landlords may be entitled to claim depreciation for the declining value of assets such as stoves, carpets and hot-water systems. However, for properties acquired from 9 May 2017, landlords can no longer depreciate assets that were in the property at the time of purchase,” Ms Kasapidis said.
When it comes to declaring taxable income, property investors need to account for more than just the amount of rent they received from tenants over the course of the financial year.
According to Ms Kasapidis, “Many landlords lost rental income or bookings as a result of COVID restrictions. These losses can’t be claimed as a tax deduction, but you can still claim your expenses, including interest on deferred loan payments.”
“If you received back payment of rent or an insurance payout for lost rent, this is assessable income and must be included in your return.”
Property investors also need to account for sources of income like rental bond money they are entitled to retain if a tenant defaults on their rent or they incur maintenance costs.
Ms Kasapidis also called attention to short-term rental platforms like Stayz and Airbnb.
“The ATO has an ongoing focus on checking rental deductions and matching reported income against details from real estate agents and online platforms such as Stayz and Airbnb,” she said.
Expenses and deduction
While there are many expenses that property investors are eligible to deduct come tax time, Ms Kasapidis cautioned that “residential landlords are no longer allowed travel deductions relating to inspecting, maintaining or collecting rent for a rental property”.
Legal expenses are another tricky area. While costs incurred through the eviction of a non-paying tenant or disputing damages can be claimed as tax-deductible expenses, the cost of getting a solicitor to prepare any loan documents is not.
“If you changed the way you use your investment property during the year, you may need to adjust your deductions. You can’t claim any losses or deductions for any period it wasn’t available to rent, for example, if you stayed in your rental property during COVID lockdowns,” she said.
While property investors will only need to navigate capital gains tax when they decide to sell, it’s important to get it right.
As put by CPA, “You should carefully time the disposal of appreciating assets, as this may trigger a capital gain. It is important to recognise that CGT is triggered when you enter into a contract for the sale of a CGT asset rather than on its settlement.”
They advise that in situations where the entry and settlement of a contract straddle the end of the financial year period, “it may be preferable from a cash flow perspective to defer the sale of the CGT asset to the subsequent year where other relief may be available, such as a capital loss sold on another asset”.
Ms Kasapidis encouraged investors to use a registered tax agent for the best results.
“You can cut your own hair, but you’ll get a better result if you see a professional. It’s the same with completing your tax return. If you talk to a tax agent about your investment property, you can be confident you’re paying the right amount of tax – and not too much.”