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9 tips for saving tax on your investment property

Venessa Paech

Venessa Paech

6 Mar 2019

Property investment is hard work, but it’s also rewarded with plenty of tax breaks. 

We hear a lot about lucky investors that have played the investment game and won, but knowing what to do and what not to do is crucial.

And so we spoke to Dr Adrian Raftery, a tax expert at Deakin University’s business school, about how property investors can maximise their deductions.

Here are his top tips for saving tax on your investment property in 2019.

Four-bedroom house in Darlinghurst

Investors can claim deductions on everything from repairs and maintenance to travel and borrowing expenses. Picture: realestate.com.au/rent

1. Claim initial repairs as capital works

According to Raftery, a common mistake made by investors is to claim initial repairs or capital improvements as an immediate deduction.

“Initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property are generally considered capital in nature and not deductible, even if conducted to make the property suitable for renting,” he said.

A better approach would be to claim capital works deductions on these repairs and improvements over a 40-year period.

Read more: 4 tips to cut end of year financial stress

2. Pre-pay interest

If you have a fixed-rate loan and have an annual income that’s on the verge of creeping into the next tax bracket, it’s often worth pre-paying your interest for the next 12 months, as this will allow you to claim the deduction in the income year in which you’re lodging your tax return.

You can use this approach when paying for other services, too. And some service providers might offer you a discount for doing so.

Three-bedroom house in Bondi

Even after you sell the property, you can claim deductions, in the form of a capital gains tax discount. Picture: realestate.com.au/buy

3. Depreciation schedule

If you owned or entered into a contract for a rental property before 7:30pm on 9 May 2017, you can claim deductions on the decline in value of the depreciating assets that were in the property before that date.

If you bought it after this date, you can only claim depreciation on brand-new assets, or if the property was newly built or substantially renovated and no one had previously claimed any depreciation deductions on the asset.

You can calculate your depreciation deductions yourself, but Raftery advises engaging a quantity surveyor to create a depreciation schedule on your behalf, as the ATO’s rules on property depreciation are fairly tricky to understand.

“You should be able to recoup their fee in your first tax return as deductions can be in the thousands each year,” he said.

4 Victoria Road, Glebe, NSW

Applying for PAYG withholding variation is a great way of boosting your cash flow. Picture: realestate.com.au/buy

4. Apply for PAYG withholding variation

If you’re negatively gearing a property and have struggled with cash flow in the last year, Raftery suggests applying for PAYG withholding variation.

Often used by people who claim higher than normal deductions, this strategy allows you to receive your tax breaks every time you’re paid your salary, rather than as a lump sum at the end of the financial year.

You need to ask the ATO for PAYG withholding variation every year, and can either lodge the application yourself or ask an accountant to do it for you.

5. Claim borrowing expenses

In 2019, you can claim deductions on the following expenses:

Read more: 8 expert qualities that makes a good real estate agent

6. Keep your receipts

Each year, the ATO contacts a growing number of rental property owners to closely inspect their claims.

Which is why Raftery says you need to be more diligent than ever when claiming deductions, and that this increased diligence begins with safeguarding all important receipts.

“The ATO motto is “no receipt, no deduction”, so you could be costing yourself a substantial amount of cash by not keeping those dockets.”

7. Keep up to date with changes

Just because your accountant let you claim something last year doesn’t mean you will be able to claim it again this year. The ATO regularly makes large-scale changes to its legislation on permissible tax deductions, and so you should make a habit of checking for updates on the collection agency’s website.

For example, for a long time, investors were able to claim travel costs incurred whilst visiting their investment property on official business. But investors were stripped of this right when the law changed on 1 July 2017. 

8. Minimise Capital Gains Tax (CGT)

If you are trying to sell your property and cement a nice capital gain, consider exchanging contracts after 1 July to defer tax for another year. This will give you more time to save the money needed to pay it, says Raftery,

“And remember: if you hold your investment property for more than 12 months, you reduce your CGT by half,” he adds.

Three-bedroom house in Surry Hills

As always, it pays to seek advice from an accountant before sending off your tax return. Picture: realestate.com.au/buy

9. Find a great accountant

Raftery’s final tip is to surround yourself with top people. It’s one we hear again and again – and that’s because it really pays dividends.

“Great accountants are like surveyors,” says Raftery. “They know where the boundaries are.”

And what’s more, their fees are tax deductible.

This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances before acting.

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