Tax time for property investors can be confusing and stressful, but getting sorted is simply a matter of being organised and understanding the basics.
We chatted to Rosie White, an industry expert and accountant with FGA Partners, about the most important points when it comes to the tax season and how property investors can get the most out of their return.
Capital Gains Tax
Capital Gains Tax (CGT) is a tax on the profit made on the sale of any capital item, including shares, units in unit trusts, businesses and property.
CGT is only payable on the sale of a property if it was purchased after September 19, 1985.
Rosie explains “the net capital gain is the sale price minus the cost base. The cost base is the amount you purchased the property for, plus the stamp duty and other purchase costs, plus any capital improvements made to the property whilst you owned it.”
The agent’s fees on the sale and any other sale costs are deducted from the sale value.
If the property has been held for over 12 months, you are entitled to a 50% discount on the gain. The discounted gain is added to your other taxable income such as salary income, interest, etc and taxed at the tax rate applicable.
The relevant dates for both purchase and sale are the contract dates. A signed contract for the sale of a property prior to June 30 may not have settled, but would still be included in your tax return in the year in which the contract was signed.
Rosie warns property investors not to leave out CGT from their tax return as the ATO matches this with the Titles Office, so they know you’ve made a capital gain.
Depreciation
Rosie recommends engaging a quantity surveyor to prepare a depreciation report for your investment property, which sets out the deduction available to be claimed on both the building and the property fixtures and fittings.
“The amounts claimed for depreciation over the period of holding the property is deducted from the cost base when calculating the capital gain.”
Deductions
The costs of purchasing the property, such as legal fees, stamp duty and most other costs, are not deductible, but form part of the cost base of the property for CGT purposes.
Borrowing costs are gradually paid back over the first 5 years.
Capital improvements or repairs are also not deductible, but are added to the cost of the property and some may be depreciable.
“Other annual costs for the property can be deductible if the property is tenanted or genuinely available for rental, which means you must be actively seeking to rent out the property, such as advertising or having the property listed with an agent,” Rosie says.
PAYG Withholding Variation
If your rental property is negatively geared then you will be entitled to a refund of tax on the loss. Rosie suggests that instead of waiting until the lodging of your annual tax return to receive the tax refund, you can apply for a PAYG Withholding Variation.
Prepay Interest
If you have the financial capacity to prepay your interest, Rosie recommends doing so.
Prepaying interest can be helpful for managing cash flow or budgeting your rental property expenses throughout the financial year. You won’t have to think about interest payments for 12 months or worry about fluctuating interest rates.
The interest is deductible in the year it is paid. This can be beneficial if you anticipate that income may be reduced in the following year due to factors such as maternity leave or being made redundant.
Documentation
Preparation and organisation is key during the tax season. For property investors, you will need:
– The agent’s rental summary
– Mortgage bank statements showing the interest charged on the borrowings for the purchase of the property
– Summary of all other expenses paid for the property during the year, such as:
- council rates
- water rates
- body corporate charges
- insurance
- repairs and maintenance
- gardening
- pest control
Don’t forget to keep all of your receipts as each year the ATO makes contact with thousands of taxpayers who own rental properties to more closely inspect their claims.
If you’re a property investor or looking to invest, you may be interested in Investing in Property: Part 1.
