Keeping up with claims: the tax deductions investors miss
With end of financial year almost upon us, property investors are no doubt turning their attention towards this year’s tax return. It’s a crucial period for investors, and one that plays a key role in maximising their wealth creation.
Every year, Australian investors run the risk of losing thousands of dollars’ worth of easy tax savings by failing to claim lucrative deductions. Whilst many are aware of their basic entitlements, it’s often the finer details that end up costing them in the long run. So, what are the common property tax claims investors overlook?
Depreciation of the building
One of the biggest, and possibly most lucrative, deductible claims that investors often miss is depreciation on their investment property. As a property’s structure devalues over time, this decline in value can be offset against an investor’s annual income, substantially reducing their tax bill come end of financial year. This is known as a capital works deduction, and it applies to the structural features of a property such as bricks, walls and fixed wiring. It’s also one of the only non-cash deductions investors can make come tax time, meaning they don’t actually have to spend money in a given year to claim this tax benefit.
The confusion for many investors comes when determining when they can (and can’t) make a depreciation claim. This rule varies slightly between commercial and residential property owners. For commercial property investors, capital works deductions can only be claimed for properties constructed after 20 July 1982. With residential rental properties, on the other hand, a capital works deduction can be claimed for properties that commenced construction after 15 September 1987. However, even if an investment property was built prior to these respective dates, this doesn’t mean there isn’t a claim to make at all. In cases where a property has been renovated and structural elements have been added further down the line, these improvements and alternations may also be eligible for depreciation. Investors who have undertaken renovations should have the alterations assessed by a licensed quantity surveyor, who can then draw up a tax depreciation schedule.
Depreciation of plant and equipment
In addition to depreciation on the structural elements of their asset, investors may also be eligible to claim depreciation for the declining value of the plant and equipment installed within their property. This typically refers to fixtures and fittings that can be easily removed from the property, and includes items such as carpets, blinds, ovens, and air conditioning units. As with capital works allowance, the exact laws for claiming depreciable items differ between commercial and residential property. While commercial property owners are able to claim depreciation for all eligible plant and equipment within their property, regardless of whether these items were installed by themselves or the previous owner, this is no longer the case for residential property investors. In light of the 2017 Federal Budget, residential property investors who acquired a property for income-producing purposes after 9th May 2017 aren’t able to claim depreciation for second-hand plant and equipment. Only investors who have bought the property new or installed the plant and equipment themselves are able to make a depreciation claim.
It’s common investor knowledge that interest on investment loans can be claimed as an immediate tax deduction, but this doesn’t stop investors missing out on the long-term claim associated with borrowing money for a loan. Borrowing expenses refer to any costs associated with borrowing the money needed to purchase a property, and includes items such as loan establishment costs, lenders’ mortgage insurance, stamp duty on the mortgage and mortgage broker fees. These costs aren’t immediately tax deductible, but can be claimed as a property tax deduction over a period of five years or over the term of the loan, depending on which is shorter.
Property management fees
Property managers can be an incredibly valuable asset when it comes to helping investors maximise their rental returns and keeping their property aligned with tenants’ needs. What some investors don’t realise, however, is that these property management fees can be claimed as a tax deduction come end of financial year. Providing investors use their property for income-producing purposes, any fees paid for the management of the property will be classified as part of the overall expenses of the property for that year, and can therefore be offset against their annual taxable income. If a property has only been rented out for half of that year, a deduction can still be claimed for the period during which the property was used for rental purposes, but not beyond this.
Another common deduction that over gets overlooked by investors is the travel expenses relating to the management of their investment property. This applies to commercial investors who need to travel to inspect, maintain or collect rent for their commercial rental property. Whilst these travel costs were once also deductible for owners of residential rental properties, the 2017 Federal Budget saw the overturning of this law. This was largely driven by the concern that investors were claiming travel deductions for private travel purposes and not correctly apportioning costs. Whilst this change impacts investors who opt to self-manage a residential property, it doesn’t impact their ability to claim a tax deduction for third-party property management.
Please note: Momentum Wealth and its affiliated entities are not accountants or financial planners. While all information is provided in good faith, investors should seek their own independent advice in relation to all tax matters.