You have to deal with a lot of taxes if you invest in real estate in Australia. The advice in this article will help you reduce your tax bill.
In Australia, income from all sources is subject to taxation. This includes income from renting out real estate, investing in stocks or other types of investments, earning interest on savings accounts, and realising capital gains from the sale of assets like stocks or real estate.
Companies may be required to pay corporate taxes in addition to the income taxes that individuals are responsible for paying. These obligations vary depending on the corporation's legal structure (for example, an Australian company pays 30 per cent corporate tax). Get assistance if you're unsure of what pertains to your circumstances. Keep in mind that taking action is preferable to doing nothing at all.
One of the most crucial factors to take into account when investing in real estate is taxes. Depending on how you own your investment and the kind of property it is, several tax regulations may apply to real estate investments. Federal income taxes, for instance, are levied on gains from the sale of a home or other personal residence.
If you reside in a state where the gain from selling your house is taxable, you can also be charged state income taxes. Capital gains may or may not be taxed depending on the nation where they are made.
EOFY 2021: Property Tax Tips For Real Estate Investors
Many Australian workers were forced to temporarily relocate to the outlying areas in 2020 as a result of lockdowns and flexible work schedules. Some of these workers set up residence in their investment properties, which are typically rented out as vacation homes. The ATO stated that it will be on the lookout for persons who submit erroneous claims for expenses connected to rental properties.
According to ATO Assistant Commissioner Adam O'Grady, "When you use your property privately, even during a time when you can't rent it out, it becomes a private expense, therefore, all your deductions for the property are no longer claimable."
Keep track of when you use the property for your own use and deduct those costs from your return for that time period, Mr. O'Grady advised. This is true even if you rent the property out to friends and relatives for little to no money.
Demand for domestic holidays has also increased as a result of international border closures. The tax office has consequently issued a warning that any income from short-term rentals must be reported on tax returns and cross-referenced with information obtained from lodging websites like Airbnb.
ATO Cracking Down On Capital Gains
According to accounting company H&R Block, rising asset prices have also brought capital gains to the public's attention.
According to Mark Chapman, head of tax communication at H&R Block, "Australians who have done well on the share market, with property, or even with Bitcoin during the past year face being audited if they get their returns wrong."
The official added that Australians might be subject to a 25% fine for recklessly underestimating their earnings from shares, investment properties, and now cryptocurrencies.
Working From Home
The Australian Bureau of Statistics states that as two in five Australians still work from home at least once a week, expenses related to employment will also be closely scrutinised.
Regular automobile and travel claimants who also submit considerable working-from-home expenditures will be looked at suspiciously.
The Temporary Shortcut Method, as it is known, is available to those claiming working from home deductions this year, according to the ATO.
The shortcut technique was developed last year at the height of the pandemic to address the rise in improvised home offices. Instead of having to perform intricate computations for certain things, it permits claims at a rate of 80 cents per work hour performed at home.
That's not necessarily the ideal approach for workers, according to Mr. Chapman.
No additional promises about working from home can be made if you employ the 80 cents per hour strategy. Therefore, services like internet and cell phone usage are covered by the 80 cent tariff, he said.
Your tax advisor will be able to advise you on the best approach to take.
The largest costs associated with working from home
- Personal costs, such as coffee, tea, and toilet paper; costs associated with your child's education, like laptops or online courses;
- Expensive initial outlays; any asset costing more than $300 should be spread out over several years;
- In general, employees are not allowed to deduct living costs, including rent, mortgage interest, property insurance, land taxes, and rates.
- Even though it's your primary property, you might have to pay capital gains tax if you claim occupation expenditures when you sell your house.
Landlords Impacted By Rent Reductions
The ATO stated that investors can continue to claim costs as usual on properties that have seen rental reductions or mortgage holidays after a difficult year for landlords.
You may continue to deduct expenses like bank interest on the property loan, rates, and other similar items. Therefore, keep deducting them as usual, Mr O'Grady added.
Once the rent is paid, the landlord merely needs to report it as income. As a result, you do not need to add these payments until you get them, for instance, if your renters' payments are postponed until the following fiscal year.
If your tenants haven't paid rent for a few months and then give you three months' worth of money as a back payment in August, Mr. O'Grady advised, you should merely report that income for that specific month.
The ATO's primary areas of attention for EOFY 2021 are:
- Gains in the capital by selling shares, securities, and cryptocurrency;
- Incorrect work-related expenses, such as replicating last year's deductions despite altered working conditions or claiming personal expenses;
- Falsely reporting expenses for rental homes while they have been occupying them themselves;
- Failing to disclose all earnings from temporary housing.
Tax Tips For Property Investors
Investors can recover a sizable sum on their properties at tax time by properly deducting costs like mortgage interest, legal fees, and rental expenses.
The depreciation of real estate is something that many investors easily overlook.
80 percent of real estate investors, who could be losing out on thousands of dollars, don't fully utilise property depreciation, according to BMT Tax Depreciation.
The interest paid on loans by investors is a major additional deduction. There are several restrictions on this, though:
- The home must have been legitimately available for rent or rented out during the year you are claiming the deduction;
- You cannot make a claim for a period of time during which the property was used for private purposes;
- You cannot deduct the interest paid on a portion of the loan if you use it for personal expenses like travelling or buying a boat. You may assert only the portion of the interest related to the rental property.
Prove It With Records
According to the ATO, the absence of receipts or other supporting documentation is the main reason claims are denied. Remember, you cannot assert something until you can prove it.
Taxpayers who revise their returns as a result of honest errors won't be penalised, while those who purposefully overclaim may be subject to fines of up to 75% of the amount of the overpayment.
Tips For Real Estate Investors At EOFY
The end of a financial year can be a profitable moment for property investors because there are still a variety of tax incentives available on investment properties. So here are our top advices for June 30.
Prepay Your Interest
If you have a fixed-rate loan, your lender may allow you to pay the interest on your mortgage for investment property in advance. This entitles you to defer the interest payments for the following fiscal year to this year and write them off on your tax return.
While you must have the money upfront to do this, it may significantly decrease your taxable income. That is especially true if you have a high income and a sizable loan on your investment home.
Claim Depreciation
Depreciation, or the yearly loss in value of the building's structure, permanent fixtures, and equipment, is a tax deduction available to property investors. For instance, the annual decline in price of appliances like ovens, washing machines, carpets, and blinds may be included here.
On investment properties purchased after 7:30 p.m. on May 9, 2017, you may deduct interest on any qualifying depreciating assets. For investment properties, you can only deduct depreciation on new things if the contract was signed after that.
You'll need a depreciation schedule to support your claim. You might do this yourself, but it's frequently a better idea to have a quantity surveyor do it.
Claim Your Borrowing Expenses
Did you know that a significant portion of the expenses related to getting a mortgage are also tax deductible? This includes any loan setup fees, appraisal fees, mortgage broker fees, lenders mortgage insurance (LMI), and even any stamp duty you have to pay on the mortgage itself. The stamp duty you paid on the property is also different (and typically far less significant than) this.
So, be sure to maximise this tax benefit if you borrowed money to buy an investment property this fiscal year or even if you refinanced the loan on an existing investment property.
Lodge a PAYG Withholding Variation
The majority of real estate investors, including those who are negatively geared, typically pay their mortgage interest when it is due but wait until the end of the fiscal year to write it off as a tax deduction. Significant cash flow issues may result from this.
Therefore, if you find yourself in this situation, you might want to think about requesting a PAYG withholding adjustment from the ATO.
With a PAYG withholding variation, you can change how much PAYG you pay during the year and take advantage of tax deductions right away rather than waiting to be repaid. If you reduce your PAYG too much, you might have to pay back the ATO when you file your tax return.
Time Any Capital Gains Tax Events Right
You must pay capital gains tax (CGT) on any profit you make if you intend to sell an investment property. Consequently, your profit will be considered income and subject to taxation at your marginal tax rate (ie the top rate you pay).
The CGT will typically be paid based on your income from the tax year in which the contracts were exchanged. However, if you wish to reduce your taxable income this fiscal year, you can think about delaying the exchange until July so that your profit will be deducted from your income for the following year. Once more, consult your accountant for personalised guidance regarding your unique situation.
Also keep in mind that any capital gain on investment properties you retain for more than a year will be subject to a 50% reduction.
Hold Onto Your Receipts
It's crucial that you keep your receipts since the ATO will use them as evidence that you actually spent the money you claimed. If the ATO ever looks into your records, you might be depriving yourself of legal deductions if you don't.
Get Good Advice
Investment property deduction regulations are intricate and occasionally downright perplexing.
More than ever, it's crucial that you seek wise counsel from your accountant or financial advisor regarding what you can and cannot claim as well as how to best structure your investment.
Tax Tips For Investors
Many Australians make investments in real estate, the banking sector, and other assets both domestically and abroad. You can grow your wealth by effectively managing the tax on your investments.
The ATO has extensive capabilities for data matching and information collection that span a wide range of capital transactions and investment revenue streams.
It is more crucial than ever to disclose investment income, particularly income from abroad, keep accurate records, calculate capital gains or losses on disposal accurately, and adhere to the many requirements and investor-specific concessions.
Investment Deductions
Exempt dividends and other exempt income are not eligible for deductions; however, expenses paid in earning interest, dividends, or other investment income are.
Investment deduction examples include:
- account-keeping expenses for a bank account used for investing
- interest accrued on borrowed money used to buy shares and other connected investments, from which you get dividend or taxable interest income
- continual management fees or retainers, as well as amounts paid for suggestions on changing the composition of investments
- a percentage of other expenses, such as some travel fees, writing in investment journals, and loan fees, provided they were incurred while you were managing your investments.
- You can only write off the percentage of your travel expenses that are connected to certain investment income activities if you travel to an investing conference.
Rental Properties
The ATO makes it a priority to check rental deductions and compare reported revenue to information received from real estate agents, Stayz, AirBnB, and other suppliers on a continuous basis.
If you own multiple rental properties, you are required to provide a multi-property rental schedule with your individual tax filings.
Check to see that owners are receiving their fair share of rental income, that claims for costs to correct damage and defects that existed at the time of purchase are being minimised, and that vacation homes are, in fact, available to be rented out.
Homeowners who are currently renting out their properties or who have residences that are available for rent are eligible to deduct a number of expenses as soon as they occur. These costs may include interest on investment loans, property taxes, council and water rates, fees for corporate bodies, fees for repairs and maintenance, and remuneration for agents.
Renters might be entitled to deduct the value of items like carpets, stoves, and hot water heaters that have decreased in quality over time. In addition, they can be eligible to deduct from their taxes the cost of capital improvements that are spread out over a number of years, such as the renovation of a bathroom.
Be advised that, as of recently, the only expenses that are eligible for depreciation deductions for residential real estate properties are those that were actually incurred on new items. For properties that were purchased after May 9, 2017, landlords are no longer allowed to depreciate goods that were already present in the rental unit at the time of purchase. However, they are capable of decreasing the value of brand-new objects (not used or refurbished).
It is no longer permissible for landlords of residential properties to deduct travel expenditures paid while inspecting, maintaining, or collecting rent on a rental property.
The following matters pertaining to taxes have been brought to light by COVID-19, which owners or agents of rental property need to take into consideration:
- deductions for rental properties when tenants have temporarily or incompletely stopped paying rent because their income has been impacted by COVID-19
- rent discounts to allow renters whose income has been negatively impacted by COVID-19 to remain in the property
- rent arrears receipts that can be measured or the cost of rent-loss insurance
- deductions for interest on postponed loan payments for a certain period because of COVID-19
- cancellation of reservations owing to COVID-19 for a house that is typically rented out for short-term lodging but has also previously been used for the owner's personal use
- the owner's personal use of a rental property (such as a vacation home) during COVID-19 and modifying applicable deductions
- modifications to short-term rental advertising and other costs during COVID-19 since there was no demand for the property
- even while you can still deduct expenses and depreciation, you might need to alter your deductions if your use of the property has changed.
It is highly recommended for landlords to examine the ATO's material on holiday houses, renting out a home in its whole, and vacation apartments in commercial and residential properties.
No exemptions exist for unused land
At the moment, there are less deductions that may be taken for holding on to vacant land. Even if the land was held before the new laws went into force, they nevertheless apply to costs that were incurred on or after July 1, 2019, which is the date when the new regulations went into effect.
The ability to claim deductions for expenses incurred for holding costs of unoccupied land is still available to corporate tax entities, pension plans (other than self-managed superannuation funds), managed investment trusts, public unit trusts, and unit trusts or partnerships where all of the members are the entity described above.
There are a variety of organisations and scenarios in which it is still permissible to claim a tax deduction for abandoned land. For example, if you use the land to conduct a business, if the organisation that owns the land is a corporation, or if there are other exceptional circumstances, you may be entitled to a tax deduction.
When land preservation costs are expended in the course of operating a business, such as a farm, or in the process of earning or producing revenue that is subject to taxation, such costs continue to be deductible.
The requirements can be difficult to understand, and you will need to assess whether or not you possess land that is vacant, whether or not it satisfies all applicable standards, or whether or not exceptional circumstances apply.
The Australian Taxation Office (ATO) has developed a flowchart in order to assist with determining whether or not deductions for costs associated with vacant land are restricted.
Residential Property And Non-residents
When you sell your residential property in Australia, let's say you are considered a foreign resident for tax purposes. In that instance, unless you pass the life events test, you will not be eligible for the CGT primary home exemption.
Gains Or Losses From Cryptocurrencies
Almost twenty percent of the population of Australia is currently invested in virtual currencies. If you are now investing in cryptocurrencies or have done so in the past, you should be aware of the tax ramifications that could apply to you.
It is possible that you will be taxed on any capital gains you obtain from the sale of the cryptocurrency. There are rules that must be followed in order to participate in chain splits, receive staking incentives, receive airdrops, and trade one cryptocurrency for another.
Due to the fact that the ATO now compares transaction data from digital exchanges, it is more important than it has ever been to ensure that appropriate reporting of bitcoin earnings and losses is carried out.
Certain rules are applicable to the use of cryptocurrencies for commercial purposes, such as the management of a start-up business or the trading of significant amounts of bitcoin.
Capital Gains Tax Planning
When selling assets that appreciate in value, you should do so at the right time to avoid a capital gain. It's crucial to understand that CGT is not activated by the sale's settlement but rather by the signing of the contract for the sale of one of the aforementioned CGT asset entities.
This is crucial in cases where the contract's entrance and settlement coincide with the year's conclusion. In some situations, deferring the sale of the CGT asset to the following year, when additional relief might be available, such as a capital loss liquidated on another asset, may be advantageous from the perspective of cash flow.
Make sure an eligible asset is kept for the 12-month holding period necessary to qualify for the CGT deduction. Foreign residents and those who are temporarily residing in Canada are typically not eligible for the CGT discount.
Maintain accurate records for each investment you make, and make sure to maintain them for at least five years following the occurrence of a capital gains tax event.
Foreign Investments
Any capital gains or losses you incur on assets located outside of Australia must be reported in your tax return if you are an Australian resident. Income from foreign investments may also need to be reported on your tax return.
Even if your money is being held abroad for you, you can still receive it. You might be eligible for an Australian foreign income tax offset, for instance, if you obtain foreign income or make taxable profits in Australia and you paid foreign tax on that income.
Be aware that the ATO may obtain information about any of your international interests and income because of the ATO's agreements with several foreign revenue authorities to exchange information.
Market-traded Funds
Exchange-traded funds, also known as ETFs, are becoming an increasingly popular investment vehicle; yet, it can be difficult to calculate the appropriate amount of tax to pay on ETFs. Because exchange-traded funds are classified as trusts rather than ordinary company shares, they are subject to the requirements governing attribution managed investment trusts (AMIT).
Because of this, the numerous dividends and amounts of capital gain must each be reported in their own line on your tax return.
The pertinent information will be included in a member annual statement, which will be sent out to a large number of investors; however, the submission of these reports is entirely voluntary. In order to guarantee that the amounts you claim for exchange-traded funds (ETFs) on your tax return are correct, you should check to see if the pertinent information is included, and if it isn't, you should follow up with the fund or registry.
Investment Products
Towards the end of the financial year, there is typically an increase in the amount of advertising that is done for investment products that have the potential to make tax-effective claims. Check to see if the ATO has issued a Taxpayer Alert or if there is a Product Ruling that may be found.
A product ruling will provide the ATO with certainty on the tax implications of an agreement provided that the arrangement is carried out in compliance with the requirements of the ruling. On the other hand, this does not in any way imply an endorsement or guarantee of the tax-efficiency of a product or investment.
Taxpayer alerts are warnings issued by the ATO identifying difficulties or arrangements involving higher-risk assets.
You need to establish your own conclusion about whether or not a product has the potential to be successful commercially and financially. Consider factors such as whether or whether the anticipated returns are realistic, the "track record" of the management, the costs in comparison to those of other products that are comparable, and how the investment will fit into your existing portfolio.
If you are considering making such an investment, it is in your best interest to get independent advise before making a decision.
As with any income you generate, the income your investment property produces is subject to income tax. Each year, the income tax on your investment property must be combined with any other personal income you make (such as your salary and other investments) and assessed together in your annual tax return.
- Property Management and Maintenance Expenses. ...
- Rates and Taxes. ...
- Property Agent Fees. ...
- Administration Expenses. ...
- Property Insurance. ...
- Repairs and Maintenance. ...
- Interest on Your Home Loan. ...
- Quantity Surveyor Fees.
If you sell the property once you've retired, you'll pay no capital gains on the property. Even if you sell the property while you're still accumulating your super, this will be taxed at a rate of only 15%. Holding onto the property for longer than a year will effectively drop this rate to 10%.