As a real estate investor in Australia, you have to deal with a lot of taxes. This article will provide some tips for saving money on your tax bill.
Income from all sources is taxable in Australia and includes income from property rentals, investing in shares or any other investment vehicle, interest earned on savings accounts and also capital gains made when selling assets such as stocks or property.
In addition to income taxes that are payable by individuals, companies may incur corporate tax obligations, which vary according to the entity’s legal structure (for example, an Australian company pays 30% corporate tax). If you’re not sure what applies to your situation, then get help! Remember that it’s better to do something than nothing at all.
Taxes are one of the most important things to consider when you invest in real estate. Many different tax laws apply to property investments, depending on how you own your investment and what type of property it is. For example, there are federal income taxes for profits from selling a home or other personal residence.
You may also be subject to state income taxes if you live in a state where the profit from selling your home is taxable. Whether or not capital gains are taxed varies by which country they’re made in.
EOFY 2021: Property Tax Tips For Real Estate Investors
Lockdowns and flexible working arrangements pushed many Australian workers to temporarily relocate to the regions in 2020, with some setting up base in their investment properties usually leased out as holiday accommodation. The ATO said it will be watching for people lodging incorrect claims for rental property-related expenses.
“When you use your property privately, even if it’s in a period when you can’t rent it out, that becomes a private expense, so all your deductions for the property are no longer claimable,” ATO Assistant Commissioner Adam O’Grady said.
“What you need to do as an investor is keep records of when you are using the property yourself, of even if you’re lending it out to family and friends for either no rent or really low rent, then you need to take those expenses off your return for that period,” Mr O’Grady said.
International border closures have also driven demand for domestic holidays. As a result, the tax office has warned that any money earned through short-term rentals must be included in tax returns and matched against data gathered from accommodation sites like Airbnb.
ATO Cracking Down On Capital Gains
Surging asset prices have also put capital gains in the spotlight, according to accounting firm 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,” H&R Block’s director of tax communication, Mark Chapman, said.
“Australians can face a 25% penalty for carelessly miscalculating how much they earned from shares, investment properties, and now cryptocurrency,” he said.
Working From Home
According to the Australian Bureau of Statistics, working-related expenses will also be under heavy scrutiny, with two in five people still working from home at least once a day a week.
People lodging regular car and travel claims as well as significant working-from-home expenses will raise a red flag.
The ATO said what’s known as the temporary shortcut method is available to those claiming working from home deductions this year.
Last year, the shortcut method was created at the height of the pandemic to deal with the surge in makeshift home workspaces. It allows claims at a rate of 80 cents per work hour at home, rather than needing to do complex calculations for specific items.
Mr Chapman said that’s not always the best method for workers.
“If you use the 80 cents per hour method, you can make no other claims in relation to working from home. So, items like mobile phone and internet usage are included in the 80 cent rate,” he said.
“Your tax agent will be able to give you advise on which method to use.”
The biggest ‘no-go’ expenses while working from home
- Personal expenses like coffee, tea and toilet paper;
- Expenses related to your child’s education, such as online learning courses or laptops;
- Large expenses up-front – any asset that costs more than $300 should be spread out over a number of years;
- Employees generally can’t claim occupancy expenses such as rent, mortgage interest, property insurance, land taxes and rates. If you claim occupancy expenses, you may have to pay capital gains tax when you sell your home, even if it is your main residence.
Landlords Impacted By Rent Reductions
After a challenging year for landlords, the ATO said investors can continue to claim expenses as normal on properties that have faced rental reductions or mortgage holidays.
“You can continue to claim all those deductions, such as bank interest on the loan for the property, rates, all those sorts of things. So continue to deduct them as normal,” Mr O’Grady said.
Landlords only need to declare the rent as income once it is paid. So, for example, if payments by your tenants are deferred until the next financial year, you do not need to include these payments until you receive them.
“If your tenants haven’t paid for a couple of months, then in August, they give you three months’ worth of rent as a back payment you just report that income for that particular month,” Mr O’Grady said.
Key areas of focus for the ATO for EOFY 2021:
- Capital gains from selling property, shares and cryptocurrencies;
- Incorrect work-related expenses, such as claiming personal expenses or copying last year’s deductions despite changed work conditions;
- Incorrectly claiming expenses for rental properties when they’ve been using the properties themselves;
- Failing to declare all income earned from short-term accommodation.
Tax Tips For Property Investors
When claimed correctly, investors can recoup a considerable amount on their properties at tax time on costs like rental expenses, mortgage interest and legal fees.
Property depreciation can also be overlooked by many investors.
According to BMT Tax Depreciation, 80% of property investors fail to take full advantage of property depreciation, potentially missing out on thousands of dollars.
Another significant deduction investors can claim is the interest on their loan. However, there are some rules around this:
- The property must have been rented out or genuinely available for rent in the same year you claim a deduction;
- If the property was used for private purposes at any point over the year, you aren’t allowed to claim for that period;
- If you use some of the loan money for personal use, such as buying a boat or going on a holiday, you can’t claim the interest on that part of the loan. You can only claim the part of the interest that relates to the rental property.
Prove It With Records
The ATO said the number one cause of disallowed claims is a lack of receipts or other documents to support a claim. Remember, if you can’t prove it, you can’t claim it.
While no penalties will apply for taxpayers who amend their returns due to genuine mistakes, those who deliberately over-claim can face penalties of up to 75% of the claim.
Tips For Real Estate Investors At EOFY
With a range of tax incentives still available on investment properties, the end of a financial year can be a rewarding time for property investors. So we give you our top tips for 30 June.
Prepay Your Interest
Your lender may let you pay your investment property home loan interest in advance, especially if you have a fixed-rate loan. That means you can push next financial year’s interest payments into this year and then claim them as a deduction on your tax return.
While this requires you to have the funds upfront, it could also potentially lead to a considerable reduction in your income for tax purposes. That’s particularly true if you earn a high income and have a substantial loan on your investment property.
Property investors can deduct depreciation on their property – that is, the annual decline in the value of the building’s structure, permanent fixtures and plant and equipment. This may include, for instance, the annual fall in the value of items such as ovens, washing machines, carpets and blinds.
You can claim interest on all qualifying depreciating items on investment properties purchased after 7.30 pm on 9 May 2017. However, you can only claim depreciation on new items for investment properties where the contract was entered into after then.
To make your claim, you’ll need a depreciation schedule. You could draw this up yourself, but it’s often a wiser approach to have it done by a quantity surveyor.
Claim Your Borrowing Expenses
Did you know many of the costs associated with taking out your home loan are also tax-deductible? This includes lenders mortgage insurance (LMI), as well as any loan establishment fees, valuation fees, mortgage broker fees and even any stamp duty you needed to pay on the mortgage itself. (This is different too – and usually much less substantial than – the stamp duty you paid on the property.)
So, if you’ve taken out a loan to purchase an investment property this financial year – or even if you’ve refinanced the loan on your existing investment property – be sure to make the most of this tax deduction.
Lodge a PAYG Withholding Variation
Most property investors, even those who are negatively geared, tend to pay the interest on their home loans when it falls due but then wait until the end of the financial year to claim it as a tax deduction. This can cause substantial problems with cash flow.
So if you find yourself in this position, you could consider applying to the ATO for a PAYG withholding variation.
A PAYG withholding variation lets you adjust the amount of PAYG you pay throughout the year so that you can effectively receive your tax deductions as they arise instead of having to wait to be reimbursed. However, if you adjust your PAYG too far downwards, you may find yourself having to reimburse the ATO when you lodge your tax return.
Time Any Capital Gains Tax Events Right
If you plan on selling an investment property, you have to pay capital gains tax (CGT) on any profit you make. This means your profit will be treated as income and taxed at your marginal tax rate (ie the top rate you pay).
Generally, that CGT will be payable based on your income in the tax year you exchange contracts. However, if you want to keep your taxable income down this financial year, you could consider pushing the exchange into July so that your profit is assessed against next year’s income. Again, talk to your accountant for specific advice on your own circumstances.
And remember, you’ll receive a discount of 50% on any capital gain made on investment properties you hold for longer than 12 months.
Hold Onto Your Receipts
The ATO treats your receipts as verification that you’ve spent the money you claimed, so it’s important you hold onto them. Otherwise, you may be denying yourself legitimate deductions if the ATO ever investigates your records.
Get Good Advice
The rules governing investment property deductions are complicated and sometimes downright confusing.
More than ever before, it’s important that you get good advice from your accountant or financial planner on what you can and can’t claim, as well as on structuring your investment for maximum effect.
Tax Tips For Investors
Many Australians invest in property, financial markets and other assets, both in Australia and overseas. Managing the tax on your investments can help you increase your wealth.
The ATO’s data matching and information-gathering capabilities are significant and cover many capital transactions and investment revenue streams.
It is more important than ever to report investment income, including from overseas, and maintain accurate records, correctly calculate capital gains or losses on disposal and comply with the various rules and concessions available to investors.
You can claim a deduction for expenses incurred in earning interest, dividend or other investment income, but not for exempt dividends or other exempt income.
Examples of investment deductions include:
- account-keeping fees for an account held for investment purposes
- interest charged on money borrowed to buy shares and other related investments from which you derive assessable interest or dividend income
- ongoing management fees or retainers and amounts paid for advice relating to changes in the mix of investment
- a portion of other costs if they were incurred in managing your investments, such as some travel expenses, investment journals and borrowing costs.
- If you attend an investment seminar, you are only entitled to claim a deduction for the portion of travel expenses relating to some investment income activities.
The ATO has an ongoing focus on checking rental deductions and matching reported income against details from real estate agents, Stayz, AirBnb and other providers.
If you are a landlord, you must lodge a multi-property rental schedule with your individual tax returns.
Make sure that 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.
Landlords of rental properties that are being rented out or are ready and available for rent can claim immediate deductions for a range of expenses. These may include interest on investment loans, land tax, council and water rates, corporate body charges, repairs and maintenance and agents’ commissions.
Landlords may be entitled to claim depreciation for the declining value of assets such as stoves, carpets and hot-water systems. They may also be able to claim a deduction for capital works spread over a number of years, such as structural improvements like re-modelling a bathroom.
Be aware that depreciation deductions for residential real estate properties are now limited to outlays actually incurred on new items. For properties acquired from 9 May 2017, landlords can no longer depreciate assets in the property at the time of purchase; however, if they purchase a new (not used or refurbished) asset, they can depreciate that asset.
Residential landlords are no longer allowed travel deductions relating to inspecting, maintaining or collecting rent for a rental property.
COVID-19 has raised a number of tax issues for rental property owners or agents to consider, including:
- deductions for properties where tenants are not paying their full rent or have temporarily stopped paying rent as their income has been affected due to COVID-19
- reductions in rent for tenants whose income has been adversely affected by COVID-19 to enable them to stay in the property
- assessable receipts of back payments of rent or an amount of insurance for lost rent
- interest deductions on deferred loan repayments for a period due to COVID-19
- cancellation of bookings due to COVID-19 for a property that is usually rented out for short-term accommodation but has also previously had some private use by the owner
- the private use of a rental property by the owner (e.g. holiday home) to isolate during COVID-19 and adjusting available deductions
- changes to advertising and other fees for short-term rental properties during COVID-19 due to no demand for the property.
- While you’re still able to claim deductions for your expenses and depreciation, you may need to make adjustments if you’ve changed how you use the property.
No deductions for vacant land
Deductions for holding vacant land have now been limited. The new rules apply to costs incurred on or after 1 July 2019, even if the land was held before that date.
Deductions for expenses incurred for holding costs of vacant land can continue to be claimed by corporate tax entities, superannuation plans (other than self-managed superannuation funds), managed investment trusts, public unit trusts and unit trusts or partnerships where all the members are the aforementioned entity as mentioned above entity types.
There are some entities and circumstances where deductions for vacant land can still be claimed. For example, where the entity holding the land is a company, where you use the land in carrying on a business, or exceptional circumstances apply.
Expenses of holding land remain deductible if they are incurred in carrying on a business such as farming or gaining or producing assessable income.
The rules can be complex and require you to determine whether you are holding vacant land, whether it satisfies the various requirements or if exceptional circumstances apply.
The ATO has produced a flowchart to assist in determining if deductions for expenses related to vacant land are limited.
Residential Property And Non-residents
Suppose you are a foreign resident for tax purposes when you dispose of your residential property in Australia. In that case, you will not qualify for the CGT main residence exemption unless you satisfy the life events test.
Gains Or Losses From Cryptocurrencies
Almost one in five Australians invest in cryptocurrencies. If you are or have been involved in acquiring or disposing of cryptocurrencies in the past, you need to be aware of the tax consequences.
You may have to pay tax on any capital gain you make on the disposal of the cryptocurrency. There are also rules when you exchange one cryptocurrency for another cryptocurrency and for chain splits, staking rewards and airdrops.
The ATO now matches transaction data from digital exchanges, so it is more important than ever to ensure cryptocurrency gains and losses are correctly reported.
Different rules apply if you use cryptocurrency in business, such as running your start-up or trading large volumes of cryptocurrency.
Capital Gains Tax Planning
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 assetentity mentioned above rather than on its settlement.
This is particularly important where the entry and settlement of the contract straddle the end of the financial year. In these circumstances, 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.
You should also take care to ensure that an eligible asset is retained for the 12-month holding period required under the CGT discount. The CGT discount is generally not available to foreign residents or temporary resident individuals.
Keep proper records for all of your investments and ensure that you keep them for at least five years after a capital gains tax event occurred.
If you are an Australian resident with overseas assets, you need to include any capital gains or losses you make on those assets in your tax return. You may also have to include income you receive from overseas interests in your tax return.
You can receive income even if it is held overseas for you. So, for example, if you receive foreign income or gains taxable gains in Australia, and you paid foreign tax on that income, you may be entitled to an Australian foreign income tax offset.
Be aware that the ATO has information exchange agreements with revenue authorities in many foreign jurisdictions and therefore is likely to receive data on any of your overseas investments and income.
Exchange-traded funds (ETFs) are an increasingly popular investment product, but calculating the tax on them can be complicated. Because ETFs are classified as trusts, not ordinary company shares, they fall under the Attribution Managed Investment Trust (AMIT) rules.
This means that you will need to separately report the various distributions and capital gains amounts in your tax return.
While many investors will receive a member annual statement with the necessary details, these reports are optional. However, you need to ensure that you correctly report ETF amounts on your tax return, so check to see if the necessary details are there and follow up with the fund or registry if they aren’t.
Towards the end of the financial year, there is often an uptick in promoting investment products that may claim to be tax-effective. Check to see if a Product Ruling is available or if a Taxpayer Alert has been issued by the ATO.
A product ruling provides ATO assurance on the tax consequences of an arrangement, provided it is carried out as described in the ruling. However, it isn’t a sanction or guarantee of the tax effectiveness of a product or investment.
Taxpayer alerts are warnings issued by the ATO about higher-riskasset entity arrangements or issues.
You should form your own view about the commercial and financial viability of a product. Consider issues such as whether the projected returns are realistic, the ”track record” of the management, the level of fees compared with similar products, and how the investment fits an existing portfolio.
If you are considering such an investment, seek independent advice before making a decision.