So you’ve just purchased your investment property and you are now wondering what you can claim on your tax return. Following are some of the common and some overlooked deductions that are available.
Property must be available for rent
It is important that the property is available for rent. This doesn’t mean that the property has to have been rented but you have taken reasonable efforts to try and rent the property. Negotiations with agents, advertising in local papers and other such things go toward proving that you have made the property available for rent. This can be extremely important where you had the property vacant for some period of time and have to prove to the ATO that the property was available for rent. If the property was not available for rent then the expenses will need to be apportioned. You also need to be careful that the rent is not set so high that the property would generally not attract a tenant for the area in which it is located as the ATO could argue you have set the rent so high so as not to attract a tenant and therefore it was not available for rent.
You can claim borrowing expenses greater than $100 over a five year period or over the life of the loan whichever is the least. You can claim all of the following borrowing costs
- stamp duty charged on mortgage (note this is not the stamp duty on purchase of the property)
- loan establishment fees
- title search fees charged by the lender
- costs for preparing and filing the mortgage documents
- mortgage broker fees
- valuation fees for loan approval
- lender’s mortgage insurance
It is important in the first year that you don’t claim the full amount amortised over the five year period but you will need to apportion the first years borrowing costs over the number of days between the date you took out the loan and the end of that particular financial year. Another common mistake is either not claiming the borrowing costs at all or claiming them all in the first year the loan is taken out.
You can claim travel associated with
- preparing the property for new tenants (except for new tenants)
- inspecting the property during and at the end of the tenancy
- maintaining the property
- collecting the rent
- visiting the agent to discuss the property
- undertaking repairs to the property
If the trip also included some element of private purposes then it is extremely important to understand what can be claimed and what cannot. If you have travelled for a holiday and on that holiday you visited your property then the cost of travelling to the destination and returning will be incidental to the inspection of the property and none of the travel will be deductible. You may however be able to claim a proportion of accommodation expenses and so documentation will be extremely important.
Depreciation and Capital Allowances
This can be significant to the property investor as it allows you to claim a deduction against your income without having to actually pay out physical cash. We believe it is extremely important to obtain a quantity surveyors report (sometimes referred to as a depreciation schedule) to ensure you have claimed all relevant depreciation and capital allowance deductions.
This can be quite a complex area and a seperate blog covering some of these issues will be posted in the future discussing some of the challenges with interest expenses. At a very basic level it is extremely important to try and keep your investment and personal (home loan, car loans, etc) separate as combining them into one loan can result in losses of deductions and extra accounting fees involved in determining the appropriate deductible amounts. In worst cases the entire amount may be non deductible (refer Domjan’s case). It is important before purchasing any new investment to discuss the structuring of your loans with your accountant and adviser to ensure it is structured to maximise your tax benefits.
Repairs and Maintenance
It is important to distinguish between a repair and improvement as the deductibility is very different. A repair replaces a part of something or corrects something that is already there and has become worn out or dilapidated. It’s usually occasional or partial, and restores something to its original efficiency. Repairs make good damage which has occurred through normal wear and tear, or by accidental or deliberate damage or the effects of natural causes. Note however that repairs are generally partial. Replacing a faulty filter in a dishwasher may be a repair; replacing the dishwasher generally is not. You may be able to claim an immediate deduction for expenditure on repairs if you’re using your property to generate income. However, if you’re claiming repairs as a deduction, you must be aware there is a difference between a repair and an improvement, as you can not claim an immediate deduction for improvements. However, you may be able to claim a capital works deduction for improvements. Although there is a difference between ‘maintenance’ and a repair, you may generally claim an immediate deduction for maintenance costs.
This is an area which causes a lot of confusion and an area which many people get wrong. If you have concerns then consult us prior to making your decisions.
Other things to keep a record of for claims include advertising, accounting fees, travel to the accountants, bank charges, body corporate fees, cleaning, commissions, electricity, fees, gardening, hire, insurance, land tax, letting fees, linen, postage, printing, rates, repairs and maintenance.
Remember keep all records related to your investment property and if in doubt consult your tax adviser before making your decisions so that you get things right and don’t miss out on your deductions.